the company has been guiding the market, telling you that the eps is going to be lower because of overhang, clearly margins were not great.
our notes from the call;
tam ~165mm, they shipped 49.8mm down 2.5% y/y (industry 2.3%). $2.25bn sales ~ BR asp $45.18 (-$6 y/y)
demand next quarter seasonally weak, however because of earthquake supply disruption should create a supply shortage.
2.5 inch shortages greater than shortages in 3.5 inch.
..sounds to BR that WD is going to try to win share as other suppliers are disrupted..
gross margin 18.2% (25% y/y) (19% q/q)
r&d ~10% of revenue @ $252mm
net income $142mm 0.62 eps (0.66 non gaap) run-rate-p-e ~15.
q&a;
is there a signed purchase agreement with hitatchi? its in the 10q
samsung-seagate, does it change the way you talk about your deal with regulators? ... no. still going to say merger is going to better serve customers, benefits of scale will be shared with customers.
intel expect low double digit growth, what is your oem colour? 2010 industry shipped more than end demand, too much inventory in channel, two year growth rate will be about 12%, 18% in '10-'09, so low growth this year.
any indication from oem's about hit aquisition? customer reaction has been very positive.
customers asking for more supply, do you ask for higher price, fixed orders, etc? work with customers for years, have flexible model, consistent, if their costs are higher, they share them, BR yes.
thought there was 8-10mm excess TAM, there was then a shortage in cpu in quarter, but they are pretty much back where they started. will take a full year to not be supply contrained for june, sep, dec get to equilib.
does toshiba have the ability/will to invest? their press release says yes
that is very significant piece of information that we've missed! need to find that ASAP...
BR thoughts; samsung-seagate deal is definitely a negative for the merger, its not positive. Toshiba deciding to invest is VERY negative, and need to find the press release that is referred to on the conference call.
reduced the position substantially until we find that toshiba press release and have a bit more of a think...
Showing posts with label $WDC. Show all posts
Showing posts with label $WDC. Show all posts
Thursday, 21 April 2011
Tuesday, 19 April 2011
WDC pnl update
Looks like there is going to be some further consolidation within the industry, again, if this passes through trust issues then its great for margin and overhang.
$WDC reports tomorrow night, and it should be a very interesting call; perhaps now is the time for a p'n'l update of the trade put on last month, and as a picture is worth a thousand words;
just to put some numbers on that trade, thats a 15% return in a month and a half, where the stock position is being hedge with a index hedge...
here is a description of why; http://blackraven999.blogspot.com/2011/03/awesome-hitwdc-reaction.html
and here is a description of thoughts on the risk; http://blackraven999.blogspot.com/2011/03/wdc-risk-managing-position.html
$WDC reports tomorrow night, and it should be a very interesting call; perhaps now is the time for a p'n'l update of the trade put on last month, and as a picture is worth a thousand words;
here is a description of why; http://blackraven999.blogspot.com/2011/03/awesome-hitwdc-reaction.html
and here is a description of thoughts on the risk; http://blackraven999.blogspot.com/2011/03/wdc-risk-managing-position.html
Wednesday, 9 March 2011
an awesome HIT..........$WDC reaction
Huge news monday morning, and would have had more to say here if there wasn't the need to trade it. WDC are buying Hitatchi's storage business, the ominous "third player". The stock moved from $30 on Friday to $36 a pretty huge move. Having been short the stock and spent the last two days first buying back the small short and putting on a proper sized long its fair to say this is a game changer.
Removing this pricing pressure from the market has an enormous impact on the multiple that one should value wdc and seagate on. Without the deal the pricing situation was bleak. A large number of units overhanging that didn't seem to get cleared a siutation getting worse because Hitatchi was looking for an exit, and in so doing was trying to push up sales at the expense of margin for a potential IPO.
It was quite plausible that the selling prices could have been knocked down a further 5%. Just using the trailing 12 months, that would have reduced sales from $9.9bn to $9.4bn, and net profit to $0.58bn from $1.09bn. Putting that on a conservative multiple of 8x (which is justified for such a cyclical business) and adding in the $2bn of cash and you were looking at a price of ~ $28, but obviously with a lot more downside if the economy got worse or Hitatchi really started to blow out stock.
