Buy Western Digital -- Even Without SanDisk Synergies

• The share price of Western Digital Corp WDC has declined 56/94 percent over the past one year, reaching a low of $42.47 on January 25.
• Brean Capital’s Ananda Baruah has maintained a Buy rating on the company, with a price target of $150.
• Baruah mentioned that the company had set a “prudent” March quarter guide and that the stock could have substantial appreciation potential.

Analyst Ananda Baruah elaborated, “We look for the stock to begin working as we enter the Jun Q and 1) TAM stabilizes and 2) the SanDisk Corporation SNDK deal closes.”

Baruah believes that Western Digital might ultimately see incremental EPS benefit of up to $4, with the company’s standalone (ex-SanDisk) “normalized” EPS could go up to $7-$8, with the combined WDC/SNDK entity expected to see CY17 EPS of abut $12.

Western Digital reported its revenue and EPS for the December quarter at $3.32 billion and $1.60, respectively, as compared to the consensus expectations of $3.35 billion and $1.54 respectively.

Revenue for the quarter declined 15 percent year on year, consistent with the rate of change in the same quarter in 2014. However, the TAM for the quarter came in below the guidance but in-line with the estimate and seasonality.

According to the Brean Capital report, “Management expects weak macro to continue into the March quarter and expects a hard drive TAM at ~100M units, citing seasonal softness and secular trends, as well as cautiousness among customers and end markets; however, management expects TAM to sequentially expand for the rest of the year.”

Management has also guided to March quarter EPS below the consensus, while expecting gross margins to expand slightly. In the long term, the company intends to aggressively reduce its cost base.