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Western
Digital: Growth
and
Transformation
Meixi Chen
Ada Del Rosso
Amir Ganaba
Richard Graham
Alyson Laux
Highlights
Buy
Price $38.18
Target $47
$24
$47
$60
Analyst Estimate Range
• Successful Transformation
of Business Model
• High Value Products
dominate the Product Mix
• Cost Structure as a
Sustainable Competitive
Advantage
• Promising Growth in
Emerging Markets
• Position in the 2-yr cycle
Source: Yahoo Finance
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
A Deeper Look at WDC…
Company
Landscape
History
Key
Positioning
Financials
CompanyCompetitive
History
Key Financials
•New
Technology
increases
product
differentiation
52
Week
Trading
Range:
$23.06
$45.09
P/E Ratio: 8.24
•History
of
adapting
to
new
markets
•Back to Basics Strategy
•Exports
to emerging
market promise revenue
Shares Outstanding:
231.67M
EPS: 4.63 growth
•Strategic
use
acquisitions
and
divestitures
Overview
•30%
Market
Share
Market
Cap:the
$8.85B
6.78
•Entering
Maturity Stage of the LifeDebt/Equity:
Cycle
•Vertical
Integration
•Key Success
Factors
•Production
Inputs make up majority
of budget
Industry
Competitive
Positioning
Key
Highlights
Company
Overview
Future
Outlook
Landscape
Risks
Financial
Summary
Conclusion
New Products
Increasing Demand in Storage
Increase in WDC Products
Branded
Source:
Company
Data and
Revenue
Projections
Key
Highlights
Company
Overview
Future
Outlook
Risks
Consumer
Electronics
Enterprise
Financial
Summary
Conclusion
New Markets
Geographic Mix
2010
2015E
Americas
24%
Asia Growth Rates
Americas
20%
120.00%
Asia
53%
100.00%
EMEA
20%
Asia
60%
EMEA
23%
80.00%
Source: Company Data and Revenue Projections
60.00%
Desktop
Enterprise
40.00%
Consumer Electronics
20.00%
Branded
Capturing a Growing
Market
Total
•PC shipments up 8.8% in 2010
•Economy improvements
•Growth of Wealth in Emerging Nations
0.00%
Source: Company Data and Revenue Projections
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Cost Structure
Market Leader
with Experience
•Economies of Scale
•HDD component vertical
integration
•Responsive and Flexible
Production Process
•Hitachi acquisition
proves thesis
Source: Company Data and Revenue Projections
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Potential Risks
Competitive Environment
• Intensifying Competition in the industry
• Average Selling Price uniformly decreasing
• Varied competitors – Pureplay & Conglomerates
Market Cannibalization
• Flash based Solid State Drives (SSDs)
• Tablets
• Cloud Computing Technologies
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Threat Level
Pure
play
Major Competitors
Established market leader; directly competes with
WDC in all segments
SSD Conglomerates
Well Positioned in SSD market but lacks focus in HDD
market
Manufacturer of media player; Data Storage service
provider
Acquired Fujitsu’s HDD business and gained market
share
Major player in the SSD market; but no
representation in HDD Market
= High Threat
Key
Highlights
Reasons
Company
Overview
= Medium Threat
Future
Outlook
= Low Threat
Risks
Financial
Summary
Conclusion
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Threat Level
Pure
play
Major Competitors
Reasons
Established market leader; directly competes with
WDC in all segments
SSD Conglomerates
Well Positioned in SSD market but lacks focus in HDD
market
Western Digital’s Advantage
Manufacturer of media player;
Data Storage service
Conclusion
provider
• Hard Drive Products are
substitutable
• Lower Average Selling Price
• High Quality Reputation
• Stable ROE over past years
Acquired Fujitsu’s
HDD business
andis
gained
marketto
Western
Digital
Superior
share
= High Threat
Key
Highlights
Company
Overview
Seagate and will be able to
Major player in the SSDCapture
market; but
no
Seagate’s
representation in HDD Market
Established Market Share in
Traditional Segment
= Medium Threat
Future
Outlook
= Low Threat
Risks
Financial
Summary
Conclusion
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Threat Level
Pure
play
Major Competitors
Established market leader; directly competes with
WDC in all segments
