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Western Digital (WDC) a Top Pick for 2014, Needham & Company Says; PT to $100

December 19, 2013 3:59 PM EST Send to a Friend
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Price: $101.17 +0.38%

Rating Summary:
    18 Buy, 8 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 21 | Down: 36 | New: 7
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Needham & Company analyst Richard Kugele reiterated his Strong Buy on Western Digital Corp. (NASDAQ: WDC) and raised his price target from $81 to $100, calling it one of his top picks for 2014.

"Despite a more than 90% move in 2013, we highlight Western Digital as one of our top picks for 2014," Kugele said. "We believe that investors are only now becoming aware of the company’s place in the Cloud, the SSD opportunity, and what the upcoming year might bring in terms of savings from the expected HGST integration."

Key elements of the firm's thesis:
  • Balanced Supply Meets Improved Demand. We believe the HDD supply stability will continue into 2014, with a tailwind from what we expect will be strong IT spending and improved commercial PC demand (driven by the April 2014 expiration of Windows XP support and the aging installed base of desktops and laptops within corporations).

  • HGST Integration. In March 2014, WDC will be able to apply to the Ministry of Finance and Commerce (MOFCOM) for removal of the “hold separate” restrictions on the HGST acquisition. While timing of the widely-expected approval is uncertain (i.e. DO NOT EXPECT THIS TO OCCUR IN MARCH), we believe that annualized incremental savings could amount to $1.25-1.50 per share once integration is complete. Additionally, we expect a portion of those savings to flow through to shareholders through improved dividend levels.

  • WD: A Leader In Enterprise SSDs. We believe that WDC is well-positioned to capitalize on its $500MM annual run rate SSD business in 2014. This division’s cohesive roadmap (which only includes the enterprise SSD efforts) should be able to enhance WDC’s market presence at top-tier OEMs and expand the company’s margin profile.

  • Previous Multiple Expansion Meets EPS Growth. Given the factors above, we believe that the resulting higher estimates could drive the stock to the $100 range over the next 12 months, based on 10-11x a $9.50-10.00 EPS estimate. While greater clarity around timing is needed, in the interim, we expect the stock to trade based on the Buy Side’s confidence in this new range of earnings power, even if the Street is unable to publish these numbers yet. Therefore, we believe that in the interim, a 12x multiple is appropriate before eventually settling back to our previous 10x-11x.

    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 $82.10 yesterday.




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