Western Digital: This Should Be A Good Year

Analyst Edward Parker premised his prognostication of a good year on the following:

• Expectations of NAND bit supply at the low end of the 35–45 percent target as 3D takes it time to yield.
• Stable HDD.
• Commentary on inventory build in anticipation of fairly strong demand in capacity enterprise, suggesting a stronger second half; This, according to the firm, corroborates Seagate Technology PLC STX's comments for better cloud service provider strength.
• Gross margins at 39.3 percent in March and expected to rise to 40 percent in June, above the 33–38 percent target, as favorable pricing, richer enterprise, HDD mix and integration synergies help.
• Good visibility.

Fiscal Q3 Print

BTIG said memory strength and the ongoing cost reductions drove revenue and margin upside in the fiscal third quarter. Accordingly, the firm believes the calendar year 2017 earnings per share of $12 is now in sight.

Delving into the "no news," the firm said there has been no news on a widely speculated Toshiba Corp (USA) TOSYY consummation, other than talks are in progress for a favorable outcome.

Information And Non-Information

BTIG noted visibility into favorable NAND demand/supply dynamics now extends into the first half of 2018, rendering calls for peak earnings premature at best. The firm also said widespread concerns about the looming 3D transition are proving to be unfounded, with the company announcing that it has achieved cost parity with existing processes.

Looking Forward

BTIG sees more reserved bit growth as a permanent feature of the industry at a time where secular forces are driving demand in more sustainable ways.

"Uncertainty here likely dominates the near-term narrative, as accretion hinges on a wide range of assumptions, but the potential benefits of such a transaction (and legal protections from competitive suitors) offset the overhang," the firm opined.

More Stable Supply/Dynamics

BTIG maintains its Buy rating on the shares of Western Digital and raised its price target to $120, reflecting valuation of 10 times its 2018 earnings per share estimate.

"Earnings power sustainability beyond current supply constraints will be the next battleground for this stock, with the market likely to discount a cyclical reversal. However, absent global macroeconomic recession, we continue to see more stable supply/dynamics going forward," the firm said.

"This is a secular growth business, in our view, not a cyclical boom/bust story."

At the time of writing, Western Digital was up 2.35 percent at $87.72.

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