Western Digital Corporation (Update)

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1 UNIVERSITY OF OREGON INVESTMENT GROUP 5/20/2011 Consumer Goods Western Digital Corporation (Update) Stock Data Price (52 weeks) $ Symbol/Exchange WDC Beta 1.31 Shares Outstanding 236 M (Diluted) Average daily volume 4.73 M (3 month average) Current market cap $8.85 B RECOMMENDATION: Hold Current Price Dividend Dividend Yield $36.38 N/A N/A Valuation (per share) DCF Analysis $40.24 Comparables Analysis Target Price Current Price $51.40 $43.59 $36.38 Summary Financials Revenue Net Income Operating Cash Flow 2010A $9.85 B $1.38 B $1.52 B BUSINESS OVERVIEW Founded in 1970 in Irvine,CA, Western Digital Corporation has grown to become the largest manufacturer of computer hard disk drives (HDDs) in the world. HDDs are used in desktop computers, notebook computers, enterprise applications, as well as network storage. Hard disk drives use rotating magnetic disks to store data fast and efficiently. HDDs are types of non-volatile storage which mean that when a power source is removed from the drive the data still remains. Western Digital (WD) HDDs currently come in 3.5-inch and 2.5-inch drives Covering Analyst: David Douglas [email protected] The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.

2 with capacities ranging from 80 gigabytes to 2 terabytes with speeds of up to 10,000 revolutions per minute. WD products are sold to original equipment manufacturers (OEMs), original design manufacturers, distributors, resellers, and retailers. WD sells to three main market segments; Desktop PC Market, Mobile PC Market, and Enterprise Market. % Revenue % Revenue OEMs 51% Americas 24% Distributors 31% Europe 23% Retailers 18% Asia 53% Desktop PC Market The desktop PC market includes personal computers that are used for regular use in one location. Desktop computers use 2.5-inch or 3.5-inch drives to store the computer s operating system, application software, and data used by applications. These computers are purchased for personal and business purposes. WD expects this market to grow because of increasing use of the internet to download data, growth of computer use in emerging markets, and an increased need for larger amounts of storage on desktop computers. Mobile PC Market The mobile PC market includes notebook and netbook computers. Mobile PCs are used for both personal and business use. Just like the desktop market, mobile PCs use hard drives to store the computer s operating system, application software, and application data. WD believes there will be strong growth in this market fueled by the increased use of portable computers and the increased use of the internet to download and store content. 2.5-inch drives are the primary choice of hard drive for mobile PCs. Enterprise Market The enterprise market includes drives used for business workstations, network storage, networkcommunications, and video surveillance. These drives are used primarily for large scale business storage. WD produces both 2.5-inch and 3.5-inch drives for this market. Enterprise class drives are faster, more scalable, and just as reliable as regular class drives. Currently there is strong demand for 2.5 inch enterprise class drives for use in business blade servers. Cloud computing also uses enterprise class drives to store data uploaded to the cloud. This is one of the primary drivers of this market. Just recently WD started making SATA interface drives for the enterprise market. Serial Advanced Technology Attachment (SATA) SATA interfaces use high speed serial cable for data transfer. The advantages of SATA technology include faster data transfer because of higher signaling rates and more efficient transfer through I/O queuing protocol. WD SATA interface drives cost less, offer higher capacities, and maintain reliability, all with high scalability and performance. 2

3 Western Digital products are broken up among these three markets. The types of drives they sell are external drives, internal drives, solid state drives, and an other segment. External External hard drives are the easiest option to add storage or to take data on the go. These drives are easily plugged into a computer and add additional storage space. These drives hold anywhere from 250GB to 6TB of space. WD s two most popular external drives are the Passport and MyBook. The Passport is a portable drive that can be directly plugged in to a computer that needs no power source. The MyBook is a larger drive that is most often used as additional storage for a desktop. These are the most popular branded products WD sells. Internal Internal hard drives are the most popular product WD sells. They are sold primarily to OEMs who install them inside desktop and notebook computers. These drives come in both 2.5 and 3.5-inch sizes and can store up to 2TB of data with speeds up to 10,000 RPM. WD also sells enterprise class internal drives that are more expensive but also the most efficient and high performing meant for large scale data storage. These drives are used in company servers, networking centers, work stations, and other large scale computer systems. Internal hard drives are the most cost effective and reliable way to store data and remain the most popular amongst both computer manufacturers and large corporations. Solid State Drives Solid State Drives are internal drives that utilize flash memory to store data without needing a power source. SSDs have no moving parts and are therefore more reliable than traditional drives. In 2009 WD released their first SSD and plan to release a second at the end of SSDs are much more expensive per unit of memory than traditional internal drives. WD continues to work to develop this product segment as it is becoming more and more popular amongst computer manufacturers and consumers. Other WD has a range of other branded products. These include networking and home entertainment products. Home entertainment products include media players, media drives, and DVR expanders. These allow for multimedia to be stored and played through a home entertainment system. Networking products allow files to be shared by computers on a single network. These drives are a small portion of WD sales but are expected to become more popular as more people store digital media content on devices of this type. 3