Whereas if we put on our rose tinted spectacles and dream, then WDCHIT looks pretty sweet; the combined group would have about $19bn of sales, on an 21% operating margin and all the synergies, and then a move up to a better multiple of lets say 10x and we're looking at $2.6bn net profit a year and a stock price of $100. yes triple.
Being very conservative, lets say a 50% leak, half synergies, 18% margin and the same old multiple 8x and we're at $36. Mid case and we're talking $55.
Lets make it even more simple, there are essentially three cases;
1) deal gets kaboshed - stock drops, $27
2) deal goes through, no synergies, high leak, no multiple expansion $36
3) deal goes through, land of milk and honey, $55
You can play around with probabilities and try to be really smart and work out a finer detail on this, however in the short term one has to recognize that the future has radically changed, and that historically markets don't digest that information quickly.
The same human nature that allows momentum to be a profitable strategy is at work, its hard to buy a stock that has gone up a large amount in a short period of time. Here we see the reason why and that there is a lot more upside potential.
The Raven has bought his position already, but will continue to add if the price action confirms this view.
Tomorrow some more thoughts as to those relative probabilites and how we're going to risk manage our position.
Removing this pricing pressure from the market has an enormous impact on the multiple that one should value wdc and seagate on. Without the deal the pricing situation was bleak. A large number of units overhanging that didn't seem to get cleared a siutation getting worse because Hitatchi was looking for an exit, and in so doing was trying to push up sales at the expense of margin for a potential IPO.
It was quite plausible that the selling prices could have been knocked down a further 5%. Just using the trailing 12 months, that would have reduced sales from $9.9bn to $9.4bn, and net profit to $0.58bn from $1.09bn. Putting that on a conservative multiple of 8x (which is justified for such a cyclical business) and adding in the $2bn of cash and you were looking at a price of ~ $28, but obviously with a lot more downside if the economy got worse or Hitatchi really started to blow out stock.
Whereas if we put on our rose tinted spectacles and dream, then WDCHIT looks pretty sweet; the combined group would have about $19bn of sales, on an 21% operating margin and all the synergies, and then a move up to a better multiple of lets say 10x and we're looking at $2.6bn net profit a year and a stock price of $100. yes triple.
Being very conservative, lets say a 50% leak, half synergies, 18% margin and the same old multiple 8x and we're at $36. Mid case and we're talking $55.
Lets make it even more simple, there are essentially three cases;
1) deal gets kaboshed - stock drops, $27
2) deal goes through, no synergies, high leak, no multiple expansion $36
3) deal goes through, land of milk and honey, $55
You can play around with probabilities and try to be really smart and work out a finer detail on this, however in the short term one has to recognize that the future has radically changed, and that historically markets don't digest that information quickly.
The same human nature that allows momentum to be a profitable strategy is at work, its hard to buy a stock that has gone up a large amount in a short period of time. Here we see the reason why and that there is a lot more upside potential.
The Raven has bought his position already, but will continue to add if the price action confirms this view.
Tomorrow some more thoughts as to those relative probabilites and how we're going to risk manage our position.
Tuesday, 30 November 2010
"Seagate Technology Terminates Private Equity Discussions And Announces Share Repurchase Authorization"
http://www.seagate.com/ww/v/index.jsp?locale=en-US&name=private-equity-termination-repurchase-seagate-pr&vgnextoid=6692a92cf699c210VgnVCM1000001a48090aRCRD
Interesting the company instantly announced a share buyback, however the Raven is skeptical as to much many share will actually get bought back and when given that they intend to do it out of future cashflow. $2bn would be ~154mm shares, approx a third of the company!
Leverage?
Just for giggles where would that take the leverage of the firm? The Raven thinks its quite possible for their margins to fall to 15% then using 4yr average revenue and SGA, we're talking EBITDA of $1.3bn. Current assets cover long term debt and current liabilities currently, so leverage would be 1.5x still investment grade. but 10% margin and its 2.7 and we're getting to the covenant zone. Its not clear that its a lock either, there are strategic hurdles and a cash rich competitor, maybe levering up isn't the smartest trade.
