Analysts See Western Digital Nearing A Bottom After Disappointing Q2 Results, Guidance

Storage device manufacturer Western Digital Corp WDC reported Thursday after the market close with second-quarter results that trailed expectations and issued below-consensus Q3 guidance.

The Analysts

• Baird analyst Tristan Gerra maintained an Outperform rating on Western Digital and lowered the price target from $55 to $50.
• Morgan Stanley analyst Joseph Moore maintained an Equal-weight rating and reduced the price target from $47 to $50.
• Bank of America Merrill Lynch analyst Wamsi Mohan reiterated a Buy rating and $55 price target.
• RBC Capital Markets analyst Amit Daryanani reiterated a Sector Perform rating and upped the price target from $40 to $46.

Baird Sees Limited Downside Risk

The downside on Western Digital shares is limited given the one-year-old downcycle and the stock trading closer to book value, Gerra said in a Friday note.

The analyst projects an EPS trough two quarters away.

Western Digital could rebound rapidly on signs of stabilization in NAND flash, which is likely to come about due to demand elasticity driving content increases and the end of inventory digestion in data center, Gerra said. 

Morgan Stanley: Stock Remains A Value

Western Digital is experiencing weakness in both hard disk drives and NAND, resulting in estimate reductions roughly in-line with investor expectations, Moore said in a Friday note. 

The analyst said he expects NAND weakness to continue, but sees a recovery in hard drive margins.

Morgan Stanley projects that earnings will remain at low levels through the year. The stock is a value buy on EV/sales, according to the sell-side firm. 

The firm sees valuation support for patient investors at its reduced price target point. With no quick fix in sight for fundamental issues, Morgan Stanley said it's staying on the sidelines.

BofA Positive On GM Trajectory, Operational Initiatives

Notwithstanding the Q2 miss and bleak guidance, there were positives, signaling a bottom, Mohan said in a Friday note. 

Western Digital is on track to lower NAND wafer output and HDD capacity in a bid to expand gross margins for both businesses, as well as to reduce operating expenditures by $100 million per quarter to offset future incentive comp increases, the analyst said. 

Citing the better gross margin trajectory and operational initiatives, BofA raised its EPS estimates.

The firm, however, kept its price target unchanged, as the FY20 margins/EPS now reflect mid-cycle performance, Mohan said. 

RBC Names Positives From Earnings Call

Western Digital remains poised to achieve a trough in the March quarter before inflecting higher in the June quarter and through 2019, Daryanani said in a Thursday note. 

The analyst sees the following a positives that emerged from the earnings call: 

• Comfort around the balance sheet, with the dividend remaining intact.
• Aggressive actions, including an $800-million cost reduction and a 10-15-percent NAND bit reduction in CY19.
• Robust product portfolio in CY19 to help share gains in HDD and NVMe.

"While we do think there is some risk that demand could degrade further across HDD and NAND, [these] print and cost reduction efforts appear closer to forming a bottom in March quarter if not [the first half]," the analyst said. 

The Price Action

Western Digital shares were trading up by 7.49 percent at $43.15 at the time of publication Friday. 

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