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Western Digital Corp. (WDC), EMC Corporation (EMC), Seagate Technology PLC (STX): How Should You Play It?

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Western Digital Corp. (NASDAQ:WDC)Would you like to invest in a profitable, high return business that has recently experienced significant growth? In addition, this company is still quite cheaply valued. It is . Since November 2012, the stock has advanced 77%, from $33.40 per share to nearly $59 per share. Western Digital Corp. (NASDAQ:WDC) is still in the portfolio of several famous investors including David Einhorn, Joel Greenblatt, and Paul Tudor Jones. Is Western Digital a sweet buy after the recent rally?

Business snapshot

Western Digital is well known for developing and manufacturing storage products under several brands including WD, HGST, and G-Technology. The company owns one of the industry’s biggest patent portfolios with over 6,000 active patients globally. Interestingly, most of Western Digital’s revenue, $7.22 billion, or 57.9% of the total revenue, is derived from Asia. The U.S. ranked second with $2.4 billion in revenue, while the revenue from Europe, Middle East, and Africa was around $2.3 billion. The company has quite a concentrated customer base, with Hewlett-Packard Company (NYSE:HPQ) accounting for 11% of its total 2012 revenue. Its top ten customers represented as much as 50% of its total net sales.

Moving away from the PC business

Recently, the company announced its third-quarter earnings results. In the third quarter, Western Digital shipped 60.2 million hard-drives and recorded revenue of more than $3.76 billion, 24% higher than the revenue in the third quarter last year. However, net income came in at only $391 million, or $1.60 per diluted share, much lower than last year net income of $483 million, or $1.96 per diluted share. The lower net income in the third quarter this year was due to a 50% increase in R&D expenses and a $63 million charges in employee termination benefits.

Even with the huge exposure of Western Digital to PC business, which is declining, investors should not be bearish, as the company has been trying to grow its non-PC business. In the recent conference call, Wolfgang U. Nickl, Western Digital’s CFO commented: “Over the last 5 years, the revenue contribution of our non-PC related business has grown from 35% in fiscal year ’08 and is projected to account for more than 50% of our revenue in fiscal year ’13.”

Profitable and cheap

What makes me excited is its consistent double-digit return on invested capital. In the past five years, its ROIC fluctuated in the range of 13.16% to 32.98%. In the past twelve months, its ROIC stayed at 18.88%. The cash flow position is also very strong, with operating cash flow of $3.56 billion and the free cash flow of more than $2.4 billion. Western Digital is trading around $59 per share with a total market cap of $14.1 billion. The market values the company quite cheaply at only 3.1 times EV/EBITDA. Compared to its peers, EMC Corporation (NYSE:EMC) and Seagate Technology PLC (NASDAQ:STX), Western Digital has the cheapest valuation of the trio.

EMC – the cloud storage play

EMC Corporation (NYSE:EMC) focuses on hybrid Cloud Computing with two main categories: EMC Information Infrastructure and VMware Virtual Infrastructure. EMC derived the majority of its revenue, $15.6 billion, or nearly 72% of total 2012 revenue from the Information Storage segment, while VMware Virtual Infrastructure ranked second with nearly $4.6 billion in revenue. Recently, EMC Corporation (NYSE:EMC) announced the latest enhancement across its Documentum portfolio to increase customers’ productivity and improve governance in the cloud.

With new innovations, including EMC Documentum Asset Operations, EMC Documentum Electronic Trial Master File, EMC Documentum Quality and Manufacturing, and EMC Healthcare Integration portfolio, EMC Corporation (NYSE:EMC) is reaching out to customers in the energy, life sciences, and the healthcare industry. EMC is trading at $23 per share, with a total market cap of $48.5 billion. The market values EMC Corporation (NYSE:EMC) the most expensive among the three, at as much as 8.4 times EV/EBITDA.

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