So what are historical returns for announced huge buybacks?
Ok there aren't many companies that announce they're going to buy back a third of the company. Interpolating the stats isn't too easy, as two factors tend to drive returns, size of announcement and completion rates, which in this case are contradictory, top decile announcement size and probably lower quartile completion rate. Looks like about a 3% pop on the announcement, and another 5% over the year.
How much fat was on this puppy?
Punters are going to compare it to where WDC has traded, however its very clear that WDC priced in its own possible LBO on the back of the STX news, because taking a historical ratio of where they traded would indicate that STX was already at fair value to WDC before last nights announcement. Perhaps the trade on th open for the Raven will be to cover his very small STX short and sell some WDC, we shall as always check the price action at the time.
Interesting the company instantly announced a share buyback, however the Raven is skeptical as to much many share will actually get bought back and when given that they intend to do it out of future cashflow. $2bn would be ~154mm shares, approx a third of the company!
Leverage?
Just for giggles where would that take the leverage of the firm? The Raven thinks its quite possible for their margins to fall to 15% then using 4yr average revenue and SGA, we're talking EBITDA of $1.3bn. Current assets cover long term debt and current liabilities currently, so leverage would be 1.5x still investment grade. but 10% margin and its 2.7 and we're getting to the covenant zone. Its not clear that its a lock either, there are strategic hurdles and a cash rich competitor, maybe levering up isn't the smartest trade.
So what are historical returns for announced huge buybacks?
Ok there aren't many companies that announce they're going to buy back a third of the company. Interpolating the stats isn't too easy, as two factors tend to drive returns, size of announcement and completion rates, which in this case are contradictory, top decile announcement size and probably lower quartile completion rate. Looks like about a 3% pop on the announcement, and another 5% over the year.
How much fat was on this puppy?
Punters are going to compare it to where WDC has traded, however its very clear that WDC priced in its own possible LBO on the back of the STX news, because taking a historical ratio of where they traded would indicate that STX was already at fair value to WDC before last nights announcement. Perhaps the trade on th open for the Raven will be to cover his very small STX short and sell some WDC, we shall as always check the price action at the time.
Thursday, 21 October 2010
$STX call
Company said they couldn't give future guidance or comment on PE approach given legality, which made for a short (if late and bland) call.
Interestingly they didn't participate in the "13th week", which $WDC had said was at twice the average rate of the prceding 12weeks. They think that the 13th week was busier because of pulled forward demand because of China's golden week, and quarter end dates.
$0.31 EPS and missed revenue.
49.2mm units (backs out ASP of $55) they said approx 8% q/q price decline. gross margin of 20.4%
'competitors more tenacious than years past'
long discussion on SSD's and hybrids in relation to notebooks, netbooks and MacBook Air.
general thoughts;
STX had popped up on the Raven's LBO candidates screen just based on historical numbers, however he'd excluded it because of the margin pressure and "third competitor" issue. To him it doesn't make sense for a PE firm to take such a big punt on storage when there are so many issues which management of the firm really don't have so much control over. Its also not apparent that higher financial leverage is either appropriate or adds value to equity holders. As the stories appeared in the WSJ its not to be written off lightly, there's a pretty good chance that a bid does materialize, and the rumoured price range is anything from $15 to $25. Anything above the 52w should be heavily mentally discounted.
FT article on Hitatchi Global Storage
Hitatchi is looking to sell its storage business, interestinly its lower margins and agressive attempts to take market share aren't helping the supply-demand imbalance. Strategically wouldn't it make more sense to buy the lowest margin competitor, accept market share and work on the cost base? the $1bn price tag for ~ $2.5bn of sales would value $STX and $WDC at $4.32bn and $3.84bn, or $9.15 and $16.76+$8.7=$25.5
Interestingly they didn't participate in the "13th week", which $WDC had said was at twice the average rate of the prceding 12weeks. They think that the 13th week was busier because of pulled forward demand because of China's golden week, and quarter end dates.
$0.31 EPS and missed revenue.
