Western Digital (WDC): A Peter Lynch-Based Idea

"Its hard drives are also used in CE applications, such as digital video recorders (DVRs), and satellite and cable set-top boxes (STBs).

"And, itsells its hard drives as stand-alone storage products and offering the products as WD-branded external storage appliances for personal data backup and portable or expanded storage of digital music, video and other digital data.

"Below are the various screens used in our Peter Lynch model:

DETERMINE THE CLASSIFICATION:

"This methodology would consider WDC a "fast-grower".

P/E/GROWTH RATIO: [PASS]

"The investor should examine the P/E (6.55) relative to the growth rate (38.09%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.

"This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for WDC (0.17) is very favorable.

SALES AND P/E RATIO: [PASS]

"For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40.

"Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. WDC, whose sales are $9,894.0 million, needs to have a P/E below 40 to pass this criterion. WDC's P/E of (6.55) is considered acceptable.

INVENTORY TO SALES: [PASS]

"When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for WDC was 5.04% last year, while for this year it is 5.69%.

"Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.64%) is below 5%.

EPS GROWTH RATE: [PASS]

"This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

"This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable.

"The EPS growth rate for WDC is 38.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.

TOTAL DEBT/EQUITY RATIO: [PASS]

"This methodology would consider the Debt/Equity ratio for WDC (6.78%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

FREE CASH FLOW: [NEUTRAL]

"The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one.

"This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WDC (17.03%) is too low to add to the attractiveness of the stock.

"Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.

NET CASH POSITION: [BONUS PASS]

"Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt.

"According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for WDC (35.08%) is high enough to add to the attractiveness of this company."

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