Small Drives May Pay Off Big for Western Digital

The storage firm could win big with its small disk drives.
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Just months after slashing its workforce and announcing a major restructuring effort, storage firm

Western Digital

(WDC) - Get Report

may offer opportunities to investors thanks to its notebook drives.

Strong execution and the company's strength in 2.5-inch notebook drives make Western Digital an attractive proposition, according to Goldman Sachs analyst David Bailey, who added the firm to his Americas Buy list Wednesday.

"Market leadership in faster-growing segments should better position the company for a hard drive channel inventory snapback in the near term and rebound in overall demand in the intermediate term," he wrote in a research note.

The analyst explained that Western Digital emerged as the leader in the 2.5-inch notebook drives last year, gaining more than 10 points of market share, and is well positioned for the shift from 3.5-inch to 2.5-inch hard disk drives.

Another analyst also noted the strength of the notebook drive market.

"The recent indications we have received from numerous sources report shortages in notebook drives due to supply limitations, along with improved demand," wrote Avi Cohen, an analyst at Avian Securities, in a note released Wednesday. "(We) believe that the drive makers will exceed consensus expectations for the March quarter while providing improved outlooks into June."

The last few months have certainly been eventful for Western Digital, which competes with







(STX) - Get Report

. Weakening demand forced the Lake Forest, Calif.-based firm to undertake a

major restructuring effort

late last year, which involved cutting 2,500 jobs, or 5% of its workforce.

Investors have nonetheless been warming to the company's stock. Despite the tech sector's recent problems, Western Digital's shares have gained more than 60% in the last three months and are currently trading around $19.

"Despite the shares' outperformance year-to-date, we expect the company to outperform," added Goldman Sachs' Bailey. The analyst raised his 12-month Western Digital price target from $20.25 to $22.

In a tough economy, however, consolidation is the name of the game in the hard disk drive market.

At one point Fujitsu was rumored to be in talks with Western Digital to buy the Japanese firm's hard disk drive business, although the discussions

ended in a stalemate

with the two companies reportedly unable to agree on a deal.

With the Western Digital transaction off,



snapped up

Fujitsu's hard disk drive operation, and more consolidation may be possible.

Avian Securites' Cohen, for example, says that Western Digital may sell a facility in Malaysia to Hitachi.

"Hitachi formerly has denied rumors that it would buy the WDC facility," he wrote. "(But) we believe Hitachi is negotiating with WDC to purchase its Sarawak substrate operation."