SSD Conglomerates
Well Positioned in SSD market but lacks focus in HDD
market
Manufacturer of media player; Data Storage service
WDCprovider
VS. Acquired Fujitsu’s HDD business and gained market
share
Seagate
Major player in the SSD market; but no
representation in HDD Market
= High Threat
Key
Highlights
Reasons
Company
Overview
= Medium Threat
Future
Outlook
= Low Threat
Risks
Financial
Summary
Conclusion
Conglomerates
Western Digital Operates in a Highly Competitive Market
Threat Level
Pure
play
Major Competitors
Established market leader; directly competes with
WDC in all segments
SSD Conglomerates
Well Positioned in SSD market but lacks focus in HDD
market
Manufacturer of media player; Data Storage service
provider
Acquired Fujitsu’s HDD business and gained market
share
Major player in the SSD market; but no
representation in HDD Market
= High Threat
Key
Highlights
Reasons
Company
Overview
= Medium Threat
Future
Outlook
= Low Threat
Risks
Financial
Summary
Conclusion
Conglomerates
Western Digital Operates in a Highly Competitive Market
Threat Level
Pure
play
Major Competitors
Established market leader; directly competes with
WDC in all segments
Conclusion
Western Digital’s Advantage
SSD Conglomerates
Well Positioned in SSD market but lacks focus in HDD
market
• Focus on the Storage
Device Market
• Low Average Selling Price
• Higher Quality
• Technological Innovation
Ability
= High Threat
Key
Highlights
Company
Overview
Reasons
• Western Digital provides
Manufacturer of
media quality
player; Data
Storage service
higher
products
&
provider
faster technology update
Acquired Fujitsu’s HDD business and gained market
• WD will expand through
share
winning their market shares
Major player in the SSD market; but no
representation in HDD Market
= Medium Threat
Future
Outlook
= Low Threat
Risks
Financial
Summary
Conclusion
Market Cannibalization – SSDs
High Cost
High
performance
Low Power
Consumption
Small Physical
Size
SSD is a high growth market with great potential; but it will not replace HDD in the
next Decade
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Market Cannibalization – SSDs
Take Away
High Cost
Western Digital has already started
manufacturing
SSD
lines
High
Low
Power
performance
Consumption
Small Physical
Size
10 Years transition period will allow
WD to leverage its brand strength and
SSD is a high growth market
great potential;
it will not replace HDD in the
R&Dwith
to capture
marketbut
share
next Decade
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Tablet & Cloud Computing
Tablet – Competition with
HDD
However…
Virtualized Storage Service
May Erode the HDD Market
However…
HDD will still be used –
demand from cloud service
provider
iPAD – Content
Consumption Device
Therefore,
HDD is still required to store
information & data
Opens up opportunities for
WD’s RAID Edition
WD’s NAS – provide
personal cloud opportunity
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Valuation Summary
Valuation balances depressed
industry valuation with future growth
potential
52 Week Trading Range
Market Approach - Comperable Companies
•Comparables more accurately
captures current market valuation
DCF - EBITDA Exit
•DCF more accurately captures
potential growth
DCF - Gordon
$15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
Valuation Method
Comparables
DCF - Gordon Growth
DCF - Exit Multiple
Implied Price Weight
$44.80
0.5
$51.47
0.1
$48.87
0.4
•Gordon growth given limited
weighting
•Precedent transactions analysis not
included due to lack of takeover
potential
Target Price: $47
Key
Highlights
Company
Overview
Future
Outlook
Risks
Financial
Summary
Conclusion
Comparable Companies
LTM EBITDA
LTM EBIT
LTM Revenue
3.1x
20.8x
3.1x
5.8x
6.7x
2.04x
12.5x
17.8x
2.90x
16.1x
20.8x
3.06x
3.0x
6.4x
1.28x
$38.45
$-
Key
Highlights
Company
Overview
$10.00
Future
Outlook
$20.00
$30.00
Risks
$40.00
$51.14
$50.00
Financial
Summary
$60.00
Conclusion
Key Ratios
Project stable margins over 5
year period
We project the firm will remain
solvent
Project declining ROA and ROE
as industry enters mature stage
Liquidity ratios suggest the firm is
