Western

Digital Corporation (NasdaqGS: WDC)

Last Price: $62.60 VIEW: HOLD

7/30/2013

Western Digital Corporation (WDC) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT). Effective July 10, 2013, Western Digital Corp acquired VeloBit Inc.

Sector: Technology Highlights: Western Digital is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. The stock closed yesterdays trading session at $62.60. In the past year, the stock has hit a 52-week low of $32.25 and 52-week high of $70.61. The intrinsic value of the stock is lower Industry: Data Storage Devices

than the current price. WDC has a market cap of $14.77 billion and is part of the Technology sector. GROWTH AND BALANCE SHEET The company reported that it earned $416 million, or $1.76 basic earnings per share ($1.71 diluted earnings per share), for the quarter that ended June 28. That's down from $745 million, $2.93 basic earnings per share ($2.87 diluted earnings per share) for the same quarter last year. Revenue decreased 21.5 percent, to $3,728 million from $4,754 million. WDCs estimates earnings per share for the quarter ending September 2013 of $1.95 to $2.05 per share. GAAP operating margin was 12.3 percent, compared to 17 percent in the fourth quarter of fiscal 2012. The decline is due to decrease of shipments to distributors, second/third tier retailers and white box manufacturers, both notebooks and desktops, which decreased to 23,989 units, compared to 32,773 units, for notebooks, for the fourth quarter of fiscal 2012. And to 16,185 units, compared to 21,211 units, for desktops, for the fourth quarter of fiscal 2012. Cash flow from operating activities was $684 million, compared to $1,128 million in the fourth quarter of fiscal 2012. VALUATION WDC PE stands at 9.27 below the industry average of 15.05 and below the S&P 500 average of 18.59. The company is currently trading below the preferable P/E ratio of 15x and over the last five years, the companys shares have traded in the range of 2.42x to 18.08x trailing 12-month earnings. WDC's current Price/Sales of 0.96 is below the average of its industry, of 1.03. WDCs head to head comparison to its main competitors shows that the company has better gross margin and operating margin than most of them, and highest EPS. WDC is trading at second lowest P/E and P/S multiples than the main competitors. The stock is currently trading 20% above its intrinsic value of $51.95 this suggests that the stock is overvalued at these levels. The beta of 1.29 implies slightly higher volatility of the stock with respect to the S&P 500. WDC has shown satisfying earnings consistency over the last five, except for the one dip in 2010. WDCs earnings per share over the last five years have grown by 11.97. The current quarter earnings in comparison to the same quarter last year have dipped by -44.20% which is well below the required level of 15%. WDCs current price levels are slightly above the preferable level, 11.34% below the 52 week high of $70.61, and the technical indicators are neutral. The majority of the analyst ratings are hold. WDCs Total Debt/Equity of 22.80 is just above the required maximum, however it is well below the industry average of 50.94. WDC have a dividend payout ratio of 15%. RECOMMENDATION for next 6 months: We initiate our coverage with HOLD. The company has demonstrated neutral signs but the valuation is expensive at current price level. WDC is up 48.73% year-to-date. Our overall score for WDC is 6.36. For options trading we suggest:

Buy the August 2013 call with a strike of 65 priced at $0.86 per contract Net credit to start: $0.86 Western Digital Corporation WDC 14.77B Beta 12.43B 1 Month Stock Returns 9.27 Year to Date Stock Returns 6.7 1 Year Stock Returns 0.96 3 Year Stock Returns 1.72 52-Week Change 0.81 S&P500 52-Week Change 3.74 52-Week High 1.60% 52-Week Low 50-Day Moving Average 10.98% 200-Day Moving Average

VALUATION Market Cap: Enterprise Value P/E PEG Ratio Price/Sales Price/Book Enterprise Value/Revenue Enterprise Value/EBITDA Dividend Yield Held by insiders NEWS and CALENDAR

1.29 0.82% 48.73% 60.36% 137.40% 57.41% 22.19% 70.61 32.25 64.73 55.18

Fri, Jul 26, 2013 Do Hard Drives Belong in Your Portfolio? Tue, Jul 25, 2013 WDC, Seagate Fall: Bulls Cheer Rationale Situation, Bears Fear PCs Tue, Jul 25, 2013 Western Digital Tops Views In Rough Disk Drive Market Wed, Jul 24, 2013 Western Digital Corp (WDC) Management Discusses Q4 2013 Results - Earnings Call Transcript WDC Strengths Well established R&D Many patents and pending patents High product quality and reliability WDC Weakness Large amount of profits comes from small amount of buyers Lack of product diversification Selected component suppliers are closed down globally

