western digital : growth and transformation lcdg capital meixi chen ada del rosso amir ganaba...
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Western Digital : Growth and Transformation LCDG Capital Meixi Chen Ada Del Rosso Amir Ganaba Richard Graham Alyson Laux. Highlights. Successful Transformation of Business Model High Value Products dominate the Product Mix Cost Structure as a Sustainable Competitive Advantage - PowerPoint PPT PresentationTRANSCRIPT
Western Digital: Growth and Transformation
LCDG CapitalMeixi Chen
Ada Del RossoAmir Ganaba
Richard GrahamAlyson Laux
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
• Successful Transformation of Business Model
• High Value Products dominate the Product Mix
• Cost Structure as a Sustainable Competitive Advantage
• Promising Growth in Emerging Markets
• Position in the 2-yr cycle
Highlights
Price - $38.18
Target - $47
Buy
$47$24 $60
Analyst Estimate RangeSource: Yahoo Finance
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
A Deeper Look at WDC…
Company History Key Financials
Industry Positioning
Competitive Landscape
Overview
Company History
•History of adapting to new markets•Strategic use acquisitions and divestitures
Competitive Landscape
•New Technology increases product differentiation•Exports to emerging market promise revenue growth•Entering the Maturity Stage of the Life Cycle•Key Success Factors•Production Inputs make up majority of budget
Positioning
•Back to Basics Strategy•30% Market Share •Vertical Integration
Key Financials
52 Week Trading Range: $23.06 - $45.09 P/E Ratio: 8.24Shares Outstanding: 231.67M EPS: 4.63Market Cap: $8.85B Debt/Equity: 6.78
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
New Products
Enterprise
Consumer ElectronicsBranded
Increasing Demand in Storage
Increase in WDC Products
Source: Company Data and Revenue Projections
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
New MarketsGeographic Mix
FY-2009
FY-2010
FY2011E
FY2012E
FY2013E
FY2014E
FY2015E
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Desktop
Enterprise
Consumer Electronics
Branded
Total
Asia Growth Rates
Capturing a Growing Market
•PC shipments up 8.8% in 2010•Economy improvements•Growth of Wealth in Emerging NationsSource: Company Data and Revenue Projections
Source: Company Data and Revenue Projections
Americas24%
EMEA23%
Asia53%
2010
Americas20%
EMEA20%
Asia60%
2015E
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Cost Structure
• Economies of Scale
•HDD component vertical integration
•Responsive and Flexible Production Process
• Hitachi acquisition proves thesis
Market Leader with Experience
Source: Company Data and Revenue Projections
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Potential Risks
• Intensifying Competition in the industry• Average Selling Price uniformly decreasing• Varied competitors – Pureplay & Conglomerates
• Flash based Solid State Drives (SSDs)• Tablets• Cloud Computing Technologies
Competitive Environment
Market Cannibalization
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Major Competitors Threat Level Reasons
Established market leader; directly competes with WDC in all segments
Well Positioned in SSD market but lacks focus in HDD market
Manufacturer of media player; Data Storage service provider
Acquired Fujitsu’s HDD business and gained market share
Major player in the SSD market; but no representation in HDD Market
Pur e pl
ay
Cong
lom
erat
es
SSD
= High Threat = Medium Threat = Low Threat
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Major Competitors Threat Level Reasons
Established market leader; directly competes with WDC in all segments
Well Positioned in SSD market but lacks focus in HDD market
Manufacturer of media player; Data Storage service provider
Acquired Fujitsu’s HDD business and gained market share
Major player in the SSD market; but no representation in HDD Market
Pur e pl
ay
Cong
lom
erat
es
SSD
= High Threat = Medium Threat = Low Threat
Western Digital’s Advantage
• Hard Drive Products are substitutable• Lower Average Selling Price• High Quality Reputation• Stable ROE over past years
Conclusion
Western Digital is Superior to Seagate and will be able to
Capture Seagate’s Established Market Share in
Traditional Segment
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Competitive Environment
Western Digital Operates in a Highly Competitive Market
Major Competitors Threat Level Reasons
Established market leader; directly competes with WDC in all segments
Well Positioned in SSD market but lacks focus in HDD market
Manufacturer of media player; Data Storage service provider
Acquired Fujitsu’s HDD business and gained market share
Major player in the SSD market; but no representation in HDD Market
Pur e pl
ay
Cong
lom
erat
es
SSD
= High Threat = Medium Threat = Low Threat
WDCVS.