49.2mm units (backs out ASP of $55) they said approx 8% q/q price decline. gross margin of 20.4%
'competitors more tenacious than years past'
long discussion on SSD's and hybrids in relation to notebooks, netbooks and MacBook Air.
general thoughts;
STX had popped up on the Raven's LBO candidates screen just based on historical numbers, however he'd excluded it because of the margin pressure and "third competitor" issue. To him it doesn't make sense for a PE firm to take such a big punt on storage when there are so many issues which management of the firm really don't have so much control over. Its also not apparent that higher financial leverage is either appropriate or adds value to equity holders. As the stories appeared in the WSJ its not to be written off lightly, there's a pretty good chance that a bid does materialize, and the rumoured price range is anything from $15 to $25. Anything above the 52w should be heavily mentally discounted.
FT article on Hitatchi Global Storage
Hitatchi is looking to sell its storage business, interestinly its lower margins and agressive attempts to take market share aren't helping the supply-demand imbalance. Strategically wouldn't it make more sense to buy the lowest margin competitor, accept market share and work on the cost base? the $1bn price tag for ~ $2.5bn of sales would value $STX and $WDC at $4.32bn and $3.84bn, or $9.15 and $16.76+$8.7=$25.5
Wednesday, 20 October 2010
$WDC earnings call
As the Raven has noted on the blog a few times, the sector will face margin pressure going forward. That's clear that this is happening from their current results. Yes sales hit estimates, net income was there, however that doesn't disguise what's happening with the MARGIN.
very roughly its got about $12 of cash, so its run rate p/e on next quarter is ~ 7.5, however;
The Raven wasn't so clear as to what effect the ipad is having for solid state devices, or just how much the company held back from shifting product to protect prices. The company is going to look at strategy and investment decisions and implied that some products didn't make sense at these prices...
Anyway its interesting and is definitely a better looking from the perch than Seagate, but if anything it and $STX are a short tomorrow and perhaps for the next few months depending on price action. Longer term though, enterprise does look a good bet, and of course it could be LBO'd. So its definitely a high risk position either way.
- average selling price $46, -$3 lower than last year, -$1 q/q.
- historical seasonality suggests this should be the best quarter for demand
- gross margin adjusted for SGA was 15.8% last year 20.8%, unajusted 18.2% v 23.2%
- margin decline driven by lower average selling prices, which is being driven by an excess of ~10mm units (Raven estimate), "6-8mm units need to get burnt off" ~ 5% capacity
- management correctly say that Seagate's ownership structure won't matter to industry pricing
- margin errosion is WITH them giving up market share to our ominous 3rd party
very roughly its got about $12 of cash, so its run rate p/e on next quarter is ~ 7.5, however;
The Raven wasn't so clear as to what effect the ipad is having for solid state devices, or just how much the company held back from shifting product to protect prices. The company is going to look at strategy and investment decisions and implied that some products didn't make sense at these prices...
Anyway its interesting and is definitely a better looking from the perch than Seagate, but if anything it and $STX are a short tomorrow and perhaps for the next few months depending on price action. Longer term though, enterprise does look a good bet, and of course it could be LBO'd. So its definitely a high risk position either way.
Thursday, 5 August 2010
An interesting point from Zecco on $WDC and $STX
The Raven read this and thought it was interesting;
http://pulse.zecco.com/2010/07/data-storage-valuation-versus-earnings-stx-wdc/
Basically it points out that data storage is cheap ie. $100 for a terabyte now. It doesn't explicitly say it, but the argument is then that 1Terabyte is enough space for you to store everything you could want and therefore that you'd just buy the cheaper version of the 1TB. Now it would be easy to dismiss this argument by regurgitating a quote about a desktop PC being everything you could need in the 90s. The Raven thinks it more interesting to wonder where the actual limit might be using a bit of imagination. As we're only really looking at personal data storage what items do people like to store? (and a point he's going to dig some more into offline)
photos, music, films, books? software? personal documents
photos, music and films all have the potential to upgrade again to higher resolution formats requiring more storage space, books less so, but software and the personal documents they produce if anything produce larger and larger files. Without even looking at the massive increase in commercial data that will be stored in the future its easy to make an argument that the size of files will expand to fill the space available to store them.
