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   Technology StocksWestern Digital (WDC)

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To: Numberspro who wrote (10989)5/19/2005 3:42:26 PM
From: Mark O. Halverson
   of 11057
It is interesting that Lehman downgraded WDC from equalweight to underweight (price plunged) while upgrading MXO from underweight to equalweight (price soared). In the case of WDC I suspect the downgrade was a valuation call based on the recent good price runnup in the stock. In the case of MXO I suspect it was the combination of MXO's depressed price combined with signs that MXO is gradually cutting its losses. Likely Lehman still views disk drive stocks as deserving only a low PE. Personally I think that with hard drives going into most everything these days, the disk drive companies should be viewed in a better light. I'm long on both WDC and MXO, but more so on WDC.


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To: Numberspro who wrote (10989)5/20/2005 7:19:33 AM
From: Sam Citron
   of 11057
The downgrade is mainly related to WDC's vulnerability to aluminum platter supply shortages and related component price increases, given that it sources 100% of its aluminum and glass platters externally. MXO, in contrast, is said to have the capacity to produce 50-60% of its aluminum platters internally. Robust demand for servers, notebooks and PCs and high consumer demand for large capacity drives which use aluminum platters is said to be straining the aluminum platter supply chain.

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From: Sam Citron5/23/2005 5:41:31 PM
   of 11057
More light on Lehman's WDC report (5.19.05):


Investment Conclusion

! While WDC has executed well over the last several
years, we are concerned about its higher relative
exposure to potential component shortages (e.g.
aluminum platters). Unlike all of its major competitors
who have some level of internal platter mfg capability,
WDC is completely reliant on 3rd party mfg. We are
downgrading Western Digital to 3-UW from 2-EW.


! We believe WDC's valuation (relative to Maxtor,
upgrading to 2-EW) does not reflect WDC specific risks
that may offset the positive impact of its entry into new
markets (notebook and 1" drives).

! Western Digital depends completely on external third
party suppliers for aluminum platters and lack of
internal manufacturing capabilities leaves the company
exposed to rising component costs in the face of

! We believe that availability of platters may constrain
WDC's growth in 2H05.

! WDC gave June guidance of $875-$900M revs/$0.22-
$0.24 EPS. Our June Qtr and FY05 ests are unch at
$885M/$0.23 and $3.6B/$0.95.

We are downgrading our rating on Western Digital to 3-Underweight from 2-Equal weight based on our belief that the good news has likely peaked and that its valuation premium relative to Maxtor is likely to narrow. We are downgrading the stock for three principal reasons:

1.) we believe WDC is the HDD vendor most vulnerable to platter supply shortages,

2.) WDC has captured the majority of margin benefits from its Read-Rite acquisition; and

3.) with Maxtor returning to health, we believe it is likely to recapture some lost share from Western Digital within the desktop market. While WDC has executed exceptionally well over the past few years and, we see no reason why this cannot continue going forward, our rating swap simply reflects our belief that MXO will post superior stock performance over the time horizon relative to WDC.

While Western Digital and Maxtor have historically traded in-line with each other in terms of valuation, their valuations have now diverged to the widest level in over 7 years. We believe this valuation gap will narrow due to improving Maxtor execution and our belief that WDC’s gross margins have likely peaked due to increasing dependence on tight 3rd party components and that the company has wrung the majority of the potential margin accretion available from its Read-Rite acquisition.

Concurrent with our downgrade of Western Digital to 3-Underweight, we are upgrading Maxtor to 2-Equal weight from 3-
Underweight in light of better prospects for margin improvement and profitability due to cost cutting initiatives as well as overall positive hard drive industry momentum. Our top pick in the HDD space remains Seagate which sources most of its platters and heads internally and which has achieved critical mass and momentum in the faster growing 1” and 2.5” markets while essentially maintaining share in desktops and enterprise.

Adequate platter availability – We believe WDC is the major HDD vendor most vulnerable to tight industry platter supply and
component price increases. Unlike the other major HDD competitors -- Seagate, Maxtor, and Hitachi GST – Western Digital does not manufacture its own aluminum platters internally. In fact, Western Digital is 100% dependent on third parties for its aluminum and glass platter needs.
When we returned from Asia in March we indicated that we felt aluminum platter supply would be increasingly constrained
heading into the 2H05. Our outlook was premised on a combination of more robust than anticipated server, notebook and PC growth and, for the first time ever, rising component count per drives (on an average basis). The rising component count per platter reflects consumer’s growing appetite for the highest capacity drives to store photos, movies, and music and enterprise desire for lower-performance, high-capacity drives to store backup and archive content for multiple years. The largest capacity drives are usually based on a 3.5” form-factor platform, which uses aluminum platters. The combination of these factors caught hard drive component suppliers throughout the entire supply chain off-guard. Further, component suppliers have been reluctant to bring new capacity on-line much in advance of actual demand given the financial travails (including bankruptcy) many have previously experienced for making the mistake of building speculative capacity in the past.