Seagate
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Conglomerates
Western Digital Operates in a Highly Competitive Market
Major Competitors Threat Level Reasons
Established market leader; directly competes with WDC in all segments
Well Positioned in SSD market but lacks focus in HDD market
Manufacturer of media player; Data Storage service provider
Acquired Fujitsu’s HDD business and gained market share
Major player in the SSD market; but no representation in HDD Market
Pur e pl
ay
Cong
lom
erat
es
SSD
= High Threat = Medium Threat = Low Threat
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Conglomerates
Western Digital Operates in a Highly Competitive Market
Major Competitors Threat Level Reasons
Established market leader; directly competes with WDC in all segments
Well Positioned in SSD market but lacks focus in HDD market
Manufacturer of media player; Data Storage service provider
Acquired Fujitsu’s HDD business and gained market share
Major player in the SSD market; but no representation in HDD Market
Pur e pl
ay
Cong
lom
erat
es
SSD
= High Threat = Medium Threat = Low Threat
Western Digital’s Advantage
• Focus on the Storage Device Market• Low Average Selling Price• Higher Quality• Technological Innovation Ability
Conclusion
• Western Digital provides higher quality products & faster technology update• WD will expand through winning their market shares
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Market Cannibalization – SSDs
High Cost High performance
Low Power Consumption
Small Physical Size
SSD is a high growth market with great potential; but it will not replace HDD in the next Decade
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Market Cannibalization – SSDs
High Cost High performance
Low Power Consumption
Small Physical Size
SSD is a high growth market with great potential; but it will not replace HDD in the next Decade
Take Away
Western Digital has already started manufacturing SSD lines
10 Years transition period will allow WD to leverage its brand strength and
R&D to capture market share
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Tablet & Cloud Computing
Virtualized Storage ServiceMay Erode the HDD Market
However…
HDD will still be used – demand from cloud service
provider
Opens up opportunities for WD’s RAID Edition
WD’s NAS – provide personal cloud opportunity
Tablet – Competition with HDD
However…
iPAD – Content Consumption Device
Therefore, HDD is still required to store
information & data
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Valuation Summary
$15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
DCF - Gordon
DCF - EBITDA Exit
Market Approach - Comperable Companies
52 Week Trading Range
Valuation Method Implied Price WeightComparables $44.80 0.5
DCF - Gordon Growth $51.47 0.1DCF - Exit Multiple $48.87 0.4
Target Price: $47
Valuation balances depressed industry valuation with future growth
potential
•Comparables more accurately captures current market valuation•DCF more accurately captures potential growth•Gordon growth given limited weighting•Precedent transactions analysis not included due to lack of takeover potential
ConclusionCompany Overview
Future Outlook Risks Financial
SummaryKey
Highlights
Comparable Companies
LTM EBITDA LTM EBIT LTM Revenue
3.1x 20.8x 3.1x
5.8x 6.7x 2.04x
12.5x 17.8x 2.90x
16.1x 20.8x 3.06x
3.0x 6.4x 1.28x
$- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00
$38.45 $51.14
Key Ratios
Project stable margins over 5 year period
Project declining ROA and ROE as industry enters mature stage
We project the firm will remain solvent
Liquidity ratios suggest the firm is highly liquid
Western Digital: Growth and Transformation
LDGC CapitalMeixi Chen
Ada Del RossoAmir Ganaba
Richard GrahamAlyson Laux
AppendixMain Presentation Appendix
Key HighlightsCompany Overview
Conclusion
