Buy Weakness in Western Digital (WDC) - Susquehanna

Mehdi Hosseini, analyst from Susquehanna, believes the SandDisk (NASDAQ: SNDK) deal continues to generate some degree of skepticism/confusion around pro forma earnings power and is suggesting people use recent weakness as a buying opportunity in Western Digital (NASDAQ: WDC). That said, after taking HGST integration and Unis dilution into account he revised his 2018 earnings estimate from $14 to $13-$14. Details on this call and the quarterly call follow:

Prior to the deal announcement, SIG outlined its pro forma earnings estimate for the combined company at $14 of EPS in Year 2 assuming: 1) $539M in opex savings, and 2) 300 bps of GM accretion. However after including HGST integration savings and Unis dilution,

Skepticism about WDC's ability to execute is also over blown. The company has a historical track record of integrating acquisitions, the HGST integration should act as a warmup to the SNDK integration, WDC has significant OEM relationships which will offer cross selling synergies.

He sees a price range for the stock of $130-$180 based on 10x-13x P/E range on CY18 pro forma EPS.

For the quarter, WDC reported revenue and EPS of $3.36B and $1.56 vs. consensus of $3.40B and $1.56. Enterprise SSD business of $233M was softer than our expectations of $252M due to share loss but the shift to 3D NAND in 2016 should help alleviate this pressure.

WDC gained share in 8 TB Nearline drives, given STX's delay in getting the 8 TB Heliums to market. Moving forward, WDC remains confident in its 35% Exabyte growth expectation over the next few years, largely driven by high-capacity drives (with 10 TB Helium drives coming soon).

Susquehanna has a Positive rating and price target of $100 on WDC.

For an analyst ratings summary and ratings history on Western Digital Corp. click here. For more ratings news on Western Digital Corp. click here.

Shares of Western Digital Corp. closed at $67.52 yesterday.

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