Western Digital Still A Buy At Stifel; Firm Sees Long-Term Opportunity Despite Negative Marketplace

In a report published Wednesday, Stifel analyst Aaron Rakers reiterated a Buy rating on shares of

with a price target lowered to $105 from a previous $125. According to Rakers, his revised price target reflects weaker June quarter trends and expectations moving forward. At the same time, the analyst suggested that investor sentiment has "overshot to the negative" as he still remains positive on the company's ability to sustain a gross margin rate in the 29 to 30 percent rage. "We continue to favor Western Digital's positioning in the high-cap enterprise market, coupled with an ongoing strong positioning in enterprise SAS SSDs expect Western Digital's positioning / ramp in NVMe PCIe SSDs to become a greater focus going forward," Rakers wrote. "We believe Western Digital should provide greater visibility into the trends within the enterprise HDD segment (e.g., cloud-driven contributions / growth, capacity shipment trends, etc.). We believe the ramp of WD's helium-filled high-cap drives will also be an increasing investor focus – driven by the ramp of the 8TB and 10TB drives." The analyst is now estimating the company will earn $1.45 per share in the fourth quarter on revenue of $3.226 billion. These estimates actually fall short of the company's own guidance of earning $1.50 to $1.60 per share on revenue of $3.3 billion to $3.4 billion. The analyst noted that capacity shipments/mix shifts in HDDs is not "being factored enough" into current investor sentiments. Looking forward to fiscal 2016 and 2017, the analyst is now estimating the company will now earn $7.45 per share and $8.20 per share on revenue of $14.05 billion and $14.4 billion, respectively. This represents a decrease from a prior earnings per share estimate of $8.02 and $8.58 on revenue of $14.4 billion and $14.8 billion, respectively. The analyst stated that the new estimates reflects "conservative" operating expenditure estimates (maintaining opex-to-revenue in the 16 to 17 percent range). Finally, Rakers argued that demand concerns may put in to question the company's ability to sustain a $2 billion annual free cash flow rate, the analyst suggested these levels are certainly attainable over the longer-term.