The other point that really should be thought about is what percentage of the population actually store this kind of data on their pc's, and if there is a potential generational effect, as stupid as this sounds the Raven would have a rather good punt that penetration of these sorts of products is much lower with consumers the older they are. ie. Your average 50yr old isn't going to have as many digital photos as your 30 something, or as many photos as that 30 something will have in 20yrs. Just to make the maths easier, lets say people only buy storage when they get to 20, and that penetration really only goes up to 40, thats 20yrs of the population that could be 40yrs in 20yrs time. Not a huge growth rate, but certainley not a stagnating industry at 3.5% p.a. growth for 20yrs.
It still looks like a situation to sit on one's hands. Especially given his other previous thoughts on WDC and STX...
http://blackraven999.blogspot.com/2010/08/wdc.html
http://blackraven999.blogspot.com/2010/08/stx-translation-of-wdc-comments.html
http://pulse.zecco.com/2010/07/data-storage-valuation-versus-earnings-stx-wdc/
Basically it points out that data storage is cheap ie. $100 for a terabyte now. It doesn't explicitly say it, but the argument is then that 1Terabyte is enough space for you to store everything you could want and therefore that you'd just buy the cheaper version of the 1TB. Now it would be easy to dismiss this argument by regurgitating a quote about a desktop PC being everything you could need in the 90s. The Raven thinks it more interesting to wonder where the actual limit might be using a bit of imagination. As we're only really looking at personal data storage what items do people like to store? (and a point he's going to dig some more into offline)
photos, music, films, books? software? personal documents
photos, music and films all have the potential to upgrade again to higher resolution formats requiring more storage space, books less so, but software and the personal documents they produce if anything produce larger and larger files. Without even looking at the massive increase in commercial data that will be stored in the future its easy to make an argument that the size of files will expand to fill the space available to store them.
The other point that really should be thought about is what percentage of the population actually store this kind of data on their pc's, and if there is a potential generational effect, as stupid as this sounds the Raven would have a rather good punt that penetration of these sorts of products is much lower with consumers the older they are. ie. Your average 50yr old isn't going to have as many digital photos as your 30 something, or as many photos as that 30 something will have in 20yrs. Just to make the maths easier, lets say people only buy storage when they get to 20, and that penetration really only goes up to 40, thats 20yrs of the population that could be 40yrs in 20yrs time. Not a huge growth rate, but certainley not a stagnating industry at 3.5% p.a. growth for 20yrs.
It still looks like a situation to sit on one's hands. Especially given his other previous thoughts on WDC and STX...
http://blackraven999.blogspot.com/2010/08/wdc.html
http://blackraven999.blogspot.com/2010/08/stx-translation-of-wdc-comments.html
Wednesday, 4 August 2010
STX translation of WDC comments
Given the view the Raven has as to where $WDC should trade (in yesterdays post), then its relatively simple to make the same sort of read across in valuation terms to $STX given the belief that the "third party" drives margins down to 15% for these two players.
(the Raven is thinking that would be a great name for an activist hedge fund, you wouldn't need to be writing caustic letters with such an ominous name)
Reducing STX margins to 15%, then applying the same prop. adjusted EV/ebitda multiple then a stock price of $7.50 compares to $23. ($28.73 -> $10.67) a lot lower than its current price. Keeping its 3% margin premium that it had to $WDC then you have $9 and $13, so that tells you that the market is expecting them to be able to keep that premium, whether that's wise or not is a much more difficult call to make.
If the Raven is going to be buying anything in the near term future its going to be $WDC rather than $STX.
(the Raven is thinking that would be a great name for an activist hedge fund, you wouldn't need to be writing caustic letters with such an ominous name)
Reducing STX margins to 15%, then applying the same prop. adjusted EV/ebitda multiple then a stock price of $7.50 compares to $23. ($28.73 -> $10.67) a lot lower than its current price. Keeping its 3% margin premium that it had to $WDC then you have $9 and $13, so that tells you that the market is expecting them to be able to keep that premium, whether that's wise or not is a much more difficult call to make.
If the Raven is going to be buying anything in the near term future its going to be $WDC rather than $STX.