4 BUSINESS AND GROWTH STRATEGIES Moving forward, WD looks to use three main strategies to allow them to grow and increase market share: 1. Expansion in Emerging Markets 2. Acquisitions to Increase Margins 3. Focus on Hard Disk Drives WD management expects large growth in emerging markets. They believe growth in Asia could be as high as 10% a year as more and more people have access to personal computers and the internet. There are also large amounts of growth projected in South America where personal computers are becoming more easily available. All of this is driven by the price of computers going down. As computers are becoming more affordable demand is increasing in emerging economies therefore fueling demand for HDDs. They look to increase distribution in these emerging economies and will focus on traditional 2.5-inch and 3.5-inch drives meant for desktops and laptops. Management believes that traditional hard drives are going to be the most popular form of data storage for the next seven to eight years. That being said, they look to focus on improving hard disk drives and putting less emphasis on solid state and other nontraditional drives. They believe that costs per unit of storage for solid state drives are too high and will remain high till at least Their goal is to keep making hard disk drives less expensive per unit of storage. By doing this they believe they will be able to maintain high sales and margins in years to come. To keep costs low and margins high they also will rely heavily on acquisitions. Acquisitions are a major driver of data storage industry and WD will look at all opportunities that allow them to stay competitive and improve margins. Over the last five years there have been four main acquisitions: Komag Inc (In 2008 for $927 Million) Silicon Systems (In 2009 for $63 Million) Hoya Magnetics (In 2010 $253 Million) Hitachi Global Storage Technologies (Expected 2012 for $4.3 Billion) Komag Inc, is the leading manufacturer of magnetic thin-film disks that are used in hard disk drives. These are one of the most important components in drives that allow data to be read and written. This acquisition has helped WD vertically integrate and add one of the main components of its products to their own supply chain. This has also allowed them to cut the costs of their drives and given them the ability to offer drives at a lower cost than their competition. Silicon Systems is a leading manufacturer of solid state drives. They focus primarily in solid state drives meant for use in embedded systems. Embedded systems are those used by existing computing systems that read and transmit data in order to improve efficiency of a product. This acquisition allowed WD to enter the solid state drive market in which they had no product offering. 4

5 Hoya Magnetics is a manufacturer of magnetic media. Magnetic media is a key component of a hard drive that allows data to be stored. Their operations are primarily in Asia where most of WD s manufacturing takes place. Like Komag Inc, this acquisition has allowed WD to add another key component of their products to their own supply chain. This vertical integration is important to lowering costs and getting higher margins on their products. Hitachi Global Storage Technologies is a producer of computer hard disk drives. They currently have HDDs, SSDs, and a significant presence in the enterprise drive market. This acquisition will allow WD to increase their market share and therefore take advantage of economies of scale as well as increase their product mix and market share in areas of the industry they do not have a significant presence. HITACHI GLOBAL STORAGE TECHNOLOGIES ACQUISITION On March 7, 2011 Western Digital announced that they would be acquiring Hitachi Global Storage Technologies (HGST) from Hitachi, Ltd. The total value of the acquisition will be about $4.3 billion. Hitachi, Ltd. will receive $3.5 billion in cash and 25 million shares of WD common stock. This will give them about ten percent ownership in WD. Two representatives from Hitachi will also be added to the WD board of directors. It is expected that this acquisition will be completed during the first quarter of fiscal WD will take on none of HGST s current debt. WD will finance this acquisition through $1 billion in cash, a $2 billion term loan, and a $500 million line of credit. The loan will be through Bank of America but the exact structure of the loan is not yet known. This acquisition will significantly alter their capital structure for several years as they currently have only $200 million in long term debt and after the transaction is complete will have almost $2.7 billion. WD expects that this acquisition will allow them to increase market share as well as gain market share in areas that they currently struggle. This acquisition gives WD an almost 49% market share in the overall hard drives market. This is important because as traditional HDD sales have slowed this increase in market share will allow them to pick up sales. It is also important because it will drastically improve their presence in the enterprise c lass market. HGST currently has the second largest market share in the enterprise market with 28%. WD only has a 1% market share in this segment. HGST also has an enterprise class SSD which will help WD increase their presence in the SSD market. The most important aspect of the acquisition is the technology that WD gains from HGST. Having a different set of drives and technology will allow WD to experiment with new drives and allow them to come up with better products that will keep them competitive in an ever changing market. 5

