Western Digital Corporation Stock Pitch Kaminski, Scudieri

Western Digital Corp (NASDAQ: WDC) Buy

PSIA | Shane Kaminski, Anthony Scudieri

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Table of Contents

I. Introduction

II. Description

III. Drivers

IV. Valuation

V. Risk Analysis

VI. Conclusion

VII. Appendix

1

I. Introduction

Introduction 2

• 12 Month Price Target: $130

• Appropriate Entry Price: ~$96

• The Growth of Data1

• Strategic Positioning in Data Storage 2

• Opportunity in Solid State Drive Business 3

Team Recommendation: Buy

Western Digital Corp (NASDAQ: WDC)

Introduction 3

II. Description

Description 4

Business Model


Western Digital is a manufacturer of data storage products. They

have a broad portfolio of storage products that can be divided into

five categories: external storage, internal storage, personal cloud,

consumer electronics, and business solutions.

• External storage units are portable storage devices made for

both PCs and Macs

• Internal storage units are hard drives designed to be placed

into desktops, notebooks, servers, surveillance equipment,

and televisions

• Personal cloud units allow the user to store data in a

centralized location that can be accessed from anywhere

• Consumer electronics units provide storage for TV recordings

and surveillance footage

• Business solution products are dedicated storage servers

that use Western Digital hard drives

Headquartered in Irvine, CA, Western

Digital sells to a variety of distributors as

well as directly to customers online

President and CEO: Stephen D. Milligan:

5Description

United States20%

Asia31%

China23%

EMEA21%

Other5%

Geographic Segments

Notebooks23%

Desktops23%

Enterprise32%

Consumer Electronics

11%

Cloud and Server11%

Business Segments

Competitive Landscape


Description

• SanDisk Corp. (SNDK)• SanDisk Corp. develops and manufactures data storage

products for consumer electronic products. Their most

popular products, commonly referred to as “SD Cards,”

are found primarily in mobile phones, tablets, eReaders,

and digital cameras.

• Seagate Technology (STX)• Seagate Technology designs, manufactures, and sells

electronic data storage products designed for enterprises

and individual users. The company also focuses on data

storage services such as backup and data protection.

Seagate is the main competitor of Western Digital.

• EMC Corp. (EMC)• EMC Corp. develops, delivers, and supports

enterprise storage systems and software. EMC’s

services encompass many different areas such as

installation, maintenance, protection, and monitoring. In

addition, they have a large focus on cloud virtualization.

6

III. Drivers

Drivers 7

The Growth of Data


Drivers

The amount of data that is created and copied is growing at an astounding rate and Western Digital is able to meet that need

• Expanding Rate of Data

• Data is being created so fast that total data doubles in size every two years

• There are currently 4.4 zettabytes in existence with a projected 35 zettabytes by 2020

• 1 zettabyte = 1 trillion gigabytes

• By 2019, emerging markets will account for 60% of the data created in the digital universe

• Currently, emerging markets only account for 40% while accounting for 54% of sales

• Growing Needs of Businesses

• Businesses are starting to utilize more and more Big Data

• Big data is a massive volume of data that requires specialized software and services to utilize

• Today, 67% of executive have reported big data initiatives running in production, up 32% from 2013

• This Big Data must be stored somewhere

• Businesses such as Google can create their own servers but they cannot create their own hard drives

• Enterprise-network assets are the oldest in 6 years

• Growing Needs of Consumers

• More than 70% of the digital universe is generated by individuals

• We predict Western Digitals HDDs will see a strong

resurgence in sales

8

Strategic Positioning in Data Storage


Drivers

Western Digital differentiates itself from its competitors, making it the more attractive option for buyers

• Focused research & development is the key to engineering better products than its main competitors

• From 2012 to 2013 R&D expenses have increased 45%; 2014 R&D expenses are maintaining this level

• HGST is consolidating its R&D centers into one centralized location in the Philippines

• For the past few years, WDC has outpaced Seagate in offering larger HDDs

• Today, WDC offers a 10TB HDD while Seagate only offers an 8TB

• Western Digital has started production on helium-filled drives that save on electricity and allow for the greatest

balance between capacity and speed

• All enterprise HDDs will use helium filled technology

• WDC plans to offer up to 50TB HDD’s by 2017 (vs. Seagate’s 30TB) using its patented Heat-Assisted

