Brean Says $120 Level Could Be Back In Play For Western Digital

Western Digital Corp WDC pre-announced its December-quarter results, higher than the Street expectations. Taking into account the expected Samsung patent royalty renewal and the acquisition of SanDisk Corporation, Western Digital’s share price could surge to $120, Brean Capital’s Ananda Baruah said in a report.

Rating And Justification

Baruah maintains a Buy rating on the company. He raised the price target from $97 to $100, while mentioning that this could prove conservative.

Western Digital pre-announced its quarterly revenue, gross margin and EPS at $4.75 billion, 36 percent and $2.10–$2.15, higher than the Street expectations of $4.73 billion, 34 percent and $1.89, respectively.

The company’s long-term model implies mid-single digit revenue growth and operating margin of 18–23 percent, after taking into account savings related to the HGST subsidiary and the SanDisk acquisition.

Stock Could Reach $120

Expressing confidence in Western Digital’s model, Baruah said that the share price could ultimately be $120–$140.

The company’s latest pre-announcement suggests an annual EPS run-rate of ~$8.50. “However, that's before realizing the vast [emphasis omitted] majority of synergies from the SNDK acquisition, which we believe ultimately can be ~$800 million, or $2.00–$3.00, which would place normalized EPS at least at $10.50,” the analyst wrote. Moreover, Samsung patent royalty renewal is due on August 15.

“We feel very strongly that once normalized, WDC will trade at 12x–14x, as that is what investors typically pay for U.S. equities with similar revenue growth, OM & FCF profiles,” Baruah said.