Sunday, 1 August 2010
WDC
This is a stock that the Raven has been keeping quite a close eye on the last couple of weeks (he's traded around a small punter sized position). The company makes hard drives, the Raven actually uses one of their external hard drives to back up all his data.
VALUATION
This stock is cheap, by whatever metric you'd look at it classically, if you're using historic data it looks cheap. EV/ebitda(ttm) its 1.84x, p/e(ttm) 4.5, p/s 0.6, p/b 1.32, forward p/e 5.7.
CHART
This looks like a three legged dog with fleas. a blind three legged dog. Its fallen 41% since its high towards the end of April. Its done 40% more volume than one would have expected in that period as well. The 200dsma is 44% higher, basically its ugly, and looks oversold, but thats not a reason for it turn tomorrow.
WHO OWNS IT?
Index funds, mutual funds and relatively passive money, so who's been selling??
4.3% of the float is short, 1.8 as a SR. (as of the middle of the month - so not very informative), not particularly high.
WHAT's THE GOSSIP/FEAR?
Going through some of the fears;
1) SSD tech becomes cheap enough to shut out HDD
2) inventory build up and volatile ASP (normal hardware producer risk really)
3) the "cloud"
4) areal growth rates too high or too slow (too high drives down the margin, too slow and SSD becomes cheaper relatively)
There is a lot of uniformed speculation as to what the fear is in the stock, the Raven doesn't claim to be any wiser than the street on this one, so its best to go through the obvious angles and see if it makes a bit more sense. SSD technically just isn't cheap enough to be competition just yet, the Raven also knows enough about the street to realize that this isn't a risk that has suddenly been priced in since April!! Neither is the cloud, or projected areal growth rates. So clearly by process of ellimination, investors are worried about inventory build up, pricing, etc. A "normal" fear in this sort of stock.
Listening to $STX and $WDC's earnings calls, its pretty clear that they both saw the same thing, the rather ominous sounding "third player" in their space producing an excess of 5mm units. They both speculate whether this is because the TP doesn't have as much control as they do, ie. aren't able to dial down their production as quickly, OR whether this is a deliberate shot at trying to gain market share with a limited number of OEM (original equipment manufacturers) that the TP is particularly close with. To the Raven the latter makes sense. In which case one should go and give the margins and balance sheet a good kicking to check how cheap the stock really is?
Ok, so looking at the suspected TP's driving down prices, the Raven thinks 'they' are running on a gross margin of ~15%, but also with higher r&d costs, and probably lower net margins than either STX or WDC. It does mean however that pricing could be quite weak, with bloody noses all round (although quite STX and WDC management seem quite aware of the danger of chasing market share thankfully). The Raven does think that the most conservative level is a 15% drop in ASP (average selling price). In which case WDC becomes break even, and worth ~ $11 of the cash its got on the balance sheet.
Realistically its easy to see WDC's margins get compressed down to 15% in the short term to match our TP's lower margins. That would mean EPS ttm of $1.95 ish. Putting that on a "value" p/e of 10x and you've got $19.50+$11cash = $30.50. So its only 16% higher than Friday's close. Certainley not bargain basement valuation in this scenario, putting a margin of saftey of 25% on that and you're at $23. (if you're a real punter though you could argue that you should use a market multiple of 14x and a 25% discount then you're looking at $28.73)
The other general trading point the Raven would make is that there seems little point being a hero, or draw a line in the sand, its much easier to trade the right hand side of a U than the left hand side, or "don't catch a falling knife", or "monkey's don't pick bottoms", etc, etc. Basically IF the Raven thought this was a screaming buy from a valuation standpoint, he's nimble and small enough to wait until the stock starts to move up before starting to buy. He's had a quick run of some quantitative screens and he'd only buy this stock when it broke throught its five day moving average on the shortest time frame.
So to sum up;
Looking in the rear view mirror, WDC is cheap. However the stock is telling traders and investors that there are worries about the future, by process of elimination it is 'clear' that market level inventory build up and weak margins going forward are a big risk given other market participants increasing supply and being less responsive to demand. The Raven believes that as a worst case scenario the stock trades at $11, at a realistic downside the stock is worth $30.50, so the Raven would look to buy a meaningful portfolio sized position if the stock went below $23 with the condition that the stock broke above its 5dma after that.
