Western Digital Post-Sandisk Simply 'Too Compelling' To Ignore, Says Longbow Research

• Western Digital Corp WDC shares are down 2 percent year-to-date, even after surging 22 percent since September 29.
• Longbrow Research’s Joe Wittine maintained a Buy rating on the company, while reducing the price target from $100 to $95.
• The acquisition of SanDisk Corporation SNDK is expected to generate synergies of over $500 million over an 18 month period, Wittine stated.

Western Digital preannounced in-line revenues and EPS for 1Q, while guiding to 2Q EPS short of Street expectations due to temporarily higher opex. The company expects the high operating expenditure to recede from March onwards, as MOFCOM savings ramp.

The company’s opex for the legacy business is expected to decline to $470 million per quarter, from $567 million in 1Q.

Western Digital, which recently announced the acquisition of SanDisk, expects sales from the latter to grow with synergies of more than $500 million expected to be realized over an 18 month period. The company has already sought the approval of regulatory authorities, including CFIUS for the Unis investment and SanDisk.

Western Digital continues to hold a leading position in the enterprise capacity drives segment. In the report Longbrow Research noted that 8TB helium shipping and 10TB PMR drives are planned to be introduced in CY16.

Wittine believes that the transformative SanDisk acquisition has changed the “WD playbook.” He added, “Sandisk has its warts but we suspect WD will eventually re-rate to a higher multiple commensurate with an improved growth profile.”

The diluted non-GAAP EPS estimates for 2016 and 2017 have been reduced from $6.71 to $6.10 and from $7.50 to $6.96, respectively.