Longbow Makes A Cut: Western Digital Faces Multiple Headwinds, Declining HDD Trends, Is Not A Buy

Following what appeared to be a “mini-comeback,” HDD attach rates have again begun to decline.

Longbow’s Joe Wittine downgraded the rating on Western Digital Corp WDC to Neutral.

Headwinds

Wittine explained the downgrade was based on “a relative reversal in the HDD attach rate within top-selling notebooks, combined with still-declining proforma forecasts” for the Western Digital - SanDisk Corporation SNDK combination.

Wittine believes HDD secular trends remain intact and a temporary boost was unlikely, while pointing out that HDD units underperformed comparable PC units by 8 percent in 2015.

The analyst expects continuing underperformance of HDD unit by at least 5 percent, given the lack of a meaningful Win10 enterprise boost in 2H.

Sandisk Dilution

Wittine also mentioned that expectations of dilution due to Sandisk continues to grow, given the increased debt costs and the “ongoing erosion in Sandisk’s fundamentals.”

The analyst now expects proforma EPS before synergies for Year 1 at $4. However, for CY1Q, Wittine believes that a sales miss is unlikely for Western Digital, “given the strong finish to the quarter.”

“We can no longer pound the table on WDC given eroding fundamentals in both HDDs and NAND/SSDs and higher borrowing costs, both of which will impact WD's forecast debt paydown schedule,” the analyst added.