6 MANAGEMENT AND EMPLOYEE RELATIONS John F.Coyne CEO Timothy M. Leyden Wolfgang U. Nickl CFO John Coyne started at Western Digital in 1983 as he was chosen to head the Hard Drive Division in Ireland. Coyne has a long history with the company and has headed the consolidation of manufacturing to Malaysia and implemented the acquisition of Read-Rite Magnetic in Thailand. He has been president since 2006 and became CEO in Before joining WD Leyden was the senior vice president and CFO of Sage Software. He has worked closely with CEO John Coyne on several acquisition and integration teams at WD. Leyden received his MBA from the University of California, Irvine and has ACMA certification from the Chartered Institute of Management Accountants in London. Woflgang Nickl started with the company in 1995 and became vice president of finance in Prior to WD Nickl worked at IBM Global Services as a financial consultant. Nickl has a Bachelor s degree in business from the University of Copenhagen and an MBA from the University of Southern California. He became CFO in PORTFOLIO HISTORY Portfolio Date Price Shares Total Current Price Current Value Gain Return DADCO 10/1/2010 $ $ 2, $ $ 3, $ % Tall Firs 10/19/2010 $ $17, $ $ 20, $ 3, % Svigals 10/8/2010 $ $ 2, $ $ 2, $ % Elan Gibb presented WDC to the group on 10/01/2010. WDC was trading at $28.20 on the date he presented. Using a comparables and discounted cash flow analysis Elan came up with an implied price of $34.67, a 22.94% undervaluation. WDC was voted a buy for all portfolios and has been one of the top performers since its purchase. The announcement of the acquisition of Hitachi Global Storage Technologies has been the key driver of the price accounting for about 22% of the total return. 6

7 RECENT NEWS Western Digital takes a hit in Q3, still out-ships Seagate - techconnect.com 4/21/2011 For third quarter 2011 Western Digital reported revenue of $2.25 billion which met expectations but was down from $2.64 billion in Q3 last year. EPS was $.62, down from $1.71 a year ago. Lower sales were caused partly by a chipset problems and the earthquake in Japan. Samsung Sells Hard Disk Drive Business to Seagate - Wall Street Journal 4/19/2011 Seagate has announced that it will be purchasing the hard disk drive segment of Samsung Electronics Co. Seagate will pay $1.375 billion in cash and stock. Samsung is the largest manufacturer of flash memory chips and this will give Seagate a significant presence in the SSD market. This deal will give Seagate about a 40% market share in the hard drive industry. Hitachi Rises on 4.3 Billion Sale of Hard-Drive Unit to Western Digital - Bloomberg 3/7/2011 Western Digital will be purchasing the hard drive manufacturing unit of Hitachi, Ltd. for $4.3 billion. For Western Digital this will help boost market share in the hard drive manufacturing industry and challenge rival Seagate in the enterprise market. Western Digital stock was up sixteen percent upon the news. INDUSTRY WD operates in the computer storage and peripherals industry. This is an industry characterized by consolidation, competition, and downward price pressure. Consolidation has been a key trend over the last five years. WD s largest competitor Seagate Technologies purchased hard drive manufacturer Maxtor and EMC has acquired many smaller drive manufacturers. Along with WD s acquisition of Hitachi, Seagate will also be acquiring the hard drive unit of Samsung. WD, Seagate, and Toshiba are the only large scale manufacturers left. Over 98% of hard drive industry sales are done by these three companies. All of these companies have large amounts of cash on hand and are expected to increase acquisitions of suppliers to help vertically integrate their business. Almost all major manufacturing in this industry is done abroad. WD does most of their manufacturing in Malaysia and Thailand. Many hard drive components are supplied from Japan. The earthquake in Japan has had a large effect on manufacturers. Not only is demand expected to fall in this region but they are also supply constrained. WD expects that they will not be able to meet demand in the first quarter of 2012 because they will not have access to enough materials as Japan rebuilds. Most hard drives in the industry are priced similarly so it is important for manufacturers to keep costs low to compete with the other companies. As computers become less expensive there will be price pressure from 7

