Novice Investing - Time to Consider Western Digital?

By: Hari Wibowo
Industry Background
We have covered Western Digital Corporation (WDC) a year earlier. It is still in the same business today. Therefore, I feel that it is not necessary to reintroduce Western Digital. Here is business description of Western Digital.

Shares of Western Digital and its competitors are being hammered due to competition fear from flash memory industries. A year ago, share price were being hammered due to weaker demand. I believe the demand for storage is strong. However, flash memory is now threatening the hard disk industry. Western Digital shares has fallen due to this concern. If it has fallen enough to attract our attention, we will add Western Digital to our portfolio holding.

Quarterly Current ratio that is greater than one and is stable or rising.

WDC	July 05	Apr 05	Dec 04	Oct 04
Current Ratio	1.44	1.48	1.40	1.35

Quarterly current ratio is stable at Western Digital over the last four quarters. Analyzing the yearly trend gives similar result. The company would have enough liquidity for at least a year. Prodding out the balance sheet, as of July 05, Western Digital had a $ 32.6 M of long term debt compared to the cash balance of $ 598 M. At this point of time, It is fairly safe to assume that risk of bankruptcy at Western Digital is minimal.

Fair value of the stock is 3% above current free risk interest rate (10 yr bond)
As of 11/04 2005, 10 yr bond yields 4.66%. The stock needs to yield 7.6% to give it a fair value. P/E value for Western Digital is therefore13.2. EPS for Western Digital for fiscal year '06 is predicted to be $ 0.90 For more details about EPS calculation, please go here. The fair value for Western Digital's business (real price) is therefore $ 11.88. Meanwhile, Cash per share for Western Digital is $ 2.76/share and Long Term Debt per share = $ 0.15/share. Real price = stock price - (cash+ short-term investment)+ long-term debt. Stock price = $ 11.88 + $ 2.76 - $ 0.15 = $ 14.49 /share.

50% potential stock price appreciation within a year.
Current price for Western Digital is $ 12.95/share. With fair value of $ 14.49/share, Western Digital does not give us 50% potential price appreciation. However at a price of $ 8.63/share, it represents a 50% potential stock appreciation.

Conclusion
For now, I believe that it is prudent to be patient and wait. Once it reach $ 8.63, the portfolio should consider buying Western Digital. Until then, we will wait for the right price while looking at further development at the company.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Western Digital Corporation (WDC) or other securities.