Magnetic Recording

• We believe the helium filled hard-drive is a key

technology enterprises will utilize to replace their aging

network assets

• Research & development efforts have given Western Digital an edge

on drive reliability, with failure rates as much as 10% percent lower

• Western digital competes in a duopoly

• Between Western Digital and Seagate, they own 85% of the market

• Western Digital owns an increasing 45%

• Western Digital’s products are carried by more suppliers

• Newegg shows Western Digital HDDs usually carried by 13

vendors while Seagate’s ranges from 4 to 9

• As Western Digital’s portfolio and sales strengthen, it gains an even

even greater market share

With such a focus on R&D, WDC is able to create innovative and highly

competitive products offered to a growing market

9

Opportunity in Solid State Drive Business


Drivers

Western Digital Corp’s most recent acquisitions in the SSD market allow it to compete with the top players in this

space. Revenue projections for WDC’s SSD offerings products are underestimated based off of new technology,

and vertical integration being implemented.

• Key Acquisitions in 2013 strengthen the Flash/SSD Portfolio

• VeloBit – Ennables higher server density and improves storage performance

• sTec – Innovation in Enterprise SSDs in various interfaces for different needs

• Virident – Allows faster data transfer through multi-channel communication

• These new integrations will place WDC in a competitive position to capture the estimated 40% growth in

SSD markets in 2014 and 2015 each

• Western Digital acquired HGST in March 2012, but was prevented by the Chinese Ministry of Commerce from

integrating the subsidiary over China’s antitrust concerns

• In March 2014 WDC began the process of applying to MOFCOM for approval to finally integrate HGST. If

approved, the potential accretion from just the operating expense synergies alone would save WDC over

$400 million per year in taxes

• Demand for Flash supply is ramping up and suppliers could have trouble keeping up in 2015 and 2016

• Western Digital Corp has a very strong relationship with Intel, their main supplier in NAND Flash that has

recently been extended for the next 3 years

• In September, Western Digital expanded relationship with Toshiba to gain more access to this supply

• Seagate’s main NAND supplier is Samsung, but has not yet established a NAND chip supply deal

Western Digital’s key acquisitions will act as a catalyst to compete in SSD technology for tablets,

smartphones, and enterprises, while maintaining supply advantages over it’s main competition

10

IV. Valuation

Valuation 11

Comparable Analysis


Valuation

Current

Price Annual

As % of 2014E 2015E Current 2014E 2015E Growth Current 2014E 2015E Growth Dividend

52 Wk High EPS EPS LTM EBTIDA EBITDA EBITDA Rate LTM Sales Sales Sales Rate Yield

Seagate 96.2% 13.7x 12.0x 8.4x 9.3x 8.8x 2.38% 1.7x 1.8x 1.7x (0.75%) 3.45%

EMC Corperation 97.4% 15.6x 13.7x 10.8x 8.1x 7.7x (15.73%) 2.7x 2.6x 2.4x (6.16%) 1.63%

SanDisk 85.9% 16.0x 14.3x 11.6x 10.1x 9.2x (11.00%) 3.8x 3.5x 3.1x (9.35%) 1.28%

Mean 93.2% 15.1x 13.3x 10.3x 9.2x 8.6x (8.12%) 2.7x 2.6x 2.4x (5.42%) 2.12%

Median 96.2% 15.6x 13.7x 10.8x 9.3x 8.8x (11.00%) 2.7x 2.6x 2.4x (6.16%) 1.63%

High 97.4% 16.0x 14.3x 11.6x 10.1x 9.2x 2.38% 3.8x 3.5x 3.1x (0.75%) 3.45%

Low 85.9% 13.7x 12.0x 8.4x 8.1x 7.7x (15.73%) 1.7x 1.8x 1.7x (9.35%) 1.28%

Western Digital Corp 94.5% 14.02x 11.75x 8.69x 7.16x 6.58x (13.01%) 1.41x 1.44x 1.42x 0.16% 1.6%