8 computer makers to get HDDs at a low price. This downward price pressure makes it very important for companies to continually be finding ways to lower costs. Major growth is expected to come in enterprise class storage products. IT departments are becoming more important to businesses and have to hold more and more data. One of the largest areas of growth will be in cloud computing where data is saved in a location other than the computer being used. Cloud computing requires large amounts of storage as all the data must be stored on a hard drive. As cloud computing becomes more popular low priced, high speed enterprise drives are expected to experience large growth. Expectations for the next five years see enterprise storage systems growing at rates as high as 25%. More and more companies are also moving towards storing data digitally instead of paper and companies need enterprise class storage devices so store all that data. Growth is also expected in emerging economies. As prices of computers have fallen the demand for computers in emerging economies, especially in Asia has risen. As prices of computers are expected to continue to fall in price it is expected that demand for these products will continue to rise. There have also been increases in demand in Latin American countries for computers. As the internet is becoming more easily accessible throughout the globe more storage space will be necessary to download content. There is also an industry trend away from traditional hard disk drives towards flash based solid state drives. Solid state drives have no moving parts so they are much more reliable than traditional hard drives. Some expectations have flash memory completely replacing traditional magnetic drives within the next five to six years. Flash memory though is still very expensive compared to magnetic drives and it could take many more years before this form of memory becomes affordable for regular use. S.W.O.T. ANALYSIS Strengths Strong financial performance and cash balance ($3.2 Billion Cash) Strategic acquisition of Hitachi Global Storage Technologies Increasing margins due to acquisitions Strong research and development department 8

9 Weaknesses Lack of product diversification Lack of SSD products Expiration of large tax holidays and incentives Opportunities Growing enterprise market Increasing demand for SSDs Increased growth in emerging markets New technologies available from Hitachi acquisition Threats Decreasing selling prices Dependence on foreign suppliers Increasing shift away from traditional hard disk drives Losing market share to Seagate after acquisition of Samsung PORTER S 5 FORCES ANALYSIS Supplier Power Medium and Decreasing Suppliers have a medium degree of power where manufacturers are highly dependent on getting supplies in a timely manner to meet demand. As manufacturers continue to make acquisitions of companies within their supply chain they will become better vertically integrated and depend less on outside suppliers. Barrier to Entry High Barriers to entry are high as developing and manufacturing hard disk drives is very capital intensive. Firms are so large now that it would be extremely hard for a new firm to compete on price. With consolidation being such a key characteristic of this industry even if a firm does enter there is a high probability they will be purchased by an existing firm. Buyer Power High Buyers have a high degree of power in this industry as most companies are forced to compete on price. The products each firm sell are not that differentiated from competitors so the main reason to purchase a product is price. Also, OEMs make up such a large portion of WD s sales, over 50%, so they can easily switch to another drive. Internal drives between companies are very similar so switching costs would be relatively low for an OEM. 9

10 Threat of Substitutes Low and Rising The only current alternatives to hard disk drive storage which is solid state storage. Solid state storage though is very expensive per unit of storage. As SSDs become cheaper it is highly likely that computer manufacturers shift away from HDDs. Currently almost all computers rely on HDDs and it will take time before SSDs become as cheap and efficient as HDDs. Degree of Rivalry High and Rising With so much consolidation happening in the industry competition is increasing. As the firms get bigger they are able to take advantage of economies of scale and charge lower prices. This gives incentives for OEMs to shift to the cheapest drive manufacturer. Such downward price pressure makes this industry very competitive. Also, currently Seagate and WD both have very little in terms of SSDs and Seagate s acquisition of Samsung will put pressure on WD to produce new SSDs. CATALYSTS Upside Completion of HGST acquisition Any new product offerings Downside Unsuccessful acquisition of HGST New products from competition Any decrease in market share to competitors COMPARABLES ANALYSIS Comparable companies were chosen based on how close their products were to that of Western Digital as well as those who face similar risk. I chose to use Seagate Technologies, Micron Technologies, and SMART Modular Technologies. The comparables analysis was done assuming that Western Digital and HGST are now one company. The reason for this is that WDs stock price is up over 25% upon the news that they would be acquiring HGST. I believe the market is already pricing the stock based on the revenues WD will create after the acquisition. Current revenues are not an accurate reflection of the price WD is currently trading at. The multiples used to calculate EV/Revenue, EV/Gross Profit, EV/EBITDA, and EV/Net Income. EV/Net Income was thrown out for the fact companies could make net income seem better than it may be. EV/EBITDA was weighted higher as it was the only bottom line multiple. 10

