Measured Approach

WESTERN DIGITAL CORP. (NYSE:WDC) Data as of: 02/05/2010

Industry: Computer Storage Devices

Current Data
Current Price $39.43 PEG 0.4
Market Cap ($M) $9,015. EPS TTM ($) $4.19
3
Shares Outstanding (M) 227.0 P/E TTM 9.4X
Institutional Holdings % 92.1% EPS Estimated 2010 ($) $5.96
Insider Holdings % 0.4% P/Estimated EPS 6.6X
Beta 1.54 Target Value ($) $52.81
Latest Quarter Reported 01/01/1 Dividend Yield % 0.00
0

The last time we wrote about Western Digital was in March 2009. At
the time, WDC was trading at $17.21 and we provided a twelve month
target price of $44.27. In retrospect, our estimate of value seems a
mite aggressive. However, the market has vindicated us the recent
price of $39.43 is awfully close to our target. Looking ahead, we have a
twelve month target price of $52.81.

Western Digital Corporation (WD) designs, develops, manufactures and

sells hard drives. The Company sells its products worldwide to original
equipment manufacturers (OEMs) and original design manufacturers
(ODMs) for use in computer systems, subsystems or consumer
electronics (CE) devices, and to distributors, resellers and retailers. Its
hard drives are used in desktop computers, notebook computers, and
enterprise applications, such as servers, workstations, network
attached storage, storage area networks and video surveillance
equipment. Additionally, its hard drives are used in CE applications,
such as digital video recorders (DVRs), and satellite and cable set-top
boxes (STBs). WD also sells its hard drives as stand-alone storage
products and integrates them into finished enclosures, embedding
application software and offering the products as WD-branded external
storage appliances. On March 27, 2009, it completed the acquisition of
SiliconSystems, Inc.

Recent Developments

WD® INTRODUCES ITS FASTEST EVER MY BOOK® EXTERNAL DRIVE

My Book® 3.0 External Hard Drives are the First Certified SuperSpeed USB 3.0 Storage
Devices Available on the Market

WD® ENTERS TRADITIONAL ENTERPRISE HDD MARKET WITH FIRST SAS PRODUCT

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
WD S25 SAS Hard Drives Provide High-Reliability and Performance for Mission-critical
Server and Storage Applications

By The Numbers

Quarterly sales for the last four reported quarters show consistent
improvement. For the quarter ending 03/09, sales stood at $1,590.0
million and compared to $2,111.0 million in 03/08. In each of the
subsequent quarters, sales increased so that by 10/09, sales were
ahead of the prior year quarter. For the twelve month period ending
01/10, sales stood at $8,348.0 million as compared to the equivalent
prior twelve month period of $8,036.0 million, a 3.9% gain.

The decline in the sales growth rate can be attributed to a lack of

pricing power in today’s environment. Historically, sales grew at a rate
of more than 19%. The company continues to add new products and
there is increasing momentum in quarter over quarter sales growth.
Reuters reports consensus estimates for FYE 06/10 at $9,814.38.

Over the past four quarters, earning reflected the decline in sales and
the same pattern of picking up when sales turned around. In the
quarter ending 03/09, EPS came in at $0.22 compared with $1.23 in
03/08. Earnings picked up in each subsequent quarter so that in 10/09,
EPS was reported at $1.25 as compared to $0.93. In 01/10, quarterly
EPS was $1.85 as compared with $0.06 in 01/09. EPS for the twelve
month period ending 01/10 totaled $4.18. In comparison, in the one
year ago period, EPS totaled $3.16. Consensus EPS for FYE 06/10 is
$6.03.

Gross margins for the TTM are a strong 21.8%. Reported gross margins
in FY09 were down to 17.9%. For the five year period 07/05 – 07/09,
gross margins averaged 18.24%. Similarly, operating margins popped
in the TTM to 12.7% from FY 09’s low of 7.0%. Again, net margins
reflect the same trend spiking to 11.5% in the twelve month period
ending 01/10 from FY 09’s margin of 6.3%. Historically, WDC reports a
net margin in the 9.0% - 10.0% range.

Historically, WDC underperforms its industry median when measured

by gross margins. However, when it comes to operating margins and
net margins, WDC significantly out-performs. This reflects well on
management’s ability to control costs. Return on Equity at 28.1% and
Return on Assets at 17.0% are higher than industry medians. In fact,
with the exception of FY 09, ROE is typically near 40.0%. In every year,
WDC reports ROE and ROA that beats the industry median.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
The company has a strong balance sheet. The Current Ratio is 2.2X
and Total Liabilities to Total Assets is a moderate 39.4%. Long term
debt stands at $350.0 million. Long Term Debt to Capital is 8.1%. Cash
and short-term investments total $2,435.0 million or 27% of the recent
market price.

Conclusion

We see continued growth for Western Digital and believe it is currently

undervalued. We are establishing a target investment value of $52.81
which translates to 8.76X estimated earnings of $6.03. After the run-up
on the past year, we will be satisfied for an addition 34% gain.

Disclosure: Author has a long position in Western Digital.

Please visit http://measuredapproach.wordpress.com for important disclosures.

© Copyright 2009 Ronald Sommer. All Rights Reserved.