Western Digital-SanDisk Combo Is This Analyst's 'Best' Idea For 2016

• Declining steadily since October 7, shares of Western Digital Corp WDC have lost 29 percent over three months.
• Pacific Crest’s Monika Garg maintained an Overweight rating on the company, with a price target of $100.
• The combination of Western Digital and SanDisk Corporation SNDK would create a “formidable” company, Garg believes.

Analyst Monika Garg said that Western Digital’s acquisition of SanDisk makes “strategic sense” for both companies. While eliminating a “flash overhang” from the former company, the deal provides a sales and OEM channel for the latter. She added that Western Digital was their “best idea” for 2016.

The combined company could achieve a $3 billion run-rate a couple of years after the completion of the deal, the analyst mentioned.

“SNDK has faced issues in ramping its enterprise SSD segment as the company lagged OEM/sales channel, but WDC has strong sales/OEM/enterprise channels, which should help ramp enterprise SSD sales,” Garg wrote.

While Western Digital’s enterprise SSD margins are currently at 30 percent, since NAND has to be purchased from NAND vendors, these margins could expand to more than 55 percent following the acquisition.

With a ramping up of enterprise SSD revenue, enterprise revenue could exceed Western Digital’s PC revenue over the next couple of years, Garg commented.

The analyst expects the deal to be highly accretive, with the combined entity generating significant cash flows and becoming a strong competitor in the SSD space. The combined entity could generate more than $10.60 in EPS and $3.33 billion in cash flows after 12 to 18 months.