Western Digital's 'Alluring' Set Up For 2016's Second-Half Warrants Longbow's Buy Rating

Longbow Research believes the current valuation of Western Digital Corp (NASDAQ: WDC) reflects too much risk to the company's highly-leverage balance sheet. Analyst Joe Wittine sees the combination of factors supporting the growth objectives in the near-term, such as achieving considerable earnings accretion from the SanDisk integration.

Aside from that, healthy NAND price is likely to help Western Digital since other players in the field are focusing on transitioning to 3D. Therefore, the analyst upgraded the company's shares to a Buy rating with a price target of $70, implying upside potentials of more than 30 percent from the current levels.

Related Link: SanDisk Acquisition Puts Western Digital On A Clear Path Forward, Says Argus

In a research note, the brokerage said, "The Sandisk deal was expensive, dilutive to near-term models, and took time for the Street to digest; but WD is now primed to reap the spoils as a one-stop, vertically-integrated, media-agnostic storage provider that should generate substantial earnings accretion in FY18 on the favorable demand backdrop combined with reductions in operating and interest expense. Our 12-month target price is $70, or less than 12x our FY18E EPS estimate of $5.90."

Furthermore, Longbow sees Western Digital gaining from cost reduction measures from HGST apart from SanDisk integration in the upcoming quarters. Aside from this, the brokerage expects operating costs to be lower than $800 million from the calendar year 2018.

The analyst is not worried about the oversupply risk after 3D is ramped up since demand comes from smartphone, enterprise and PC to offset this ramping bit supply.

At time of writing, Western Digital was down 0.25 percent on the day at $52.18.

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