Our suspicions of a pending aluminum platter shortage were reinforced by Komag and Maxtor on their most recent
conference calls and by a recent news release from Showa Denko.

• Komag indicated that they are bringing more capacity on-line for the second time in the last year to meet anticipated

• Maxtor indicated that they have shaved their potential guidance by around 500,000 units for the June quarter based
on concerns over aluminum platter availability in the June quarter. Maxtor is Komag’s largest customer despite
Maxtor having the capability to produce approximately 50%-60% of its aluminum platter needs internally. WDC used
to be Komag’s largest customer but Western Digital turned to other suppliers for the bulk of its capacity several years
ago. WDC accounted for approximately 19% of Komag’s revenue in the most recent quarter.

• Finally, Showa Denko just announced that they intend to increase their platter capacity from approximately 10 million
platters per month to 14 million/month by March 2006. Aluminum platters represent approximately 2/3 of Showa’s
current capacity with glass constituting the balance. It is our understanding that the incremental capacity will be used
entirely for glass bringing Showa’s total mix to 50%/50% but doing very little to relieve the pending aluminum platter
shortage. While de-bottlenecking can allow new capacity to be added relatively quickly, the Showa announcement
shows the type of lead time that is required to bring greenfield capacity on line. It is our understanding that WDC is Showa’s largest aluminum platter customer.

Second, the situation in glass platters (used for portable products such as notebooks and MP3 players) is also tight but we believe capacity constraints will gradually ease through the end of the year and improve meaningfully in 2006 due to
incremental capacity additions and a more accurate assessment of consumer company needs. WDC is currently attempting
to ramp production in the 1” and 2.5” drive space. While the company is likely to continue to see meaningful sequential unit
growth in these two segments, albeit from a very small unit base, WDC is not likely to get all of the glass platters that it desires. Rather, we believe Hitachi, Toshiba, Fujitsu and Seagate, as larger and more established players, will continue to have preferred access to glass platter industry capacity. Hoya is the principal supplier of glass platters while Showa also ships approximately 3.5 million units per month. As mentioned earlier, Showa is currently in the process of doubling its glass platter capacity while Hoya is bringing new capacity on line in Vietnam.

Third, the transition to perpendicular recording could further constrain the supply chain. Perpendicular recording is likely to suffer the inevitable inefficiencies of new technology transitions and consume already scarce platter supply. Further, the transition to perpendicular recording requires that the platters meet tighter specifications which will require a longer manufacturing and testing process.

On the head side, we believe WDC may also need to once again begin sourcing more of its heads from 3rd party
manufacturers, particularly for high-end platter densities.

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To: Sam Citron who wrote (10992)5/23/2005 5:50:03 PM
From: Sam Citron
   of 11057
Following is Sarmad Hermiz' response to Lehman's report:

There is a puzzling item in the analysis. Which is: if wdc (and the drive industry sell so many drives they cause a component shortage), then wdc's earning estimate (by the Lehman analyst) is much too low.

For instance, the analyst is projecting $885 rev for wdc in q2. But in q1 the actual was $920m. And certainly there was no component shortage. So how will a shortage develop with less revenue.

The other inconsistency is in earnings.

(1)- Seagate's q1 earnings were 45c. They are now guiding to 50c (increased from 45c a month ago). This increase is due to better prices and mix. It is not due to more units because Seagate has been producing at max capacity for two quarters and cannot produce more.

(2)- The analyst is citing better earnings for Maxtor (maybe he means lower losses!). The only reason Maxtor is losing less money now is that drive prices are higher. So lets put the two factors together, high revenue for wdc (units), with higher unit prices. That will mean higher profits. So where does this guy come up with 24c EPS ? Last q's eps was 35c. And that was at less than full capacity. And I know for sure there was a price and unit volume dip in February. So his wdc earning estimate is too low.

The other non substantiated part of this analysis is the idea of a platter shortage for desk-top drives. There just aren't any signs of that. The first sign would be an increase in the price differential between multi-platter drives and single platter drives. At this time there is no such development.

The second sign would be disappearance of marginal drive makers such as ExcelStor, Samsung, Fugitsu or Toshiba. That may still happen, but it hasn't yet. However if it does happen, then the positive effect on ASP will outweigh any negative effect.

I think the reasoning of this analyst is just not supported by any currently visible evidence. And if a component shortage does occur, I'm pretty sure it will be positive for wdc and negative for Maxtor. Because wdc's management has always beaten Maxtor's management in all varieties of conditions.


