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Western Digital (WDC) Q3 Earnings: What's in the Cards?

Western Digital Corp. WDC is set to report third-quarter fiscal 2016 results on Apr 28. Last quarter, the company posted a positive earnings surprise of 4.58%. Let’s see how things are shaping up for this announcement.

Factors at Play

Western Digital derives the bulk of its revenues from PCs, which are still the primary users of hard-disk drives (HDD). The company is the largest manufacturer of HDDs in the U.S. and holds a rough 44% share of the market, followed closely by Seagate Technology plc STX with a 40% share. Therefore, the cannibalization of PCs by mobile devices will continue to hurt Western Digital’s results, going ahead.

According to data recently released by International Data Corporation (“IDC”), PC shipments in the quarter ended Mar 31, 2016 tanked 11.5% year over year to 60.6 million units. IDC highlighted that the strengthening U.S. dollar, lack consumer of interest in new PCs amid the growing popularity of inexpensive mobile devices, and the delay in fully deploying Windows 10 operating systems by enterprises, as primary reasons behind the dismal performance of the PC industry.

To deal with the situation, the company is focusing on the enterprise side, where it has the scope to acquire higher-margin businesses. Synergies from acquisitions and product innovations are other growth catalysts. We believe that this will boost first-quarter margins and reduce Western Digital’s dependence on the PC market.

Moreover, Western Digital should benefit from the strength in its hybrid drives. Also, the company’s cloud-based applications have drawn customer interest to a considerable extent.

Earnings Whispers

Our proven model does not conclusively show that Western Digital will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Most Accurate estimate stands at $1.19, while the Zacks Consensus Estimate is pegged higher at $1.25. This translates to a difference of -4.80%.

Zacks Rank: Western Digital’s Zacks Rank #3, when combined with a negative ESP, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are a couple of stocks, which you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Align Technology Inc. ALGN, with an Earnings ESP of +5.13% and a Zacks Rank #2.

Benefitfocus Inc. BNFT, with an Earnings ESP of +4.00% and a Zacks Rank #2.

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WESTERN DIGITAL (WDC): Free Stock Analysis Report
 
SEAGATE TECH (STX): Free Stock Analysis Report
 
ALIGN TECH INC (ALGN): Free Stock Analysis Report
 
BENEFITFOCUS (BNFT): Free Stock Analysis Report
 
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