Brean Capital leads bullish analysts in upping Western Digital targets
The shares of Western Digital (WDC) are advancing after the company last night raised its second quarter guidance and announced a new patent royalty deal with Samsung (SSNLF). A number of analysts reacted favorably to the news, as Citi, Deutsche Bank and Brean Capital all raised their price targets on the shares. Western Digital makes hard disk drives and flash memory products. NEWS: Western Digital increased its second quarter earnings per share guidance, excluding some items, to $2.10-$2.15 from $1.85-$1.95. The hard disk drive maker increased its Q2 revenue guidance to $4.75B from $4.7B. Additionally, at its investor day, the company raised its long-term gross margin target to 33%-385, versus its previous target of 27%-32%, according to Deutsche Bank. Western Digital also announced an eight year semiconductor royalty deal with Samsung."The agreement includes rights to each party's patents broadly covering multi-level cell flash memory and flash storage systems," Western Digital stated. ANALYST REACTION: Western Digital's guidance increase and the other news it announced last night increase the chances that its EPS will reach $10 in 2018, wrote Citi's Stanley Kovler. The analyst raised his price target on the shares to $85 from $80 and kept a Buy rating on the stock. The deal with Samsung, along with Western Digital's higher long-term margin targets, should increase Western Digital's earnings power, wrote Deutsche Bank analyst Sherri Scribner. Consequently, the analyst raised her target on the shares to $75 from $68. She kept a Buy rating on the shares. Brean Capital's Ananda Baruah raised his price target on Western Digital to $100 from $97, but feels that even that target, which is the highest on the Street according to Bloomberg data, could be conservative. Baruah wrote that Western Digital will eventually trade at 12 times to 14 times its profit, based on its profit, operating margin and free cash flow outlook. If the shares reach that multiple, they could rise to $120-$140, wrote the analyst, who kept a Buy rating on the stock. WHAT'S NOTABLE: Separately, Citi analyst Christopher Danely initiated coverage of peer Micron (MU), which also develops flash memory products, with a Buy rating and a $30 price target. The fundamentals of DRAM, a form of flash memory, are "rapidly improving" amid lower supply and "stable to improving demand," according to Danely. Capital spending on DRAM supply sank 32% this year, the first decline in four years, he reported. Meanwhile, demand for DRAM has increased in the second half of 2016 amid higher orders from PC makers and increased DRAM utilization by servers and handset applications, said Danely, who set a $30 price target on the shares. PRICE ACTION: In morning trading, Western Digital rose 6% to $67.75 and Micron advanced 3% to $19.63 per share.