Western Digital: A Covered Strangle Strategy
Tom Armistead submits:
Back in January last year I did a compare and contrast on diskmakers Western Digital (WDC) and Seagate Technology (STX). At the time, I saw value, but found that WDC exhibited superior management and financial strength. Subsequent performance and price appreciation have confirmed the value, but with WDC trading under 40 with a TTM P/E of 9.7, the question comes up: why so cheap?
Margins – The disk-making industry can be characterized as cyclical and commodity-like, so that typically the stocks will trade at low P/Es during high points of the cycle. Working with 5 year average EPS, and projecting through the end of WDC’s 2010 fiscal year on 6/30, I get 3.80 X 15.9 average P/E on that metric = 60 as a midpoint target price. A similar exercise based on P/S yields a target of 36. When these valuation methods give such widely divergent results, the issue is margins. The market is interpreting WDC’s margins as unsustainable.
Investing, Long Term Investment, stock market | admin March 3, 2010
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