Price to: Enterprise Value to: Enterprise Value to:

2014E 2015E Current 2014E 2015E Margin Current 2014E 2015E Margin

EPS PEG PEG LTM EBITDA EBITDA EBITDA Growth LTM Profit Profit Profit Growth Credit

Growth Ratio Ratio Margin Margin Margin Rate Margin Margin Margin Rate Rating

Seagate 8.6% 1.6x 1.4x 20.67% 19.52% 19.42% (3.06%) 13.18% 12.72% 13.69% 1.92% BBB-

EMC Corperation 11.2% 1.4x 1.2x 25.04% 31.43% 31.05% 11.35% 12.74% 16.66% 17.53% 17.28% A

SanDisk 14.4% 1.1x 1.0x 32.84% 34.58% 34.07% 1.86% 17.83% 20.87% 20.95% 8.41% BB+

Mean 11.4% 1.4x 1.2x 26.18% 28.51% 28.18% 3.39% 14.58% 16.75% 17.39% 9.20%

Median 11.2% 1.4x 1.2x 25.04% 31.43% 31.05% 1.86% 13.18% 16.66% 17.53% 8.41%

High 14.4% 1.6x 1.4x 32.84% 34.58% 34.07% 11.35% 17.83% 20.87% 20.95% 17.28%

Low 8.6% 1.1x 1.0x 20.67% 19.52% 19.42% (3.06%) 12.74% 12.72% 13.69% 1.92%

Western Digital Corp 9.5% 1.48x 1.24x 16.28% 20.06% 21.58% 15.14% 6.95% 11.35% 13.39% 38.76% NR

12

Ratio Analysis


Valuation

Market LTM

Value Sales Beta WACC EPS ROA ROE ROIC

Seagate $23,886.5 $14,351.0 1.35 10.54% $4.95 15.95% 46.41% 33.31%

EMC Corperation $63,482.4 $23,222.0 0.95 8.62% $1.37 5.78% 11.51% 13.41%

SanDisk $22,453.9 $6,170.0 1.54 12.51% $4.58 11.64% 16.73% 17.45%

Mean $36607.6 $14581.0 1.28 10.56% $3.63 11.12% 24.88% 21.39%

High $63482.4 $23222.0 1.54 12.51% $4.95 15.95% 46.41% 33.31%

Low $22453.9 $6170.0 0.95 8.62% $1.37 5.78% 11.51% 13.41%

Western Digital Corp $24,073.6 $15,351.0 1.17 9.40% $4.34 10.95% 17.95% 12.86%

Price to: Debt to: Price to: Price to: Revenue per: FCF per:

