No. of Recommendations: 2
This is one of my successes. As of last night:

Date bot Gain vs. SPY
1/05/11 +27.64% +13.85 ppts
1/25/11 +30.02% +17.57 ppts
9/08/11 +44.48% +23.59 ppts

If you remember, I bought this maker of hard disk drives (HDDs) when there were worries that HDD shipments would be declining due to too high inventories and declining PC sales. Then last October, there was the massive flooding in Thailand, which really put a crimp on inventory. That sucked out the inventory overstock and actually led to an undersupply which is only now filling back up.

In the meantime, Western Digital has worked like champions to get the Thailand manufacturing plants back on line and, as of the end of the fiscal year (end of June), that's been essentially completed. Eight months and, I believe, ahead of schedule.

During all this, the company has been working through and completing its acquisition of the HDD unit of Hitachi, HGST. That closed in early March and the higher revenue and earnings of the company are a reflection of it.

Currently, the company is projecting about $10 EPS (non-GAAP) for fiscal 2013, which makes the forward PE pretty darn low. Even better, the company should be able to generate about $2.4 billion a year in FCF. Currently, at a $42 share price, that gives negative growth numbers priced in (about -9.5% / -4.8% / 0% at a 15% discount rate).

The balance sheet is strong, with over $1 billion in net cash (despite taking on debt to pay for HGST).

The prospects for this industry are even stronger, with IDC forecasts of 10% growth per year through 2016. Growth in the cloud and in personal clouds is expected to remain strong. Remember, the cloud runs on hard drives. More and more mobile means more data that has to be stored off-device. Here's how CEO John Coyne addressed it in fiscal Q3:

We believe the demand for personal ownership, availability, security of content, and the value proposition of owning a terabyte of your own secure accessible data for less than $100. Compared with renting that same capacity at 10 or 20 times that cost over a reasonable expectation of lifetime of that data in the cloud. We believe the personal content ownership, both from a safety and security and keeping other people's eyes off it, as well as the value proposition, offer a compelling value. And so we believe we're going to see the retail market rebound as the constraints I outlined go ahead away. 

And, in fact, we see the way that the cloud enables mobility, and the way that it enables people to easily generate content on mobile devices and consume content on mobile devices, all plays into a significant increase in demand for personal storage for personal content. And home-based personal network attached storage, or personal cloud storage. And we're addressing both of those markets. Now just to hedge our bets, of course, we're very strong players in the cloud market. In fact, the entire cloud would not exist were it not for the backbone technology of performance and capacity enterprise product. So either way we win.

In other words, lower PC shipments, which was the worry 18 months ago when I first bought, are not the whole story. There's plenty of demand elsewhere to lead to growing shipments, not declining.

If we assume $2.4 billion in FCF a year (and the CFO showed how that is possible at $600 MM a quarter in answering a question on the Q3 call), and 0% growth of that forever at a 15% discount rate, the expected share price would be over $65, nearly 60% higher than last night's rice of $41.84.

Strong balance sheet, expected growth, and too-low expectations. I'll likely be adding to this winning company in the next few days.

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