highly liquid
Western
Digital: Growth
and
Transformation
Meixi Chen
Ada Del Rosso
Amir Ganaba
Richard Graham
Alyson Laux
Appendix
Main Presentation
Appendix
Key Highlights
Company Overview
Conclusion
Financials
Future Outlook
New Products
New Markets
Cost Structure
Financial
Summary
Valuation Summary
Comparable Companies
Discounted Cash Flow
Risks
Overview
Competitor Analysis
Advantage over Seagate
ROE Comparison
Conglomerates
Advantage over
Conglomerates
SSDs
SSD Takeaway
Tablet and Cloud Computing
Sensitivity Analysis
WACC
PV Interest Earned on
Cash
Tax Treatment
EPS and PE Analysis
Capex
Key Ratios
Wall Street Consensus
Strategic Insights
WDC History of Innovation
Seagate Technology
Potential Acquisition Effects
Hitachi
WACC
WACC
Sensitivity Analysis
###
9%
10%
11%
12%
13%
###
9%
10%
11%
12%
13%
2.75x
$40.44
$39.34
$38.30
$37.30
$36.36
EV/EBITDA Exit Multiple
3.75x
4.75x
$46.23
$52.02
$44.87
$50.41
$43.58
$48.87
$42.36
$47.42
$41.20
$46.03
5.75x
$57.82
$55.94
$54.16
$52.47
$50.87
6.75x
$63.61
$61.48
$59.45
$57.53
$55.70
0.50%
$60.31
$54.57
$49.97
$46.21
$43.07
Gordon Growth Rate
0.75%
1.00%
$61.54
$62.85
$55.50
$56.49
$50.70
$51.47
$46.79
$47.40
$43.55
$44.04
1.25%
$64.25
$57.55
$52.28
$48.04
$44.55
1.50%
$65.75
$58.66
$53.14
$48.71
$45.09
Sensitivity analysis
shows roughly an
average $25 price
range for each DCF
valuation
methodology
WACC
Risk Free Rate
Return on Market
Beta
Cost of Equity
3.2% Cost of Debt
7.0% Tax Rate
1.65
9.5% After-Tax Cost of Debt
Equity Weight
CSRP
WACC
95.74% Debt Weight
1.5%
10.6%
1.63%
35.00%
1.06%
4.26%
PV Interest Earned on Cash
$18.00
$16.00
$14.00
$12.00
Effect of interest
earned on cash
balance small
$10.00
$8.00
$6.00
$4.00
$2.00
$FY-2011E
FY-2012E
FY-2013E
FY-2014E
FY-2015E
Present Value of Income from Cash Balance
PV Income From Cash Balance
$34.44
Per Share
$0.15
Tax Treatment
Effect of Tax Treatment on EPS
$7.00
$6.00
$5.00
$4.00
Tax Benefit
$3.00
Without Benefit
$2.00
$1.00
$0.00
2011E
2012E
2013E
2014E
2015E
Tax holiday until
2020 in Malaysia
substantially
improves WDC’s
EPS
CAPEX Forecast
Projected CAPEX
900
8%
880
8%
860
8%
840
8%
820
8%
800
7%
780
7%
760
7%
2011E
2012E
2013E
2014E
2015E
Projected 2011 CAPEX
consistent with
management forecast
CAPEX (MM)
% Sales
Projected 2012-2015
CAPEX based on
historical CAPEX as %
of sales
EPS and P/E Analysis
2006
Price $19.81
EPS $1.84
P/E 10.77x
2007
$19.35
$2.57
2008
$34.42
$3.92
2009
$26.36
$2.12
2010
$30.20
$6.06
2011E
$30.20
$2.70
7.53x
8.78x
12.43x
4.98x
11.19x
Historical and Forward P/E
Average P/E: 8.9x
14.00x
12.00x
10.00x
8.00x
6.00x
4.00x
2.00x
.00x
2006
2007
2008
2009
2010
2011E
WDC has a History of Innovation
1: WDC Emerges
from Bankruptcy
2: Begins
Constructing own
HDDS
3: Begins Multiple
HDD models
4: Increases Product
Variety
5: Enters Enterprise
Market
Wall Street Consensus
Standard and Poor’s
Seagate Technology
Strength
Weakness
Industry leader
Replaceable products
Domination in the
Enterprise Market
Higher ASP
High reputation
Unstable ROE
Business Overview:
Seagate Technology (NASDAQ: STX)
designs, manufactures, markets
and sells hard disk drives. Its
products are used in enterprise
applications, client computer
applications and consumer
electronics. Seagate sells its
products to OEMs, retailers and
distributors. The company is direct
competitor with WD in all areas.
1 Year Stock
Performance
Potential Acquisition Effects
Acquisition
Currency
Characteristics of
Potential
Acquisition
Cash on Hand: $3.1B
Market Cap of $1-3B
Core Competencies:
Semiconductors
Electronic
Components
Software
Development UI
Dilution Effects
Cash on hand more
than adequate to
finance future
potential acquisitions
motivated by vertical
integration
Total Market Size
Recent Hitachi Acquisition
Benefits
•
•
•
•
Combined HDD Shipments 48%
Push Revenues Ahead of Seagate
Introduce fast SSDs
Increase Enterprise Market Share
from 11.4% to 46%
• Enhanced R&D Capabilities
• Better Cost Structure
• Improved Competitive Dynamics
Weaknesses
• Potential Market Share
Decline
• Increased Debt by $2.5 Billion
$4.3 Billion=$3.5 Billion Cash + $750 Million
Equity