VALUATION
This stock is cheap, by whatever metric you'd look at it classically, if you're using historic data it looks cheap. EV/ebitda(ttm) its 1.84x, p/e(ttm) 4.5, p/s 0.6, p/b 1.32, forward p/e 5.7.
CHART
This looks like a three legged dog with fleas. a blind three legged dog. Its fallen 41% since its high towards the end of April. Its done 40% more volume than one would have expected in that period as well. The 200dsma is 44% higher, basically its ugly, and looks oversold, but thats not a reason for it turn tomorrow.
WHO OWNS IT?
Index funds, mutual funds and relatively passive money, so who's been selling??
4.3% of the float is short, 1.8 as a SR. (as of the middle of the month - so not very informative), not particularly high.
WHAT's THE GOSSIP/FEAR?
Going through some of the fears;
1) SSD tech becomes cheap enough to shut out HDD
2) inventory build up and volatile ASP (normal hardware producer risk really)
3) the "cloud"
4) areal growth rates too high or too slow (too high drives down the margin, too slow and SSD becomes cheaper relatively)
There is a lot of uniformed speculation as to what the fear is in the stock, the Raven doesn't claim to be any wiser than the street on this one, so its best to go through the obvious angles and see if it makes a bit more sense. SSD technically just isn't cheap enough to be competition just yet, the Raven also knows enough about the street to realize that this isn't a risk that has suddenly been priced in since April!! Neither is the cloud, or projected areal growth rates. So clearly by process of ellimination, investors are worried about inventory build up, pricing, etc. A "normal" fear in this sort of stock.
Listening to $STX and $WDC's earnings calls, its pretty clear that they both saw the same thing, the rather ominous sounding "third player" in their space producing an excess of 5mm units. They both speculate whether this is because the TP doesn't have as much control as they do, ie. aren't able to dial down their production as quickly, OR whether this is a deliberate shot at trying to gain market share with a limited number of OEM (original equipment manufacturers) that the TP is particularly close with. To the Raven the latter makes sense. In which case one should go and give the margins and balance sheet a good kicking to check how cheap the stock really is?
Ok, so looking at the suspected TP's driving down prices, the Raven thinks 'they' are running on a gross margin of ~15%, but also with higher r&d costs, and probably lower net margins than either STX or WDC. It does mean however that pricing could be quite weak, with bloody noses all round (although quite STX and WDC management seem quite aware of the danger of chasing market share thankfully). The Raven does think that the most conservative level is a 15% drop in ASP (average selling price). In which case WDC becomes break even, and worth ~ $11 of the cash its got on the balance sheet.
Realistically its easy to see WDC's margins get compressed down to 15% in the short term to match our TP's lower margins. That would mean EPS ttm of $1.95 ish. Putting that on a "value" p/e of 10x and you've got $19.50+$11cash = $30.50. So its only 16% higher than Friday's close. Certainley not bargain basement valuation in this scenario, putting a margin of saftey of 25% on that and you're at $23. (if you're a real punter though you could argue that you should use a market multiple of 14x and a 25% discount then you're looking at $28.73)
The other general trading point the Raven would make is that there seems little point being a hero, or draw a line in the sand, its much easier to trade the right hand side of a U than the left hand side, or "don't catch a falling knife", or "monkey's don't pick bottoms", etc, etc. Basically IF the Raven thought this was a screaming buy from a valuation standpoint, he's nimble and small enough to wait until the stock starts to move up before starting to buy. He's had a quick run of some quantitative screens and he'd only buy this stock when it broke throught its five day moving average on the shortest time frame.
So to sum up;
Looking in the rear view mirror, WDC is cheap. However the stock is telling traders and investors that there are worries about the future, by process of elimination it is 'clear' that market level inventory build up and weak margins going forward are a big risk given other market participants increasing supply and being less responsive to demand. The Raven believes that as a worst case scenario the stock trades at $11, at a realistic downside the stock is worth $30.50, so the Raven would look to buy a meaningful portfolio sized position if the stock went below $23 with the condition that the stock broke above its 5dma after that.
