Why Western Digital (WDC) Dipped Lower Friday

NEW YORK (TheStreet) -- Western Digital (WDC) dipped lower on Friday on news Hitachi will sell approximately 44% of its stake in the digital storage maker.

Hitachi received 25 million shares as part of compensation for Western Digital's purchase of its hard drive unit.

Western Digital announced it will engage in a secondary public offering of the 10.87 million shares Hitachi is selling. The offering will raise around $728 million or $67 a share, an approximate 3% discount on current share prices.

The Irvine, Calif.-based company has also proposed a 30-day option whereby underwriters can purchase an additional 1.63 million shares. Goldman Sachs and Bank of America are acting as lead book-running managers for the deal, while JPMorgan is joint book-running manager.

Shares fell 1.4% to $68.67 early Friday afternoon, chipping away at the 61.6% gain in the year to date.

TheStreet Ratings team rates Western Digital as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about its recommendation:

"We rate Western Digital (WDC) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, solid stock price performance and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Although WDC's debt-to-equity ratio of 0.29 is very low, it is currently higher than that of the industry average. To add to this, WDC has a quick ratio of 1.50, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to its closing price of one year ago, WDC's share price has jumped by 108.94%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • 36.8% is the gross profit margin for WESTERN DIGITAL CORP which we consider to be strong. Regardless of WDC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 13.01% trails the industry average.
  • WESTERN DIGITAL CORP reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, WESTERN DIGITAL CORP reported lower earnings of $3.90 a share vs. $6.45 a share in the prior year. This year, the market expects an improvement in earnings ($8.10 vs. $3.90).
  • WDC, with its decline in revenue, slightly underperformed the industry average of 0.6%. Since the same quarter one year prior, revenues slightly dropped by 5.7%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

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