Is Western Digital a Great Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Western Digital Corporation WDC stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Western Digital has a trailing twelve months PE ratio of 16.42, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 20.15. If we focus on the stock’s long-term PE trend, the current level puts Western Digital’s current PE ratio above its midpoint over the past five years, with the number having risen rapidly over the past few months.

Further, the stock’s PE also compares favorably with the Zacks classified Computer–Storage Devices market’s trailing twelve months PE ratio, which stands at 22.20. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Western Digital has a forward PE ratio (price relative to this year’s earnings) of just 13.92, which is a little below the current level. Hence, we could say that forward earnings estimates are roughly incorporated in the company’s current share price.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Western Digital has a P/S ratio of about 1.41. This is a bit lower than the S&P 500 average, which comes in at 3.01 right now. Also, as we can see in the chart below, this is tad below the highs for this stock in particular over the past few years.

If anything, WDC is trending towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Western Digital currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes WDC a solid choice for value investors.

What About the Stock Overall?

Though Western Digital might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘A’. This gives WDC a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past sixty days compared to one lower, while the full year estimate has seen one up and no downward movement in the same time period.

This has had just a substantial impact on the consensus estimate though, as the current quarter consensus estimate has risen by 7.8% in the past two months, while the full year estimate has jumped 15.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Western Digital Corporation Price and Consensus

 

Western Digital Corporation Price and Consensus | Western Digital Corporation Quote

Bottom Line

Western Digital is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a robust industry rank (among the Top 9%) and a Zacks Rank #1 (Strong Buy) instills investor confidence.

However, over the past two years, the Zacks Computer-Storage Device industry has underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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