11 Seagate Technologies (STX) Seagate Technologies is the second largest hard disk drive manufacturer in the world. Seagate designs, manufactures, markets, and sells computer hard disk drives. They make internal, external, and enterprise class drives. They have recently announced the acquisition of the hard drive unit of Samsung which will give them a significant presence in the SSD market. The majority of Seagate s revenue comes from the enterprise market. Seagate was chosen because they are the only pure play competitor to WD. They sell the same products as WD and their product mix also only consists of storage devices. They face almost the exact same risk as WD, have similar margins, and similar forward looking growth. The fact that Seagate is the only pure play competitor is why I weighted it at 70%. Micron Technology, Inc (MU) Micron Technology, Inc is a manufacturer of dynamic random access memory, flash memory, and other memory systems. Their products are sold to OEMs, resellers, and retailers. Their most popular products are DRAM memory products that are used for volatile memory in computers. They are now starting to sell more flash memory products and chips. Micron was chosen because their products are all focused on data storage and memory. With a high focus on RAM memory they face similar risks from computer manufacturers and their products are also an integral part of computers. Micron also does not have many flash products and are not that far ahead of WDC in terms of flash memory. Micron is weighted at 15%. SMART Modular Technologies (SMOD) SMART Modular Technologies is an independent designer, manufacturer, and supplier of data storage products. They primarily produce RAM memory and SSDs. Their products are sold to computer, industrial, networking, telecommunications, aerospace, and defense markets. SMART was chosen because of their product make up which is completely dedicated to computer storage and memory and almost all of their products are sold to OEMs. SMART faces very similar risks to WD and is also expected to grow at similar rates. They are also expected to make product offerings to the enterprise market. SMART is weighted at 15%. DISCOUNTED CASH FLOW ANALYSIS The DCF was projected taking into consideration the Hitachi acquisition. The price of the stock currently, as mentioned in the comparables analysis, is reflective of the acquisition. 25 million shares have also been added 11

12 to the diluted share count to reflect the issuing of stock to Hitachi. The assumptions use debt at the current rate today as the long term debt has been taken into consideration and paid off in the working capital model. Revenue The revenue model splits Western Digital up into the WD segment and the Hitachi segment. Revenues are then projected separately. I grew the companies as if they were the same but projected the two companies separately because product mixes are different. Revenue is then broken up by geographical region. Growth in Asia is expected to be the largest, the Americas the second largest, and the European market is expected to become a very small portion of revenue. It is expected that Western Digital will grow at a faster rate than the Hitachi segment as they have more popular products and the addition of enterprise class drives should fuel growth in the Americas. Hitachi will grow at a slower rate at first but towards the end will grow faster. Costs of Revenue The Hitachi acquisition will allow WDC to take better advantage of economies of scale and keep costs down. Management believes that by 2016 they can achieve gross margins of 24%. Costs should also decrease as WDC becomes more vertically integrated and acquires current suppliers. Cost of revenue will fall until 2016, level out, and slowly rise to 77% in the terminal year. This rise is due to lower margin drives such as solid states becoming a larger portion of sales. Sales, General, and Administrative SG&A is expected to stay relatively constant as a percentage of revenue. It is trended up over the course of the DCF to the historical average. Research and Development Research and development is the key to WDC staying competitive in their market. They must continue to innovate and introduce new products to meet the changing demands of OEMs. Management expects R&D to increase as a percentage of revenue in the future as they work to expand into the enterprise and solid state markets. Acquisitions Acquisitions allow WDC to stay competitive in the marketplace and keep costs down. In 2012 the acquisition of Hitachi is expected to be complete. It is expected that acquisitions will continue to be made and are projected slightly lower than the historical average. Acquisitions are expected to be 2% of revenue following the last payment on the Hitachi acquisition. Interest Expense The Hitachi acquisition will be financed through a $2 billion loan paid in full over the next five years. The interest payments on this loan are reflected in years Interest expense is expected to be.25%, slightly higher than the historical average, as WDC also plans to add a 500 million dollar line of credit. Tax Rate 12

