Morgan Stanley Cuts Western Digital's Target From $53 To $48 Following Outlook

Western Digital Corp WDC updated its June quarter guidance broadly in-line with expectations. Morgan Stanley’s Katy L. Hubert maintained an Equal-weight rating for the company, while reducing the price target from $53 to $48. The analyst said that tighter supply of HDD and NAND would limit downside in the back half of the year.

Updated Guidance

Western Digital guided to revenue of $3.35B-$3.45B and EPS of $0.65 for the June quarter, taking into account the completion of the acquisition of SanDisk Corporation SNDK. This was marginally higher than the MS estimates of $3.3B and $0.52 for the combined entity.

Analyst Katy Hubert pointed out that tax rate is a benefit in the June quarter, which has driven the EPS forecast higher despite lower PBT. Going forward, the tax rate would be in the 20-25 percent range for FY17, 10-15 percent for FY18-23, and 7-10 percent thereafter. “This structure allows the company to efficiently access cash for debt paydown,” the analyst wrote.

Limited Downside In 2H

Management has not provided any guidance beyond the June quarter. It did mention, though, that NAND supply and some parts of HDDs could be tight. “Tighter supply can help offset higher Yen-based costs and increasing mix of lower margin 3D NAND in the second half of 2016. As a result, the company believes it can hold combined company gross margin relatively steady in the next several quarters,” Hubert stated.