Western Digital (WDC) is at
Multi-Year Highs and Poised to Go Higher
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By: Timothy Lutts
Editor
Cabot Wealth Advisory
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Published:
December 18, 2007
Western Digital Corp. (NYSE: WDC,
$29.06)
is a leading maker of
hard disk drives. Western Digital's
drives can be found in corporate
servers, in desktop computers, in
portable computers, in backup
applications and in consumer
electronics, like DVRs, gaming
systems, karaoke systems and video
surveillance systems. In short,
they're everywhere.
You can buy a Western Digital drive
directly, but half the company's
output goes to original equipment
manufacturers (OEMs) who put them in
their own products.
As such, Western Digital is caught
in a never-ending race to make its
products better and cheaper, and to
do it before the competition.
It's a cutthroat business, and
because of that, hard drive makers
have never been great long-term
investments.
No longer in business are old
names like Integral, Tandem, Control
Data, MiniScribe and Connor
Peripherals. Little Iomega, a
thrilling and very profitable
investment back in 1995 after
the Zip drive came out, has lost
money in five of the last six years
and was just "bought" (in a complex
transaction) by Great Wall
Technology, which is majority-owned
by the Chinese government. Last
year, Seagate bought Maxtor for $1.9
billion. And early this year,
Western Digital acquired Komag for
$1 billion.
That leaves only four companies -
Western Digital, Seagate (NYSE: STX), Samsung,
and Hitachi (NYSE: HIT) -- manufacturing over 98%
of the world's hard drives. Samsung
and Hitachi, of course, are
electronic behemoths; hard drives
are just a fraction of their
business.
But why would you want to invest in
a hard disk maker anyway? Because
historically, these companies have
provided many opportunities to make
big money quickly, and it looks like
we're entering one of those periods
today.
What typically happens in the
industry is that as business
improves and profits increase,
companies expand so they can
increase revenues. But the increased
production, typically the result of
expansion by several firms, means
capacity begins to exceed demand, so
manufacturers cut prices to move
product. Trouble is, that reduces
profitability, and as earnings fall,
investors desert the stocks. And
it's not until demand for product
increases and allows product prices
to stabilize that earnings can creep
up and the good times return.
All the while, of course, all
companies are involved in the
never-ending race to increase
storage capacities and reduce
prices.
So why is WDC attractive today?
Because it's strong ... stronger
than Seagate and stronger than
the broad market.
Right now, the industry's
fundamentals are outstanding - lower
production from a couple of Asian
competitors has kept inventory
levels low, while demand remains
very strong thanks to an explosion
in mobile device sales (the firm's
mobile-related drive sales were up
55% in the third quarter) and
healthy growth in computer and
digital video recorder shipments.
The result: Third quarter earnings
crushed estimates by 39%, and the
firm upped its fourth-quarter
outlook. All told, we expect the
positive news flow to continue for
the intermediate-term.
WDC peaked at $25 per share in February of
2006, fell to $16 by March of this
year, and has been strongly uptrending since. The best aspects
of the chart, however, occurred just
in the past few weeks -- the surge at
the start of November was caused by
a great earnings report, the stock
held up well during the market's
November slide, and it's push
to new multi-year peaks came on a
higher fourth-quarter forecast. WDC
is extended to the upside, but we
don't believe a big pullback will
come. You can buy a little here, and
look to add on strength.
But if you buy, I caution you
not to fall in love with the stock.
If you do, I guarantee it'll break
your heart.
Timothy W. Lutts
Editor
Cabot Wealth Advisory
About Timothy Lutts
[includes/bios/lutts.htm]
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