Investidea: Western Digital, because stocks multiply by fission

Инвестидея: Western Digital, потому что акции размножаются делением

Investidea: Western Digital, because stocks multiply by fission

Western DigitalWDC$58.75BuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

Today we have a speculative idea: take shares in storage device maker Western Digital (NASDAQ: WDC), to capitalize on the activist investor's campaign against this issuer.

Growth potential and validity: 19,5% during 14 Months; 81% behind 10 years. Both options take into account the possibility of separating one of the company's divisions into a separate issuer.

Why stocks can go up: because one fund can make them grow.

How do we act: we take shares now by 58,75 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

WDC makes HDD and flash storage. Six months ago, we published a detailed review of the company, therefore, we indicate the most important point for us: almost half of Western Digital's revenue comes from China - mainland China and Hong Kong. A huge part of WDC's manufacturing activity is in Asia.

Investidea: Western Digital, because stocks multiply by fission

Arguments in favor of the company

Activator-3000. Investfond Elliott Investment Management, known for his activist campaigns, acquired a stake in WDC and urged the company's management to divide it into two issuers, each of which will perform different functions: HDD и, respectively, flash. According to representatives of the fund, this will allow the shares of two different companies to grow more vigorously than the shares of a single WDC.

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Really, WDC quotes are marking time last 5 years, and in some parameters, such as pre-tax margin, the company is inferior to competitors from Seagate, and besides, that the latter pay dividends, which the WDC canceled 2 years ago. Since 2018, WDC shares have not returned to the level 108 $, what, probably, upsets investors.

From the point of view of the operational activity of WDC as an enterprise, the division into two companies is unlikely to be painless, so the WDC leadership will not go for it. Although this option should not be completely ruled out..

But still I think, that the Elliott campaign was a wake-up call for WDC management and, not to bring to court, WDC can meet the needs of investors. For example, introduce dividends in the same volume — 2 $ per share per year, that will give shameless 3,44% per annum and help quotes grow.

Other advantages. WDC has several advantages, who attracted the Elliott fund to the company, seeing beauty, hidden in these promotions.

Now WDC is actively increasing the share of the cloud computing sector in its sales: its share is approximately 42% from proceeds, and by 2025 it will be 49%. This is a more stable and profitable market for WDC, than other segments, essentially focused on serving the consumer segment. So the movement in this direction can be considered an additional argument in favor of the company.

And WDC is not very expensive.. In terms of P / E and P / S it is cheaper than its nearest competitor Seagate. And the capitalization of WDC is not very large - 18.03 billion.

Probably, these two points convinced Elliott management that, that WDC shares have potential.

What can get in the way

The best argument against WDC is a close examination of its business.

Competitors. The market is very competitive: Seagate and Toshiba are breathing hot companies in the back of the head, and in some ways even surpass, which creates monstrous stress for the leadership of the WDC. Such strong competitors, by the very fact of their existence, do not allow it to maintain high prices for its products for a long time and force them to spend crazy money on modernizing their production - hence the rollercoaster reporting of the company, where periods of profit are replaced by the same periods of losses.

Imperfect bookkeeping. The company has 13.715 billion debts, of which 4.397 billion must be repaid within a year. WDC has a lot of money at its disposal, which should be enough to close all urgent debts: 2,505 billion in accounts and 2.353 billion debts of counterparties. But, Considering, that the total amount of debts she has is large, I don't think, that the company decides to return dividends. Especially in light of the relentless competition from Seagate and Toshiba.

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You should also take into account the increase in rates and the resulting increase in the cost of loans.: servicing such a mountain of debt will become more difficult, which again reduces the probability of returning dividends in the amount of interest to us. Well, the fact of large debts in itself will scare away some investors from the company.

Corona crisis in China. Large-scale quarantine not only leads to a paralysis of business and industrial activity in this country, but also negatively affects operations in neighboring regions. How do we remember, Asia accounts for the lion's share of the company's operations and revenue.

So investors should mentally prepare for, that the company may start adjusting its expectations for the year. Well, or reporting will disappoint investors. In any case, Chinese quarantines can lead to a significant drop in WDC shares..

What's the bottom line?

Strictly speaking, if not for the Elliott campaign, then I would not look closely at WDC shares at all. But I think, that the fund will “cheep” something like that, why prices go up. Well, or that the fund will at least try to do it..

So with a heavy heart, we take shares now 58,75 $. And then there are two options:

  1. wait, when stocks return to level 70 $ - so much they asked for in June 2021. That will be enough booty for Elliott. I believe, what makes sense here 14 months of waiting;
  2. keep shares next 10 years before returning to the level 108 $, who asked for them in 2018. Very likely, that at such long distances, the WDC management will decide to return dividends.

Both options take into account the possibility of separating one of the company's divisions into a separate issuer. That is, if the shares of the second issuer grow, while the shares of the main WDC will stagnate, then we will consider it a victory.

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