Shares of disk-drive maker Western Digital to rally 27 percent in 2017, analyst says

Published Thu, Jan 5 201710:45 AM ESTUpdated Thu, Jan 5 201712:24 PM EST

BMO Capital Markets upgraded shares of Western Digital to outperform from market perform, citing the potential for strong revenue growth in 2017, attractive valuations and margin improvements. "We expect to see the return of revenue growth in FY17 [fiscal year], fueled by continued demand for flash in a supply-constrained environment, the catching up on 3D NAND, and favorable customer relationships," equity analyst Tim Long wrote in a note to clients. The analyst's 12-month forecast implies a 27 percent gain from Wednesday's close. Long believes Western Digital's focus on 3D Nand technology, a type of flash memory that allows for higher capacity and performance, should help the firm boost sales among its customer base. "WDC is quickly catching up on 3D and management expects 3D to represent 50% of its bit mix in 2017, on par with the industry. We believe this factor, combined with the constrained flash capacity environment and WDC's strong customer relationships, should help return the company to growth in FY17," Long said. Western Digital, 1 year Source: FactSet Along with the potential for higher organic revenue growth in 2017, the analyst thinks operating margins could increase to 18 percent from around 12 percent due to cost savings from recent synergies and high-margin enterprise products. "The continued margin expansion from HGST [Hitachi Global Storage Technologies] and SanDisk synergies will help drive further earnings growth," Long said, referencing Western Digital's two biggest mergers in the past four years. Given the potential for improving revenue and margins, BMO believes the stock is attractively valued at the current levels. The stock trades at 10 times fiscal year 2020 EPS, compared with a ratio of 17 times for the semiconductor sector, according to estimates by the investment bank. "We are expecting the multiple to expand slightly as WDC returns to growth. We view our updated model as conservative on both the top and bottom lines," Long said. In the next 12 months, BMO predicts shares of Western Digital could trade as high as $90, implying a gain of 27 percent from Wednesday's close. The firm previously had a price target of $60.

The hard drive assembly line at Western Digital.

Shepard Sherbell | Corbis | Getty Images

BMO Capital Markets upgraded shares of Western Digital to outperform from market perform, citing the potential for strong revenue growth in 2017, attractive valuations and margin improvements.

"We expect to see the return of revenue growth in FY17 [fiscal year], fueled by continued demand for flash in a supply-constrained environment, the catching up on 3D NAND, and favorable customer relationships," equity analyst Tim Long wrote in a note to clients. The analyst's 12-month forecast implies a 27 percent gain from Wednesday's close.

Long believes Western Digital's focus on 3D Nand technology, a type of flash memory that allows for higher capacity and performance, should help the firm boost sales among its customer base.