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To: Sarmad Y. Hermiz who wrote (10987)5/24/2005 1:08:18 PM
From: Sam Citron
   of 11057
Samsung develops flash-based 'disk' for PCs
It uses memory chips instead of a mechanical recording system
News Story by Martyn Williams

MAY 23, 2005 (IDG NEWS SERVICE) - Samsung Electronics Co. is touting a replacement for conventional hard disk drives that's based on flash memory chips. The company said today it plans to begin mass production of the device in August.
The solid-state disk (SSD) uses memory chips in place of the mechanical recording system used inside hard disk drives and has several advantages including lower power consumption and higher data rates, according to Samsung. Flash memory technology isn't new, and the advantages have been known for years. But such disks have never been commercially produced because flash has one big disadvantage over hard disk storage: It's much more expensive.

Samsung announced basic details of the SSD today but declined to provide any information about its price.

The Seoul, South Korea-based company is planning SSDs with parallel Advanced Technology Attachment interfaces in capacities up to 16GB. The 16GB devices will contain 16 memory chips holding 8Gbits each, it said. Such chips sell for about $55 each on the spot memory market, according to DRAM Exchange Tech Inc. That would put the chip cost of the 16GB SSD at almost $900.

Because Samsung is a major manufacturer of flash memory chips, it can likely source the chips internally at a lower price. Even so, it will be difficult to compete with hard disk drive makers on cost. Laptop drives at capacities of up to 30GB can easily be found for less than $200.

The SSD operates silently, consumes 5% of the power used by a hard disk and weighs less than half as much. It can read data at up to 57MB per second and write it at up to 32MB per second.

Because SSDs don't use moving parts, they are much more resistant to harsh environmental conditions or shock and are thus suitable for industrial or military markets, said Samsung. Such users are less focused on low-cost components than the consumer market.

Samsung expects that the SSDs will find a home in specialized portable products such as tablet PCs or laptops, said Suyeon Chae, a spokeswoman at Samsung Electronics in Seoul. Three versions are planned: a 16GB version that will be about the same size as a 2.5-inch hard-disk drive, and 8GB and 4GB versions that will be a similar size to 1.8-inch drives.

The price difference between flash memory and hard-disk storage has been narrowing and continues to do so, said Simon Woo, an analyst at Merrill Lynch & Co. in Seoul. While per-bit prices for the type of memory produced by Samsung are dropping at between 30% and 40% per year, the equivalent price for hard disk storage is falling by about 20% annually, he said.

Eventually, SSDs will be able to compete with hard-disk storage on price, he said, but that's several years away.

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To: Sam Citron who wrote (10994)5/24/2005 7:41:53 PM
From: Sarmad Y. Hermiz
   of 11057
>> Samsung develops flash-based 'disk' for PCs

Sam, this is nothing new. I've been using SanDisk 1 GB Industrial Flash Drives for several years in automotive computer applications. And of course my Pocket PC uses flash memory for file storage. In fact I'm very puzzled about what prompted Samsung to release this 10-year old news today. Unless they mean that they too (Samsung) will now get into this market that is dominated by SanDisk and Simple Tech.


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To: Sarmad Y. Hermiz who wrote (10995)5/25/2005 10:18:06 AM
From: rlev
   of 11057
I think that the "new" idea is to mix flash with a hard drive to produce a drive which has the best of both worlds: lots of storage, quick access, and low power.

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To: Sarmad Y. Hermiz who wrote (10995)5/25/2005 3:15:52 PM
From: Sam Citron
   of 11057
Yes, to amplify on rlev's comment, though the "news" may not be new to you, it appears Samsung is trying to get some free PR for the summer launch of this product. I do see the potential of massive arrays of flash to someday perform many of the functions that HDDs perform today. Of course HDD technology will not stand still either. But solid state flash devices may have a cost advantage in 10 years or so.


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To: Sam Citron who wrote (10997)5/25/2005 7:23:21 PM
From: Sarmad Y. Hermiz
   of 11057
Sam and rlev,

The puzzle in the Samsung news release is that there just is no demand for low capacity storage in notebook computers. Notebooks now are selling with 20 GB and up. And the main demand is for 60+. Because notebooks are replacing desktop computers in homes and businesses. I think this product would be very appropriate in automotive applications, and many others. But generally it will be products where disk drives are not the ideal storage media because of environmental or usage factors. It is not a competitor to disk drives in the main line of usage, such as home and business computers, or PVR's.


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To: Sarmad Y. Hermiz who wrote (10998)5/25/2005 8:14:01 PM
From: rlev
   of 11057

the product is a hard drive (read 40/60/80 gigs or better) combined with a flash drive ... apparently some data is accessed often and if it was kept in flash it would be available immediately. Large or less accessed data would be stored on the hard drive. This gives you the large storage, better access time, and lower power.


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