Robust Upside Potential For Western Digital Inventory?

We consider Western Digital inventory (NASDAQ: WDC) has the potential for sturdy positive aspects as soon as fears surrounding the Covid outbreak are put to relaxation. Western Digital trades at $36 at the moment and has misplaced 41% in worth to date this yr. Additional, it traded at a pre-Covid excessive of $69 in February, and at the moment trades at round 47% decrease than that stage. Regardless of the pandemic, WDC’s full yr 2020 outcomes (fiscal yr ending June) noticed income are available at $16.7 billion vs $16.6 billion in 2019. A drop in SG&A bills noticed internet loss lower to $250 million, solely a 3rd of the $750 million in internet loss for 2019. Additional, since WDC inventory has gained solely 25% from its March low of $29 in comparison with the S&P 500 which has gained 50%, we consider that the inventory has the potential to rise nearly 90% to its pre-Covid stage as soon as there may be clear proof of containment of the virus. Our conclusion is predicated on our detailed evaluation of Western Digital’s inventory efficiency through the present disaster with that through the 2008 recession in an interactive dashboard evaluation.

2020 Coronavirus Disaster

Timeline of 2020 Disaster So Far:

• 12/12/2019: Coronavirus instances first reported in China
• 1/31/2020: WHO declares a worldwide well being emergency.
• 2/19/2020: Indicators of efficient containment in China and hopes of financial easing by main central banks helps S&P 500 attain a report excessive
• 3/23/2020: S&P 500 drops 34% from the height stage seen on Feb 19, as Covid-19 instances speed up outdoors China. Doesn’t assist that oil costs crash in mid-March amid Saudi-led worth battle
• From 3/24/2020: S&P 500 recovers 49% from the lows seen on Mar 23, because the Fed’s multi-billion greenback stimulus package deal suppresses near-term survival nervousness and infuses liquidity into the system.

In distinction, here’s how WDC and the broader market carried out through the 2007/2008 disaster.

Timeline of 2007-08 Disaster

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline akin to Lehman chapter submitting (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Preliminary restoration to ranges earlier than accelerated decline (round 9/1/2008)

Western Digital vs S&P 500 Efficiency Over 2007-08 Monetary Disaster

WDC inventory declined from ranges of round $20 in September 2007 (pre-crisis peak) to ranges of round $11 in March 2009 (because the markets bottomed out), implying WDC inventory misplaced 46% from its approximate pre-crisis peak. It recovered publish the 2008 disaster, to ranges of about $35 in early 2010, rising by a staggering 223% between March 2009 and January 2010.

Western Digital’s Fundamentals in Latest Years Look Robust

Western Digital’s income grew 28% from $13 billion in 2016 to $16.7 billion in 2020, primarily led by rising NAND flash drive gross sales. With the sturdy development in revenues, the company’s margins additionally expanded until 2018, leading to EPS rising from $1.01 in 2016 to $2.27 in 2018. The provision glut in 2019, led to a drop in promoting costs, and with COGS remaining on the identical stage, EPS dropped to -$2.58. EPS recovered to -$0.84 in 2020 regardless of the pandemic resulting in solely marginal income development. 

Does Western Digital Have A Adequate Money Cushion To Meet Its Obligations By The Coronavirus Disaster?

Western Digital’s whole debt decreased from $13.2 billion in 2017 to $9.6 billion in 2020. Nonetheless, Western Digital’s whole money additionally decreased from $6.four billion to $Three billion over the identical interval. Additional, the corporate generated $800 million in money from its operations in 2020, and it seems to be in an honest place to climate the disaster.

CONCLUSION

Phases of Covid-19 disaster:

• Early- to mid-March 2020: Concern of the coronavirus outbreak spreading quickly interprets into actuality, with the variety of instances accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival nervousness
• Might-June 2020: Restoration of demand, with gradual lifting of lockdowns – no panic anymore regardless of a gradual enhance within the variety of instances
• July-October 2020: Poor Q2 outcomes for a lot of corporations, however continued enchancment in demand and a decline within the variety of new instances and progress with vaccine improvement buoy expectations

As buyers focus their consideration on anticipated 1H 2021 outcomes, we consider Western Digital inventory has the potential for sturdy positive aspects as soon as fears surrounding the Covid outbreak are put to relaxation.

What if you’re in search of a extra balanced portfolio as a substitute? Here’s a prime quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of corporations with sturdy income development, wholesome income, masses of cash, and low threat, it has outperformed the broader market yr after yr, constantly.

 

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The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.