An upgrade to
gave shares of the hard-drive maker -- and its major rivals -- a boost Monday.
In recent trading, Western was up $1.21, or 6%, to $21.11, a new 52-week high;
was gaining 81 cents, or nearly 3.8%, to $22.20; and
acquisition by Seagate is pending, was up 26 cents, or 3.5%, to $7.73. All three stocks were being traded amid fairly heavy volume.
Deutsche Bank analyst Sherri Scribner promoted Western to a buy, saying the company's business will benefit from the merger of its rivals. Additionally, the loss of the industry's No. 3 player will likely act to dampen the sector's normally brutal rounds of price-cutting.
Seagate agreed to acquire Maxtor in late December for $1.9 billion, but citing concerns over regulatory scrutiny, the two companies said the deal probably won't close until the second half of the year.
One important effect of the additional business will be higher overall gross margins for Western, says Scribner. That's because computer makers and other OEM customers, wary of becoming too heavily dependant on any one supplier, will shift business to Western, along with Samsung and Hitachi.
Since the additional business is spread over a fixed cost base, the contribution margin of the incremental units will be as high 24% to 28%, compared with the company's average gross margins of 16% to 18%, says Scribner. Bottom line: Gross margins as a whole increase to the 18% to 20% range.
The analyst noted that Western is trading at 11 times 2007 EPS estimates, well below its average P/E of 13. On that basis, she raised her target price from $14 to $24.
Deutsche Bank does not have a current investment-banking relationship with Western Digital.