Future Outlook
New ProductsNew MarketsCost Structure
Risks
Financial Summary
Valuation SummaryComparable CompaniesDiscounted Cash Flow
Financials
Sensitivity AnalysisWACCPV Interest Earned on CashTax TreatmentEPS and PE AnalysisCapexKey RatiosWall Street Consensus
Strategic Insights
WDC History of InnovationSeagate TechnologyPotential Acquisition EffectsHitachi
OverviewCompetitor AnalysisAdvantage over SeagateROE ComparisonConglomeratesAdvantage over ConglomeratesSSDsSSD TakeawayTablet and Cloud Computing
Sensitivity Analysis
### 2.75x 3.75x 4.75x 5.75x 6.75x9% $40.44 $46.23 $52.02 $57.82 $63.61
10% $39.34 $44.87 $50.41 $55.94 $61.4811% $38.30 $43.58 $48.87 $54.16 $59.4512% $37.30 $42.36 $47.42 $52.47 $57.5313% $36.36 $41.20 $46.03 $50.87 $55.70
### 0.50% 0.75% 1.00% 1.25% 1.50%9% $60.31 $61.54 $62.85 $64.25 $65.75
10% $54.57 $55.50 $56.49 $57.55 $58.6611% $49.97 $50.70 $51.47 $52.28 $53.1412% $46.21 $46.79 $47.40 $48.04 $48.7113% $43.07 $43.55 $44.04 $44.55 $45.09
WA
CC
Gordon Growth Rate
WA
CC
EV/EBITDA Exit Multiple
Sensitivity analysis shows roughly an average $25 price
range for each DCF valuation
methodology
WACC
Risk Free Rate 3.2% Cost of Debt 1.63%Return on Market 7.0% Tax Rate 35.00%Beta 1.65Cost of Equity 9.5% After-Tax Cost of Debt 1.06%
Equity Weight 95.74% Debt Weight 4.26%
CSRP 1.5%WACC 10.6%
PV Interest Earned on Cash
$-
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
FY-2011E FY-2012E FY-2013E FY-2014E FY-2015E
PV Income From Cash Balance $34.44Per Share $0.15
Present Value of Income from Cash Balance
Effect of interest earned on cash balance small
Tax Treatment
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2011E 2012E 2013E 2014E 2015E
Effect of Tax Treatment on EPS
Tax Benefit
Without Benefit
Tax holiday until 2020 in Malaysia
substantially improves WDC’s
EPS
CAPEX Forecast
7%
7%
7%
8%
8%
8%
8%
8%
760
780
800
820
840
860
880
900
2011E 2012E 2013E 2014E 2015E
Projected CAPEX
CAPEX (MM)
% Sales
Projected 2011 CAPEX consistent with
management forecast
Projected 2012-2015 CAPEX based on
historical CAPEX as % of sales
EPS and P/E Analysis
2006 2007 2008 2009 2010 2011EPrice $19.81 $19.35 $34.42 $26.36 $30.20 $30.20
EPS $1.84 $2.57 $3.92 $2.12 $6.06 $2.70P/E 10.77x 7.53x 8.78x 12.43x 4.98x 11.19x
Average P/E: 8.9x
.00x
2.00x
4.00x
6.00x
8.00x
10.00x
12.00x
14.00x
2006 2007 2008 2009 2010 2011E
Historical and Forward P/E
WDC has a History of Innovation
1: WDC Emerges from Bankruptcy
2: Begins Constructing own
HDDS
3: Begins Multiple HDD models
4: Increases Product Variety
5: Enters Enterprise Market
Wall Street Consensus
Standard and Poor’s
Seagate TechnologyBusiness Overview:Seagate Technology (NASDAQ: STX)designs, manufactures, markets and sells hard disk drives. Its products are used in enterprise applications, client computer applications and consumer electronics. Seagate sells its products to OEMs, retailers and distributors. The company is direct competitor with WD in all areas.
1 Year Stock Performance
Strength Weakness
Industry leader
Domination in the Enterprise Market
Replaceable products
Higher ASP
Unstable ROEHigh reputation
Potential Acquisition Effects
Acquisition Currency
Cash on Hand: $3.1B
Characteristics of Potential
Acquisition
Market Cap of $1-3BCore Competencies:
SemiconductorsElectronic
ComponentsSoftware
Development UI
Dilution Effects
Cash on hand more than adequate to
finance future potential acquisitions motivated by vertical
integration
Total Market Size
Recent Hitachi Acquisition
Benefits•Combined HDD Shipments 48%•Push Revenues Ahead of Seagate•Introduce fast SSDs•Increase Enterprise Market Share from 11.4% to 46%•Enhanced R&D Capabilities•Better Cost Structure•Improved Competitive Dynamics
Weaknesses•Potential Market Share Decline•Increased Debt by $2.5 Billion
$4.3 Billion=$3.5 Billion Cash + $750 Million Equity