Current Quick Book Value Equity LTM Sales FCF Share Share

Seagate 2.2x 1.6x 6.8x 0.8x 1.7x 10.29x $37.57 $5.60

EMC Corperation 1.4x 1.1x 2.7x 0.3x 2.7x 5.41x $10.75 $2.65

SanDisk 2.0x 1.4x 3.2x 0.3x 3.6x 12.60x $25.69 $6.84

Mean 1.85x 1.38x 4.2x 0.5x 2.7x 9.43x $24.67 $5.03

High 2.15x 1.58x 6.8x 0.8x 3.6x 12.60x $37.57 $6.84

Low 1.42x 1.12x 2.7x 0.3x 1.7x 5.41x $10.75 $2.65

Western Digital Corp 2.3x 1.9x 3.0x 0.2x 1.6x 9.94x $62.40 $9.57

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Five-Year Summary


Valuation 14

Historical & Projected Fiscal Year

2009 2010 2011 2012 2013 2014E 2015E

Revenues $7,453.0 $9,850.0 $9,526.0 $12,478.0 $15,351.0 $15,130.0 $15,301.5

% Growth NA 32.2% -3.3% 31.0% 23.0% -1.4% 1.1%

EBITDA $998.0 $2,035.0 $1,383.0 $2,596.0 $2,499.0 $3,035.0 $3,302.4

% Margin 13.4% 20.7% 14.5% 20.8% 16.3% 20.1% 21.6%

% Growth NA 103.9% -32.0% 87.7% -3.7% 21.4% 8.8%

D&A $479.0 $510.0 $602.0 $825.0 $1,233.0 $1,244.0 $1,136.1

% of Sales 6.4% 5.2% 6.3% 6.6% 8.0% 8.2% 7.4%

EBIT $519.0 $1,525.0 $781.0 $1,771.0 $1,266.0 $1,791.0 $2,166.3

% Margin 7.0% 15.5% 8.2% 14.2% 8.2% 11.8% 14.2%

% Growth NA 193.8% -48.8% 126.8% -28.5% 41.5% 21.0%

Capex $519.0 $737.0 $778.0 $717.0 $952.0 $1,180.14 $1,361.8

% of Sales 7.0% 7.5% 8.2% 5.7% 6.2% 7.8% 8.9%

EBITDA - Capex $479.0 $1,298.0 $605.0 $1,879.0 $1,547.0 $1,854.9 $1,940.6

Total Debt / EBITDA 0.48x 0.20x 0.21x 0.84x 0.78x

EBITDA / Interest n/a n/a n/a n/a n/a

(EBITDA - Capex) / Interest n/a n/a n/a n/a n/a

Current Ratio 2.12x 2.33x 2.53x 1.77x 1.91x

Quick Ratio 0.94x 0.98x 0.92x 0.98x 0.83x

Projections


Valuation 15

Historical Year Projected Fiscal Year

2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Income Statement Projections

Revenue $7,453.00 $9,850.00 $9,526.00 $12,478.00 $15,351.00 $15,130.00 $15,301.50 $15,944.16 $16,693.54 $17,528.22

EBITDA 998.0 2,035.0 1,383.0 2,596.0 2,499.0 3035.0 3302.4 3172.9 3405.5 3418.0

EBIT 519.0 1,525.0 781.0 1,771.0 1,266.0 1791.0 2166.3 1642.2 1853.0 2015.7

Growth Analysis

Revenue 32.2% -3.3% 31.0% 23.0% -1.4% 1.1% 4.2% 4.7% 5.0%

EBITDA 103.9% -32.0% 87.7% -3.7% 21.4% 8.8% -3.9% 7.3% 0.4%

EBIT 193.8% -48.8% 126.8% -28.5% 41.5% 21.0% -24.2% 12.8% 8.8%

Margin / % of Sales Analysis

EBITDA 13.4% 20.7% 14.5% 20.8% 16.3% 20.1% 21.6% 19.9% 20.4% 19.5%

EBIT 7.0% 15.5% 8.2% 14.2% 8.2% 11.8% 14.2% 10.3% 11.1% 11.5%

Depreciation & Amortization 6.4% 5.2% 6.3% 6.6% 8.0% 14.9% 18.2% 9.6% 9.3% 8.0%

Capital Expenditures 7.0% 7.5% 8.2% 5.7% 6.2% 7.8% 8.9% 8.7% 8.5% 8.3%

Net Working Capital -0.1% 0.7% -0.3% 1.0% -3.0% -2.0% -2.0% -1.5% 1.0% 0.5%

Total Revenue Growth 0.00% 32.2% -3.3% 31.0% 23.0% -1.4% 1.1% 4.20% 4.70% 5.00%

Base 4.20% 4.70% 5.00%

Bull 5.20% 5.70% 6.00%

Bear 3.00% 3.50% 3.80%

EBIT as a % of Sales 7.0% 15.5% 8.2% 14.2% 8.2% 11.8% 14.2% 10.30% 11.10% 11.50%

Base 10.30% 11.10% 11.50%

Bull 11.50% 12.30% 12.70%

Bear 9.10% 9.90% 10.30%

D&A as a % of Sales 6.4% 5.2% 6.3% 6.6% 8.0% 14.9% 18.2% 9.60% 9.30% 8.00%

Base 9.60% 9.30% 8.00%

Bull 10.80% 10.50% 9.20%

Bear 8.40% 8.10% 6.80%

CapEx as a % of Sales 6.96% 7.48% 8.17% 5.75% 6.20% 7.80% 8.90% 8.70% 8.50% 8.30%

