Tech Stock STX has forward PE in the 3's
WDC: Needham Ups to Strong Buy, $66 Target
By Tiernan Ray
Shares of disk drive maker Western Digital (WDC) are up $2.49, or 6%, at $41.97, after Needham & Co.‘s Richard Kugele this morning raised his rating on the stock to Strong Buy from Buy, and raised his price target to $66 from $50, writing that the completion of its acquisition of Hitachi‘s (6501JP) storage business is going to be a turning point for the entire drive industry.
Western announced on March 8th it completed the purchase of Hitachi Global Storage Technologies, also known as Viviti Technologies, for $3.9 billion in cash plus Western stock.
Kugele thinks the era of consolidation in disk makers can help improve the valuation of the stocks, including competitor Seagate Technology (STX):
Since we first initiated coverage of the space over a decade ago, P/E has been the primary metric for relative valuation for the group. Initially, the rule of thumb was 12-15x, with that range gradually declining over time despite an industry that continued to consolidate, set higher peaks and troughs for margins and profitability, and generate significant cash flow. Today, after industry consolidation and with the space controlled by three players (really two), we would argue that the improved stability and profitability requires a new approach. Specifically, we see EV/EBITDA as a more accurate method for valuation of the true businesses for their improved fundamentals.
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