13 Taxes for WDC have been historically low because of tax incentives and foreign tax holidays. The holidays and incentives are expected to expire over the next ten years. A weighted average of corporate tax rates in areas of Europe, Asia, and the Americas was used to determine the tax rate in the terminal year. The rate is slowly trended up in the beginning then starts to increase to the weighted average rate in the terminal year. Depreciation and Amortization Depreciation and amortization has remained relatively constant as a percentage of revenue but have been trended up because of capital expenditures and acquisitions. Capital Expenditures Capital Expenditures are projected to increase then decrease to 7.5% in the terminal year. Most expansion and major changes will be made through strategic acquisitions so major increases in capital expenditures are accounted for in the acquisitions section. Net Working Capital WDC is currently holding a high amount of cash. This is expected to decrease considerably over the course of the DCF as the Hitachi loan is repaid and new acquisitions are made using cash. Cash and equivalents are trended down with acquisitions and loan repayments that are expected to be made using cash. Inventories and accounts receivable are trended up as acquisitions are made and controlling inventories will become more difficult. Beta Five different betas were calculated, a five year monthly, two year bi-monthly, one year weekly, Hamada, and Vasicek. The Hamada and Vasicek I felt were too high. The peer group used on average had much higher betas and had much more risk than WDC. The one year weekly was much lower than it has been in the past so I felt the average of the five year monthly and two year bi-weekly were the most reflective of WDC moving forward which gave a beta of Year Monthly 1.30 Two Year Bi-Monthly 1.32 One Year Weekly 1.17 Hamada 1.70 Vasicek 1.65 Cost of Debt Cost of Debt was calculated using the preliminary terms of the Hitachi loan with Bank of America. The interest rate on the loan will be determined using the highest rate of four options. Currently the highest of these options is the Bank of America prime rate which is 3.25%. On top of this there will be a 1.5% margin and a.25% commitment rate. This is a conservative estimate and there is a good chance this rate will be lower. Weighted Average Cost of Capital (WACC) 13

14 A single WACC could not used to be discount the entire DCF because the capital structure of WDC will change over the course of the DCF. The Hitachi loan will make WDC 28% debt compared to 2% debt now. Since the loan will be paid off over five years, the percent debt will continue to decrease over those five years. This will also cause the cost of equity to change. With more debt WD will have a higher beta over those five years. A new beta was also calculated for each year to take into consideration taxes and capital structure. A new cost of equity, capital structure, and tax rate was used to calculate a different WACC for each year. RECOMMENDATION Western Digital Corporation is currently held in the DADCO, Tall Firs, and Svigals portfolios. Since it was purchased it has been one of the top performing stocks for the group and has already exceeded the implied price that was presented in October. The announcement of the acquisition of Hitachi Global Storage Technologies has been the key driver of the price of the stock. This acquisition will allow WD to enter the enterprise storage market where they currently lack products, expand their SSD offerings, and substantially increase their market share in the HDD market. With strong growth projected in Asia as well as increases in demand for enterprise class storage in America, WD has the opportunity to take advantage of their acquisition and grow the company. Weighting my DCF at 70% and comparables analysis at 30% gave an implied price of $45.02, a 23.75% undervaluation. Based on the undervaluation, I recommend a HOLD for all portfolios. 14

15 APPENDIX 1 COMPARABLES ANALYSIS 15

16 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS 16

17 APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS APPENDIX 4 WACC CALCULATIONS 17

18 APPENDIX 5 NET WORKING CAPITAL MODEL 18

19 APPENDIX 6 REVENUE GROWTH MODEL 19

20 APPENDIX 8 HAMADA & VASICEK CALCULATIONS 20

21 APPENDIX 9 SOURCES WDC 10K WDC 10Q WDC Investor Relations Standard & Poors Net Advantage Business Source Premier IBIS World Google Finance Yahoo! Finance Hitachi.com Seagate.com Smartm.com Micron.com Stockcharts.com FactSet Sec.gov BankofAmerica.com 21