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DECEMBER 26, 2005
Why Western Is Heading North  Western Digital (WDC
), the second-largest maker of hard drives, has bumped up from 11 in October to 15 now, reflecting strong sales growth in PCs and music players, DVDs, and video games. Bernie Schaeffer of Schaeffer's Investment Research, which owns shares, says expanding beyond PCs not only drives growth but also reduces earnings volatility. He expects solid fourth-quarter earnings after profits jumped 126% in the third quarter and revenues leaped 23%. Yet Western remains cheap, he says, selling for just 11 times his earnings forecast of $1.36 a share for the year ending June 30, 2007. (Zacks Investment Research puts the consensus 2006 estimate at $1.16, vs. 2005's 91 cents.) According to Zacks.com, only five of the 14 analysts who cover Western rate it a buy, three tag it a sell, and the rest are neutral. Schaeffer, however, figures the stock, which hit 54 in 1997, could double in a year. Richard Stice of Standard & Poor's (MHP
), who rates Western a buy, says its push into consumer electronics will let it participate in the growth of cell phones, digital cameras, and portable music devices. So Stice predicts gross margins will widen from 16.2% in 2005 to 17.5% in 2006 as a result of higher sales volume, manufacturing efficiencies, and a less volatile pricing environment. He also figures the stock will benefit from increased share repurchases in 2006. From May, 2004, through September, 2005, Western bought back nearly 8 million shares.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.  By Gene G. Marcial
BW MALL
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