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Technology Stocks : Western Digital (WDC)
WDC 37.06-0.3%Oct 6 4:00 PM EDT

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From: Carey Thompson2/26/2008 6:37:40 AM
   of 11057
Here is a good article on the new products and improved profitability at WDC.

Investor's Business Daily
Once Conservative And A Follower, Hard Drive Maker Takes The Lead
Thursday February 21, 6:02 pm ET
Brian Womack

For Western Digital, the follower has become the leader.
The hard drive maker (NYSE:WDC - News) once known for keep-it-steady conservatism is suddenly the sexiest stock in the hard-drive industry with cutting-edge technology and sleek consumer products.

"It's really a manifestation of a philosophy change," said Mark Geenen, an analyst with Trend-FOCUS. "They've really remade the company."

Earlier in the decade, the company had a reputation as a "fast follower" -- letting competitors ramp up technologies to test demand. But that changed last year after Western Digital was the first to market with a massive hard drive for laptops, beating rival Seagate Technology (NYSE:STX - News). Thanks to some key acquisitions, the company is looking to hold its technology edge as it continues to grab share in markets it once ignored.

"WD (Western Digital) is capitalizing on growth opportunities through thoughtful strategies, which we have executed very effectively in recent years," said John Coyne, president and chief executive of Western Digital during the company's last quarterly analysts' call. "WD's positioning has never been better."

Earnings Growth

Western Digital's adjusted earnings more than doubled to $1.35 per share in the second fiscal quarter ended Dec. 28, 2007, from the year-ago period. That crushed analysts' estimates by 30%, even after the company had raised guidance in early December.

Sales shot up more than 54% in the recent quarter to more than $2.2 billion.

Western Digital is benefiting form solid demand for gear to store the exploding amount of digital content in homes and businesses. Hard drives store information for computers, digital video recorders and other devices.

Meanwhile, the industry has been careful to restrain production capacity growth, keeping long-standing fears of price wars at bay.

"While there may be concern about the impact of macroeconomic conditions on demand for storage, we have yet to see any effect on actual usage or order rates or the forecasts from our customers," Coyne said during the call on Jan. 23.

However, Christian Schwab, an analyst with Craig-Hallum Capital Group, says the company is entering a typically tough part of the year for the hard drive industry. At the same time, economic concerns could still be a drag on the industry.

"There seems to be increasing questions about the ... economic environment," said Schwab, who rates Western Digital a buy.

Still, Mark Miller, an analyst with Brean Murray Carret & Co., says demand is still looking solid. He notes there could be shortages of some key hard drive parts this year. He expects the hard drive industry to grow 10% to 15% annually over the next three years, based on unit shipments.

"You're still seeing some solid growth," he said.

Western Digital is better positioned for any potential downturn now that it's beefed up its in-house technology.

Back at the beginning of the decade, the company worked with outside providers to get key parts that make up the guts of a hard drive.

"They were basically an assembler of other people's technologies," Geenen said.

The company took an important step toward changing that in late 2003 when it bought Read-Rite, a company that had fallen into bankruptcy. It made the heads in a drive that read and write information on the spinning storage discs -- sort of like a two-way record needle.

The other big acquisition came just last September, when the company spent $1 billion on Komag, which makes the media, or the spinning discs that store information.

With these two technologies in-house, Western is on par with market-heavyweight Seagate, analysts say. The acquisitions also pad profit margins. For example, Komag could add another 3 percentage points to its already expanding gross margins, the company says.

Schwab says the moves "should allow them to bring future products faster to the market."

Western Digital already was doing that in the key laptop market.

Geenen points out that the company was the first to introduce a laptop drive last spring that offered 250 gigabytes of capacity at a time when most hard drives were at less than 200. In the fall, Western Digital was the first to market with a 320 gigabyte drive.

Schwab notes Seagate should close the technology gap later in the year.

These drives haven't just been popular among a handful of geeks, but has helped fuel market share growth.

Its 2.5-inch hard drives, which are designed to fit inside laptop computers, grabbed 20% of the laptop market in the fourth quarter of 2007 compared with just 15% share in the third quarter, according to TrendFOCUS.

Not bad for a company that didn't even enter the hard-drive laptop market until 2004 -- a time when the market was beginning to show huge growth as more computer users went mobile. The market for laptop hard drives showed year-over-year unit growth of 47% in the fourth quarter and 8% sequential growth.

"They have taken the leadership mantle away for their competitors," Geenen said. "Twelve to 18 months ago that was almost unthinkable."

But this wasn't just all Western Digital's doing.

Price War

Earlier in 2007, Seagate, which had been on the technology forefront for most of the decade, pulled back on research spending on higher-capacity hard drives. There were growing fears of yet another industry price war, and Seagate didn't want to overspend at a time that its margins could shrink. But a drawn-out price war never materialized, leaving Western Digital in the driver's seat.

"It was just an opportunity for (Western Digital)," Miller said.

Western Digital isn't just leaving it to computer companies to target consumers. The company has found a hit with its "My Book" and "My Passport" external hard drives -- whose names reflect their sleek appearance. They target people who need extra hard drive space to back up digital files, such as movie clips and songs.

Two years ago these branded products made up just 5% of overall sales. Today, they make up 18% of hard drive revenue.
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