Why Western Digital Shares Are Cheap Even In Extreme Bear Scenario

Jefferies on Friday reiterated a Buy rating on Western Digital Corp WDC.

The firm trimmed its price target to $82.00.

The analysts argued that, even in an “extreme bear scenario” the shares look cheap.

Given Nidec’s recent weak results and outlook, and the steep sell-off seen in both Western Digital and Seagate Technology PLC STX, Jefferies decided to take a “very conservative approach” with their estimates for the two latter companies. They believe the current stock price fully prices in a radical bear case for Western Digital / SanDisk Corporation SNDK.

The analysts see more upside for Western Digital’s stock given cost savings from the HGST integration and accretion from the acquisition of SanDisk, but believe Seagate shares also offer an attractive value, especially given its 9 percent dividend yield.

Related Link: What Catalyst Can Boost Western Digital's Annual EPS By 5%?

Even assuming an extreme bear case where (1) Sandisk’s sales came in 20 percent below consensus estimates for calendar 2017; (2) Sandisk’s gross margin falls from the low 40’s to 30 percent; and (3) “Unisplendour investment doesn't come to fruition,” the firm has arrived at $6.27 in long-term earnings power. This implies a P/E multiple of 7x and EV/EBITDA of 5.8x – still quite cheap relative to peers.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.