Western Digital Corp Valuation – March 2019 #WDC

Company Profile (excerpt from Reuters): Western Digital Corporation (Western Digital), incorporated on October 26, 2000, is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company also generates license and royalty revenue related to its intellectual property which is included in each of the three categories.


Downloadable PDF version of this valuation:

ModernGraham Valuation of WDC – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $14,501,831,037 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.24 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -73.33% Fail
6. Moderate PEmg Ratio PEmg < 20 31.02 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.32 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.24 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.92 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail


Stage 2: Determination of Intrinsic Value

EPSmg $1.61
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $23.30
MG Value based on 0% Growth $13.66
Market Implied Growth Rate 11.26%
Current Price $49.84
% of Intrinsic Value N/A

Western Digital Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $5.72 in 2015 to an estimated $1.61 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.26% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Western Digital Corp revealed the company was trading above its Graham Number of $23.31. The company pays a dividend of $2 per share, for a yield of 4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 31.02, which was below the industry average of 35.5, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-25.12.

Western Digital Corp scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$25.12
Graham Number $23.31
PEmg 31.02
Current Ratio 2.24
PB Ratio 1.32
Current Dividend $2.00
Dividend Yield 4.01%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $9,742,000,000
Total Current Liabilities $4,350,000,000
Long-Term Debt $10,370,000,000
Total Assets $27,939,000,000
Intangible Assets $12,222,000,000
Total Liabilities $17,027,000,000
Shares Outstanding (Diluted Average) 290,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.62
Jun2018 $2.20
Jun2017 $1.34
Jun2016 $1.00
Jun2015 $6.18
Jun2014 $6.68
Jun2013 $3.98
Jun2012 $6.58
Jun2011 $3.09
Jun2010 $5.93
Jun2009 $2.08
Jun2008 $3.84
Jun2007 $2.50
Jun2006 $1.76
Jun2005 $0.90
Jun2004 $0.69
Jun2003 $0.87
Jun2002 $0.34
Jun2001 -$0.31
Jun2000 -$2.69
Jun1999 -$5.51

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.61
Jun2018 $2.56
Jun2017 $3.11
Jun2016 $4.29
Jun2015 $5.72
Jun2014 $5.41
Jun2013 $4.63
Jun2012 $4.74
Jun2011 $3.71
Jun2010 $3.75
Jun2009 $2.51
Jun2008 $2.46
Jun2007 $1.63
Jun2006 $1.10
Jun2005 $0.68
Jun2004 $0.31
Jun2003 -$0.41

Recommended Reading:

Other ModernGraham posts about the company

Western Digital Corp Valuation – May 2018 $WDC
Western Digital Corporation Valuation – February 2017 $WDC
Best Stocks Below Their Graham Number – August 2016
Western Digital Corporation Valuation – August 2016 $WDC
10 Low PE Stock Picks for the Defensive Investor – August 2016

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The author held a long position in WDC but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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