Thursday, 22 July 2010
WDC
$WDC results were worse than "expected". One would imagine that the market's expectations were lower than the consensus analyst expectations (given the pounding its taken this quarter), he's picked up a little stock given the beating it took today and after hours once reported.
Just to highlight some of the widely quoted stats that the Raven looks at before running his own prop models;
from FINVIZ http://finviz.com/quote.ashx?t=wdc
5y sales growth; ~20%
5y EPS; ~17%
Forward p/e 5.1
Trailing p/e 5.3
p/sales ~0.8
EV/ebitda ~ 2.56
Short ratio 2.2
% of float short 5.8%
52w change -(0.2)%
52w residual -(19.2)%
current ratio>1
cash>debt
mkt cap $6.92bn
from market watch;
8 buys, 3 overweights, 6 holds, 1 underweight, 0 sell
or with a touch more brevity;
growth CHECK
balance sheet health CHECK
valuation CHECK
beaten up CHECK
reason for being cheap ?? The Raven would guess that the sector has always traded at a lower multiple, but that there is softer demand and some reports of much lower pricing in June.
The Raven doesn't like the insider selling over the last year.
There also isn't a catalyst, and in this sort of environment its not a smart idea to have "value" trades on, or trades that are based on the market coming to its senses and deciding to reprice an asset upwards in your favour. Especially when the chart looks so ugly.
HOWEVER, the Raven does think it is a touch oversold technically and just can't resist a tiny punt that it recovers some of the ground its lost. This is not a position that he's going to add to if it goes against him as his stop is going to be pretty far away.
Bernanke was a big yawn today.
More interesting to the Raven's eye was the $EURUSD continuing to move lower, that really is a bullish sign for Bunds. He heard a great comment today, "if Greek banks pass the stress test, then the test has failed" or something to that effect. Not a bad line.
$AMR (3.4)%, $NFLX (0.6)%, $WDC (5.2)% (and off another 3.5% in AH trading), $WFC +0.6% yesterdays view of the results would have produced about +1.5% delta neutral at the close.
tomorrow we should see $AXP, $CAT and $SNDK that the Raven cares about. The Raven is short some $AXP, but thats more of a hedge for some of his longs.
Just to highlight some of the widely quoted stats that the Raven looks at before running his own prop models;
from FINVIZ http://finviz.com/quote.ashx?t=wdc
5y sales growth; ~20%
5y EPS; ~17%
Forward p/e 5.1
Trailing p/e 5.3
p/sales ~0.8
EV/ebitda ~ 2.56
Short ratio 2.2
% of float short 5.8%
52w change -(0.2)%
52w residual -(19.2)%
current ratio>1
cash>debt
mkt cap $6.92bn
from market watch;
8 buys, 3 overweights, 6 holds, 1 underweight, 0 sell
or with a touch more brevity;
growth CHECK
balance sheet health CHECK
valuation CHECK
beaten up CHECK
reason for being cheap ?? The Raven would guess that the sector has always traded at a lower multiple, but that there is softer demand and some reports of much lower pricing in June.
The Raven doesn't like the insider selling over the last year.
There also isn't a catalyst, and in this sort of environment its not a smart idea to have "value" trades on, or trades that are based on the market coming to its senses and deciding to reprice an asset upwards in your favour. Especially when the chart looks so ugly.
HOWEVER, the Raven does think it is a touch oversold technically and just can't resist a tiny punt that it recovers some of the ground its lost. This is not a position that he's going to add to if it goes against him as his stop is going to be pretty far away.
Bernanke was a big yawn today.
More interesting to the Raven's eye was the $EURUSD continuing to move lower, that really is a bullish sign for Bunds. He heard a great comment today, "if Greek banks pass the stress test, then the test has failed" or something to that effect. Not a bad line.
$AMR (3.4)%, $NFLX (0.6)%, $WDC (5.2)% (and off another 3.5% in AH trading), $WFC +0.6% yesterdays view of the results would have produced about +1.5% delta neutral at the close.
tomorrow we should see $AXP, $CAT and $SNDK that the Raven cares about. The Raven is short some $AXP, but thats more of a hedge for some of his longs.
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