Base 7.80% 8.90% 8.70% 8.50% 8.30%

Bull 6.60% 7.70% 7.50% 7.30% 7.10%

Bear 9.00% 10.10% 9.90% 9.70% 9.50%

NWC as a % of Sales -0.09% 0.70% -0.30% 1.05% -2.96% -2.00% -2.00% -1.50% 1.00% 0.50%

Base -2.00% -2.00% -1.50% 1.00% 0.50%

Bull -3.20% -3.20% -2.70% -0.20% -0.70%

Bear -0.80% -0.80% -0.30% 2.20% 1.70%

Discounted Cash Flow


Valuation 16

2014E 2015E 2016E 2017E 2018E

EBIT $1,791.0 $2,166.3 $1,642.2 $1,853.0 $2,015.7

Taxes @ 8.0% 143.3 173.3 131.4 148.2 161.3

EBIT (1-t) $1,647.7 $1,993.0 $1,510.9 $1,704.7 $1,854.5

Plus: Depreciation & Amortization 2,257.3 2,780.1 1,530.6 1,552.5 1,402.3

Less: Capital Expenditures (1,180.1) (1,361.8) (1,387.1) (1,419.0) (1,454.8)

Less: Change in NWC (151.4) 3.4 (66.9) (406.1) 79.3

Unlevered Free Cash Flow $2,573.4 $3,414.7 $1,587.5 $1,432.2 $1,881.2

% Growth 26.73% 32.69% -53.51% -9.78% 31.35%

Implied DCF Intrinsic Valuation Range

A + B = C

Discounted PV of Terminal Value Using a

Cash Flows Growth Rate in Perpetuity of Enterprise Value

Discount Rate (2014 - 2018) 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%

8.90% $8,718.3 $19,671.5 $20,521.1 $21,442.7 $28,389.9 $29,239.5 $30,161.0

9.15% $8,668.0 $18,716.2 $19,494.7 $20,336.5 $27,384.2 $28,162.7 $29,004.6

9.40% $8,618.2 $17,832.9 $18,548.4 $19,319.9 $26,451.1 $27,166.6 $27,938.1

9.65% $8,568.9 $17,014.1 $17,673.5 $18,382.6 $25,582.9 $26,242.4 $26,951.4

9.90% $8,520.0 $16,253.1 $16,862.5 $17,515.9 $24,773.1 $25,382.5 $26,035.9

- D = E

Total Equity Value Intrinsic Value Per Diluted Share (a)

Discount Rate Less: Net Debt 2.50% 2.75% 3.00% 2.50% 2.75% 3.00%

8.90% ($2,354.0) $30,743.9 $31,593.5 $32,515.0 $124.98 $128.43 $132.17

9.15% ($2,354.0) $29,738.2 $30,516.7 $31,358.6 $120.89 $124.05 $127.47

9.40% ($2,354.0) $28,805.1 $29,520.6 $30,292.1 $117.09 $120.00 $123.14

9.65% ($2,354.0) $27,936.9 $28,596.4 $29,305.4 $113.56 $116.25 $119.13

9.90% ($2,354.0) $27,127.1 $27,736.5 $28,389.9 $110.27 $112.75 $115.41

Growth Analysis and CAGRs


Valuation 17

Seagate EMC Corperation SanDisk Average Company 1

Revenues 6.8% 11.1% 13.2% 10.4% 12.7%

EBITDA 17.7% 22.0% 22.7% 20.8% 22.1%

EBIT 56.2% 28.3% 26.2% 36.9% 26.9%

EBITDA - Capex 28.7% 23.0% 21.8% 24.5% 26.3%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2014E 2015E 2016E 2017E 2018E

Growth Analysis

Revenue

EBIT

D&A

CapEx

NWC

Price Target Scenario


Valuation 18

Implied DCF Intrinsic Valuation Range Price Target Weighting

Intrinsic Value Per Diluted Share (a) $120.00 60.0%

2.25% 2.50% 2.75%

Base $120.00

8.90% $124.98 $128.43 $132.17 Bull $155.37

9.15% $120.89 $124.05 $127.47 Bear $86.19

9.40% $117.09 $120.00 $123.14 Change offset on Projections sheet and copy/paste 3 scenario targets

