WDC: Opportunity and Uncertainty

How exposed is WD to China? 

The supply chain seems to have been moved away from China. The ban on Huawei affects demand since it is a significant partner (<10% revenues). As long as the global demand remains intact, these effects should be partly mitigated by increased demand from manufacturers like Samsung and Apple.

What is the impact of tariffs on Mexico?

Politically, these tariffs don’t seem sustainable.

Are its problems temporary or permanent?

Temporary headwinds including supply/demand imbalance (2-3Q more of pain), optics of Trump’s tweets, ban on Huawei, talk of tariffs in general. Longer term they have secular tailwinds.

How serviceable is the debt? Will WD survive?

LT Debt $10.3B; cash = $3.6B. Interest payments TTM 466M as  of March 2019 (at interest rates <4%). Interest payments are well covered by cash and EBIT. WD is still trying to delever from $17B in debt after SanDisk acquisition.

The company has been around since 1970 through many cycles and consolidation. It will survive; possibly thrive.

How much is it worth?

In 3 years, $8 FCF seems reasonable. Slap a 10x multiple for $80 as a conservative target. It has been there not long ago.

This implies an IRR of nearly 30%. The company pays a 5%+ dividend, and the volatility may be exploited by using options to get in and out. At current prices mcap is $11B. It could also be a takeover target in any consolidation.

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