Measured Approach

Data as of: 02/05/2010Industry: Computer Storage Devices

Current Data

Current Price$39.43PEG0.4Market Cap ($M)$9,015.3EPS TTM ($)$4.19Shares Outstanding (M)227.0P/E TTM9.4XInstitutional Holdings %92.1%EPS Estimated 2010 ($)$5.96Insider Holdings %0.4%P/Estimated EPS6.6XBeta1.54

Target Value ($)$52.81

Latest Quarter Reported01/01/10Dividend Yield %0.00

The last time we wrote about Western Digitalwas in March 2009. Atthe time, WDC was trading at $17.21 and we provided a twelve monthtarget price of $44.27. In retrospect, our estimate of value seems amite aggressive. However, the market has vindicated us the recentprice of $39.43 is awfully close to our target. Looking ahead, we have atwelve month target price of $52.81.Western Digital Corporation(WD) designs, develops, manufactures andsells hard drives. The Company sells its products worldwide to originalequipment manufacturers (OEMs) and original design manufacturers(ODMs) for use in computer systems, subsystems or consumerelectronics (CE) devices, and to distributors, resellers and retailers. Itshard drives are used in desktop computers, notebook computers, andenterprise applications, such as servers, workstations, networkattached storage, storage area networks and video surveillanceequipment. Additionally, its hard drives are used in CE applications,such as digital video recorders (DVRs), and satellite and cable set-topboxes (STBs). WD also sells its hard drives as stand-alone storageproducts and integrates them into finished enclosures, embeddingapplication software and offering the products as WD-branded externalstorage appliances. On March 27, 2009, it completed the acquisition of SiliconSystems, Inc.

Recent Developments

WD® INTRODUCES ITS FASTEST EVER MY BOOK® EXTERNAL DRIVE

My Book® 3.0 External Hard Drives are the First Certified SuperSpeed USB 3.0 StorageDevices Available on the Market

WD® ENTERS TRADITIONAL ENTERPRISE HDD MARKET WITH FIRST SAS PRODUCT

WD S25 SAS Hard Drives Provide High-Reliability and Performance for Mission-criticalServer and Storage Applications

By The Numbers

Quarterly sales for the last four reported quarters show consistentimprovement. For the quarter ending 03/09, sales stood at $1,590.0million and compared to $2,111.0 million in 03/08. In each of thesubsequent quarters, sales increased so that by 10/09, sales wereahead of the prior year quarter. For the twelve month period ending01/10, sales stood at $8,348.0 million as compared to the equivalentprior twelve month period of $8,036.0 million, a 3.9% gain. The decline in the sales growth rate can be attributed to a lack of pricing power in today’s environment. Historically, sales grew at a rateof more than 19%. The company continues to add new products andthere is increasing momentum in quarter over quarter sales growth.Reuters reports consensus estimates for FYE 06/10 at $9,814.38.Over the past four quarters, earning reflected the decline in sales andthe same pattern of picking up when sales turned around. In thequarter ending 03/09, EPS came in at $0.22 compared with $1.23 in03/08. Earnings picked up in each subsequent quarter so that in 10/09,EPS was reported at $1.25 as compared to $0.93. In 01/10, quarterlyEPS was $1.85 as compared with $0.06 in 01/09. EPS for the twelvemonth period ending 01/10 totaled $4.18. In comparison, in the oneyear ago period, EPS totaled $3.16. Consensus EPS for FYE 06/10 is$6.03.Gross margins for the TTM are a strong 21.8%. Reported gross marginsin FY09 were down to 17.9%. For the five year period 07/05 – 07/09,gross margins averaged 18.24%. Similarly, operating margins poppedin the TTM to 12.7% from FY 09’s low of 7.0%. Again, net marginsreflect the same trend spiking to 11.5% in the twelve month periodending 01/10 from FY 09’s margin of 6.3%. Historically, WDC reports anet margin in the 9.0% - 10.0% range.Historically, WDC underperforms its industry median when measuredby gross margins. However, when it comes to operating margins andnet margins, WDC significantly out-performs. This reflects well onmanagement’s ability to control costs. Return on Equity at 28.1% andReturn on Assets at 17.0% are higher than industry medians. In fact,with the exception of FY 09, ROE is typically near 40.0%. In every year,WDC reports ROE and ROA that beats the industry median.