 Competitor Comparison WDC Market Cap: 14.77B Employees: 85777 Qtrly Rev Growth -0.22 Revenue 15.35B Gross Margin 0.28 EBITDA 3.32B Operating Margin 0.14 Net Income 1.66B EPS 6.75 P/E 9.27 PEG 6.7 P/S 0.96 EMC 54.77B 60000 0.06 22.31B 0.63 5.33B 0.19 2.78B 1.27 20.81 1.07 2.46 STX 14.47B N/A -0.24 14.35B 0.27 2.97B 0.15 1.84B 4.81 8.38 -84.78 1.01 TOSBF 18.85B 206087 0.01 73.70B 0.24 5.24B 0.03 985.21M 0.23 19.1 N/A 0.26 Industry 291.29M 1.25K 0.19 432.93M 0.28 10.06M 0.01 N/A N/A 23.38 1.16 1.03

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock. Intrinsic value of the stock Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized. WDC Intrinsic Value EPS ttm EPS Growth (Assumption) PE DIVIDEND PAYOUT EXPECTED STOCK RETURN in 2022 Forecasted Stock Price Earnings Per Share after the 10th year TOTAL DIVIDENDS Forecasted Stock Price in 2022+DIVIDENDS 14.47 130.88

6.75 1.06 9.27 15% 1.097

116.41 12.56

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 TOTAL EPS

EPS 7.18 7.64 8.13 8.65 9.21 9.80 10.42 11.09 11.80 12.56 96.49

Net Present Value

51.95

WDCs intrinsic value is $51.95 the current price is $62.60, the stock trades 20% above its fair value. The Sensitivity analysis of the stock varying the growth rate of the EPS are presented in the table below. EPS Growth (Assumption) Value 5% 45.77 5.5% 47.89 6% 50.1 6.40% 51.95 7% 54.8 7.5% 57.3 8% 59.91 Based on the prospects of the company the valuation range is from $45.77 to $59.91. Financials The financial health of the company the higher the better, we evaluate all the financial ratios of the company. Sentiment Investors sentiment for the stock. Analyst ratings The model assigns a value according to analysts recommendation for the stock. Analyst rating on Reuters.com is 5 Buy, 7 Outperform, 12 Hold, and 2 Underperform. Earnings Consistency We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. WDCs annual EPS for the last 5 years were 3.84, 2.08, 3.09, 6.58, and 6.75 this type of earnings action is favorable. Total Debt/Equity The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

WDCs Total Debt/Equity of 22.80 is slightly above the required maximum, however it is well below the industry average of 50.91. EPS This Quarter VS Same Quarter Last Year The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. WDCs EPS growth for this quarter relative to the same quarter a year earlier is -44.20 %, below our target. Annual Earnings Growth This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. WDCs annual earnings growth rate over the past five years is 11.97%, right at our target growth rate. Current Price Level Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. WDC's 52 week high is $70.61 current price is $62.60, is 11.34% below the 52 week high. P/E Ratio The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 9.27 the average industry P/E ratio is 15.05 and is below the S&P 500 P/E ratio of 18.59. Insider Ownership When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 10.98% of WDC stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model. Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value. WDC is trading in the range of $61.49 - $70.61 in the past 30 days. The stock has been showing support around $62 and resistance in the $69.70 range. The stock is trading below the 50-Day Moving Average and above 200-Day Moving Average. RSI(14): 35.60. From the graph on page 1 it can be seen that the stock has been in an upward trading channel since the beginning of the year. However, the company has recently broken down a significant support level, at the 50-Day Moving Average line, and has closed for the last three trading days below the upward trending line. Our indicators give a neutral view on WDC. Western Digital Corporation WDC COMPANY: Intrinsic value o f the stock Financials Sentiment Analyst ratings Earnings Consistency Total Debt/Equity Quarterly EPS change Annual Earnings Growth Current Price Level P/E Ratio Insider Ownership Technical Analysis SCORE RECOMMENDATION: 4 6 7 7 8 7 1 6 4 8 8 4 70 6.36

HOLD