Western Digital Corporation (WDC)

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Western Digital, Seagate Gain as Disk-Drive Woes Recede

Jul 26, 2012 11:41:26 (ET)

By Shara Tibken

Shares of Western Digital Corp. (WDC) soared more than 20% Thursday after its quarterly report raised hopes that the hard disk-drive industry is holding up better than expected in a tough environment.

Severe flooding late last year in Thailand--where a lot of hard disk-drives and their components are made--hurt the industry at atime when makers like Western Digital and rival Seagate Technology Inc. (STX) already were feeling the effects of sluggish demand from weakening PC sales and the slumping global economy.

Since then, conditions have dramatically improved, leading Western Digital and Seagate to report record results. Western Digital's revenue nearly doubled in its recently completed quarter, and Seagate has projected a 60% topline increase.

The companies have benefited from higher prices for hard disk-drives, which resulted from the shortages caused by the flooding. While the effects from the flooding have eased, prices haven't fallen as much or as fast as projected. In addition, recent consolidation in the industry has reduced competitive pressures, and demand from PC makers and data-center clients have held up better than expected.

"Storage continues to be at the center of the evolving digital universe in entertainment, education, commerce and communication," Western Digital Chief Executive John Coyne said. "We believe a strategy of delighting customers, focusing investments in faster growing market segments, and driving strong execution in both internal operations andour supply chain will continue to deliver consistent and superior financial performance."

The news sent Western Digital shares up 23% to $39.98 in recent trading, moving the stock into positive territory for the past year and paring its losses over the past three months. With the gains, Western Digital shares are now up 9.6% over the past 12 months and down 9.3% over the past three.

Rival Seagate Technology Inc. (STX) also soared, up 14% to $30.05. Its shares have doubled over the past 12 months as it has benefited from Western Digital's woes followingthe Thai flooding. Seagate's facilities remained intact during the disaster, allowing it to take share from its rivals.

But Seagate earlier this month said its quarterly results would be softer than it anticipated because of supplier issues and the faster-than-expected industry recovery from flooding. Despite the soft current quarter, investors bought shares Thursday on hopes Seagate could experience yearly growth similar to Western Digital.

Meanwhile, hard-disk drive chip supplier LSI Corp. (LSI) also soared in recent trading, jumping 20% to $7.25. It reported quarterly results and guidance late Wednesday that analysts said were better than feared. Rival Marvell Technology Group Ltd. (MRVL) grew 3.4% to $11.26.

Western Digital, which manufactures about 60% of its drives in Thailand, was one of the companies hardest hit by the region's flooding. The company has largely recovered from the disaster's impacts, and it's also benefiting from its acquisition of Hitachi Ltd.'s (HT, 6501.TO) hard-disk drive assets. In addition, some supplier issues at Seagate caused Western Digital to gain share in the high-margin enterprise storage market in the recently ended quarter.

Western Digital late Wednesday reported better-than anticipated fiscal fourth-quarter results and provided much-stronger-than-anticipated earnings guidance for its new fiscal year. The company said it believes it can generate about $10 a share in adjusted earnings this year, much better than the $8.06 projected by analysts, according to Thomson Reuters.

And it said industry-wide drive shipments shouldn't decline in the current quarter or year as many had expected, but instead should be flat in the fiscal first quarter and up about 5%this year.

"Even in the face of macro headwinds, a'meh' PC environment, and whatever tablets are or aren't doing to consumer perceptions, [Western Digital] posted robust results and guidance," Needham analyst Richard Kugele noted. He recommended investors buy shares ahead of the company's analyst day in September.

However, some analysts still remain cautious about the stability of selling prices and PC demand. For one, ThinkEquity analyst Rajesh Ghai is skeptical Western Digital will be able to achieve its target for the fiscal year.

"We believe that given PCs are in secular decline...and PCs with [hard-disk drives] are in even worse shape given the encroachment of flash- and cloud-based storage options," Mr. Ghai noted. He added it's unlikely the total hard-disk drive market can grow 5%this year because about 75% of drives go to PCs.

Write to Shara Tibken at [e-mail]

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(END) Dow Jones Newswires

July 26, 2012 11:41 ET (15:41 GMT)