Western Digital (WDC-NYSE) reported earnings on an EPS basis of $0.57, above the $0.53 estimates; and revenues were $1.43 Billion instead of the expected $1.36 Billion estimate.  This is 23% earnings growth year over year.  This is a BAIT SHOP name, meaning it is one of 24/7 Wall St.’s potential merger and takeover candidates.

Last week when the stock was roughly around $20.60 I had sent an email regarding the BAIT SHOP call with the idea since tech was giving a sell signal that it would be prudent to sell half of the position to lock in more than a 10% gain.  After Seagate (STX) traded up on earnings this position felt safer and the chart never did given any implosion sell signal, so this one may be ok.  Unfortunately the street is just not treating tech with a lot of respect so far in 2007, even though the two disk drive competitors are doing well.  The call looked smart in the 48 hours after the email, and then dumb yesterday.  This isn’t just about one week and this one would still be attractive to a buyer, but being prudent is worth every penny.

This company could easily be acquired, no different than an American Power Corp, and either a private equity firm or a larger overseas tech company could be the acquirer.  The position will be revisited after all the earnings dust settles next week.  Until then this "half off the table" call still seems prudent to lock-in some gains if things start getting sketchy out there in general.  We are in a soft landing and certain companies and sectors are attractive from a bottom-up approach.  The stock is still cheap, even if it were to lower guidance by a decent amount.  A new company leader is keeping this one cheap until Wall Street learns to trust or to evaluate him.

I either didn’t realize it or had forgotten all about this, but Motley Fool lists this one as undervalued too; here is a note on this from today.  Time will tell, but this would be a cheap acquisition for any major tech company that wanted to build more in the end-user storage arena and there is plenty of balance sheet that can be used to pay out a couple of hefty dividends back to a private equity buyer before a re-IPO down the road.

The company grew its cash by $184 million from operations and ended the quarter with cash and short-term investments of $830 Million.  Its property and plants also grew and are now worth $637 million (up almost $90 million). It still has over 41 Billion in liabilities and has a market cap of $4.6 Billion.  It isn’t dirt cheap on all of the multiples, but it is kicking and is expected to keep kicking back good cash flows.

On last look the stock is down over 3.5% around the $20.00 mark after-hours in reaction to forward comments and under a new helm.  This is a longer-term call and it still offers quite a bit of value if investors can buy in on pullbacks if it gets much cheaper in the coming days

Here is a copy from last week’s update and here is what was said back in November.

If you would like further updates to our free private email list regarding BAIT SHOP candidates and other special situation investing please send an email to [email protected] and title the email SUBSCRIBE.  We value privacy and do not share our email lists with any third parties.  If you already signed up and did not get an email this morning it is possible that filters screened it out and some email addresses are not immediately added to the list.

Jon C. Ogg
January 25, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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