How Western Digital Shares Could Rise 48% Over The Next Year

Western Digital Corp WDC’s battle with Toshiba over the sale of its chip business is set to come to a conclusion on Friday, but no matter how it comes down, Loop Capital Markets analyst Ananda Baruah sees a strong future ahead.

Baruah initiated coverage on Western Digital shares with a Buy rating and $140 price target, a 48-percent upside from Monday’s close price.

Catalysts This Week

The company is set to announce its fourth-quarter earnings on Thursday after the close. The Street is looking to see EPS come in at $2.81.

Western Digital was already ahead of that though, reporting preliminary EPS on June 26 of $2.85. Preliminary sales were in-line with consensus at $4.8 billion.

“These results came as a pleasant surprise, and as such view them as incremental to our long-term thesis,” said Baruah (see his track record here).

Baruah joins several other analysts in the belief that this Friday’s court decision regarding Toshiba will only determine the extent to which Western Digital gains from the chip business sale, not whether or not it will.

Western Digital won an early battle, when a San Francisco judge confirmed its right to access data held by the chip business, but that ruling was later overturned following an appeal by Toshiba, which had locked Western Digital employees out.

“Regardless if [Western Digital is] included in the buying group” Baruah sees the company’s EPS and material revenue benefitting by almost equal amounts.

The analyst assumes that any private equity firm included in the group — such a Bain Capital, which was in the preferred buying group — would “insist” on at least 15-20 percent returns from the chip business over five years.

Long-Term Potential ‘Materially More Pronounced’

The analyst notes that Western Digital’s normalized EPS may already be closing in on $13.

Ahead of stronger second half 2017 seasonality and before seeing the majority of synergies from SanDisk, estimated to be at least $2-3, the company is already run-rating about $10.50 in annual EPS over the last nine months.

The Street’s consensus for calendar year 2017 was only $10.67 for comparison.

Also excluded is the potential gains from the sale of Toshiba’s chip business, which Baruah estimates could be up to $5 regardless of the outcome.

“Our price target is 10x the low end of what we’re increasingly convicted is a $14–18 normalized EPS,” said Baruah. “We believe, with conviction, that investors will ultimately pay 10x–15x suggesting long-term upside sweet spot potential of $170–250.”

At last check, shares of Western Digital were down 3.03 percent at $91.75.

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