9.65% $113.56 $116.25 $119.13

9.90% $110.27 $112.75 $115.41

Implied DCF EV/Sales Valuation Range

Western Digital Corp Implied $167.09 20.0%

Equity Value per Diluted Share

$44.08 Weighted Price Target

$105.58 Base $129.99 60%

$167.09 Bull $151.22 10%

$228.59 Bear $109.71 30%

$290.10 Please include conviction level behind each price target

Implied DCF EV/EBITDA Valuation Range

Western Digital Corp Implied $122.89 20.0%

Equity Value Per Diluted Share

$98.21

$110.55

$122.89

$135.22

$147.56

Western Digital Corp

Median EV/Sales

for Peer Group

Discount Rate

1.6x

comments

comments

0.6x

7.2x

8.2x

9.2x

10.2x

11.2x

Average EV/EBITDA

for Peer Group

3.6x

4.6x

2.6x

Bull & Bear Case


Valuation

• Bull Case

• Enterprise storage growth turns out to be strong which leads to a large

increase in purchases of WDC’s continuously improving products

• WDC is able to strongly capitalize on the SSD market due to its strong

portfolio offerings stemming from its recent acquisitions

•WDC receives approval from MOFCOM and integrates with HGST

• Bear Case

• A downturn in the global economy, particularly in China which has reported

weak manufacturing numbers, drives down technology consumption

• Enterprises decide to wait to upgrade or replace their current assets

• Lower personal computer unit growth than anticipated

• Our Case

• Product mix improvements and stable volume drive margin increases

• Data will continue to grow at or above the current rate in which it is being

created, causing an increasing need for storage drives

• Moderate gains in market share continue against competitors

19

Historical Valuation


Valuation

1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14

0

5

10

15

20

25

Source: FactSet Fundamentals

Price to Earnings

07-Nov-2012 to 07-Nov-2014 (Daily)

Western Digital Corporation

1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14

1

2

3

4

5

6

7

8

Source: FactSet Fundamentals

Enterprise Value to EBITDA

07-Nov-2012 to 07-Nov-2014 (Daily)

Western Digital Corporation

20

V. Risk Analysis

Risk Analysis 21

Company & Industry Risk


Risk Analysis

• Industry Risk

• The data storage device industry faces some risks moving forward. Any data

breaches or negative sentiment could damage growth. Another concern is the

PC market dropping significantly, causing a slowdown in sales. If PC sales slow

or change technology, HDD providers profitability will be impacted. Keeping up

with SSD adoption and changing consumer devices is a risk to all data storage

companies.

• Company Risk

• Western Digital faces the risk of an inability to procure components, particularly

in SSD products. They rely heavily on few suppliers, although holding an

advantage against competitors with supply deals. A natural disaster could cause

damages to plant equipment or inventory. WDC incurred large costs on

equipment in 2011 due to flooding in Thailand. Also, failure in approval for HGST

integration pose a risk to the companies marginal expansion. Unexpected SSD

adoption in PCs and transitions in technological trends could cause

supply/demand mismatch.

22

Benchm

ark

Ris

k

Sub-Sector

Geographic

Valuation

Market Cap

Com

pany

Specific

Valuation

Earnings

Volatility (Beta)

Acquisitions

Product Quality

Industr

y S

pecific PC Sales

Pipeline

Changing Technology

0 1 2 3 4 5 Notes

Market Cap 24B

Beat last 8 quarters

3 recent

acquisitions

Risk Analysis


Risk Analysis 23

Risk Analysis – Supply Chain


Appendix 24

VI. Conclusion

Conclusion 25

• 12 Month Price Target: $130

• Appropriate Entry Price: ~$96

• The Growth of Data1

• Strategic Positioning in Data Storage2

• Opportunity in Solid State Drive Business 3

Team Recommendation: Buy


Introduction 26

Questions & Comments


Conclusion 27

VII. Appendix

Appendix 28

Stock Charts


Appendix

1 Year 6 Month

1 Month3 Month

29

Correlation & Debt Distribution


Appendix 30

Appendix Notes


Appendix

•Aging Enterprise Network Assets

31

Economy & Finance

Western Digital Corporation Stock Pitch Kaminski, Scudieri