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Jim Cramer's Action Alerts PLUS

Micron's Blowout Benefits Western Digital

By Jim Cramer and the AAP Team | 2017-03-23 18:03:34.0
Stocks in Focus: WDC, MU

Western Digital (WDC) shares are trading sharply higher after hours (up more than 3% as of this writing) as peer Micron (MU) posted a blowout fiscal second quarter and, more importantly, provided very strong guidance for the upcoming fiscal third quarter. 

MU reported EPS of 90 cents, beating consensus estimates for 85 cents, and posted revenues of $4.65 billion, roughly in line with consensus (we note that MU had pre-announced fiscal-second-quarter revenue earlier this month). Looking ahead, Micron management sees fiscal-third-quarter EPS coming in around $1.43 to $1.57, shattering consensus expectations of 95 cents, and expects fiscal-third-quarter revenues to come in between $5.2 billion and $5.6 billion, again beating consensus of $4.77 billion. 

Specifically within the quarter, Micron noted that "strong demand and limited industry supply for NAND and DRAM solutions ... produced excellent results." Micron said revenues in its Storage Business unit were up 21% quarter over quarter. The company noted that an 18% increase in trade NAND storage sales volumes helped drive the upside numbers for the quarter. The forward-looking guidance provides further support for the investment thesis hinging on continued tightening supply conditions and strong demand in the storage market. Much of the momentum in the storage market relies on periods where demand is high and supply remains low, boosting prices for memory chips and products. Micron's strong results and commentary should bode well for Western Digital's late-April earnings report. 

Recall that WDC has exposure to NAND through its acquisition of SanDisk, but perhaps more importantly, may be a leading bidder for Toshiba's NAND business, which is up for sale. You can read our recent articles here, here and here for more information regarding the Toshiba semiconductor sale. We believe a purchase of all or some of the Toshiba NAND business would be an added boost to the Western Digital investment thesis, further diversifying the business away from hardware disk drives (HDDs), sales of which are slowing compared to flash memory (NAND is a type of flash). 

Separately from the solid read-through from Micron's report this afternoon, WDC shares also performed nicely in today's down market after the company refinanced some debt obligation, freeing up an incremental $12 million in annual cash interest savings (in addition to a roughly $30 million savings announcement last week). This move may potentially be a signal highlighting the company's desire to deleverage ahead of a possible bid on/acquisition of the Toshiba business. We cannot be certain, but either way, the refinancing puts WDC in a more flexible position. 

Overall, today was a good day for Western Digital -- we will continue to follow the Micron conference call, but all signs seem to be pointing in the right direction for WDC at the right time. The storage market appears poised to maintain its favorable supply/demand dynamics for at least the coming couple of quarters (backed by Micron's commentary this afternoon), and adding the Toshiba business (or at least a portion of it) would be gravy to the investment thesis. We reiterate our One rating on WDC.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WDC.

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Stocks in Focus: ADBE, APA, XEC, WDC, AAPL, AGN, CMCSA, DHR, TMO, ILMN, FTV, FB, SNAP, GE, GOOGL, PYPL, HPE, MMP, NWL, SLB, SNA, AEP, ARNC, C, CSCO, DOW, DD, PEP, QCOM, SBUX, TJX, COST, WBA, RAD, WFC, FRED

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03/17/17 - 04:34 PM EDT

Markets

Chart of I:DJI
DOW 20,656.58 -4.72 -0.02%
S&P 500 2,345.96 -2.49 -0.11%
NASDAQ 5,817.6930 -3.9480 -0.07%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.04291784267013053 Consumer Durables
AGN 0.048082124040559504 Drugs
APA 0.04092843220650227 Energy
CMCSA 0.02764762058705265 Media
DHR 0.019231512546985307 Health Services
FB 0.051822575235242564 Internet
GE 0.02585260513437633 Industrial
GOOGL 0.04677792442084651 Internet
HPE 0.016939924435457703 Telecomm
KEY 0.0032024665302506916 Banking
LUV 0.011670386003309625 Transport
MMP 0.022712349464527725 Energy
NWL 0.03379126803386527 Consumer Durables
SBUX 0.029040401043815785 Leisure
SLB 0.037506277772204805 Energy
SNA 0.03089001349039722 Industrial
WDC 0.03186681685074043 Computer Hardware
XEC 0.03479648411552645 Energy
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
ADBE 0.025918344371935548 Computer Software & Services
AEP 0.025051477815646178 Utilities
ARNC 0.02972750606915226 Industrial
C 0.03770442400518696 Banking
CSCO 0.03784463057116779 Computer Hardware
DOW 0.03498423092109812 Chemicals
NXPI 0.024793349170992744 Electronics
PEP 0.033221713679079605 Food & Beverage
TJX 0.040781354590268076 Retail
WBA 0.02773415867943287 Retail
WFC 0.03898856758632257 Banking