WDC - Western Digital Corp - Company Profile

Western Digital develops, manufactures and sells data storage devices that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content worldwide. They produce hard drives for consumer PCs and enterprise servers. They produce solid-state drives (SSDs) that contain flash memory and operate at many times the speed of a conventional mechanical disk drive. They produce direct attach storage solutions for private and public clouds with storage per device of up to 24 TB.

Several months ago Western Digital agreed to buy flash memory maker SanDisk for roughly $80 per share or $16 billion. SanDisk has a revolutionary new memory technology that is due to hit the market soon and is considerable faster than existing flash memory. Western will be able to incorporate this super fast flash into its products and move well ahead of competitor Seagate Technology (STX). Seagate purchased competitor Samsung and Western Digital purchased Hitachi over the last several years. That leaves Seagate and Western Digital as the only major disk storage manufacturers in the world.

The SanDisk acquisition was completed on May 12th.

When Western Digital bought Hitachi in 2012, China approved the transaction but required WDC to maintain manufacturing and sales separate from WDC manufacturing and sales for 2 years. At the end of that period, China tried to impose new restrictions and after a long battle they finally relented in December. Western will finally be able to fully integrate the Hitachi acquisition into Western's manufacturing process. That is expected to provide them with another $500 million in synergies over the next two years.

As a result of the SanDisk merger, Western Digital will have an opening to spread out in the flash storage market. SanDisk will be able to leverage Western's decades of market share in the hard drive market to expand on its flash storage into laptops, notebooks, tablets, PCs, etc. This is a win-win for both companies.

Western Digital shares crashed to $41 on May 19th after the acquisition was completed. They revised their guidance as a combined company. They now expect current quarter revenue in the range of $3.35-$3.45 billion compared to the prior forecast of $2.6-$2.7 billion. Earnings are expected to be between $.65-$.70 cents compared to the prior forecast for $1.05. The new guidance now includes interest costs of about $220 million. They incurred $30 million in debt issuance costs and $50 million in interest prior to closing on the acquisition. I believe WDC is going to rally off the recent lows and through resistance at $51. The combined companies are much stronger with a wider range of products than Seagate and sales late this year and in 2017 are going to be much stronger.

Analysts upgraded their ratings with Needham upgrading to strong buy and Citigroup to a buy. Needham has a price target of $90.

We tried to play WDC back in March but were stopped out on a decline after Seagate warned on expected revenue for 2016. WDC also suggested enterprise spending had slowed. However, after completing the acquisition and revising guidance analysts are suddenly more bullish saying the guidance was conservative. With shares $8 off the lows it appears investors are trying to buy the bottom. There is decent resistance at $51 that could provide a pause point. However, as a combined company with dozens of new products I believe they will eventually push through. I am going to recommend a 2018 LEAP with an offsetting put because WDC could take a couple quarters to really build up some new product momentum.

Buy 2018 $50 call, currently $7.70, no initial stop loss.

Optional

Sell short 2018 $30 put, currently $4.25, no initial stop loss.
Net debit $3.45.