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STOCKWATCH / John Charles Tighe

Western Digital, AT&T Set-Up Opens Some Eyes

September 20, 1987|John Charles Tighe

Sure, the financial community has heard of Western Digital Corp., the Irvine computer-components maker.

But even the pros admit that they have a tough time keeping track of a rapidly changing company that is not quite like the other technology firms they follow.

Many of New York's biggest brokerages, and even some California securities firms that specialize in high technology, haven't really paid attention to Western Digital.

"They make computers, right?" one analyst asked.

Wrong. Western Digital makes a variety of computer components--the internal subassemblies that make the machines actually work--but no finished computers.

As Jay Vleeschhouwer, an analyst at the Los Angeles investment firm of L.H. Friend & Co., said: "They've got so many products it's hard to get a track on."

Andrew Neff, an analyst at Montgomery Securities in San Francisco, said Western Digital's stock price often "drifts without any clear reason."

In fact, a handful of analysts who regularly track the company said Wall Street's lack of interest is a major reason for a 26% decline in the price of Western Digital stock over the last four months.

But when AT&T--the nation's eighth-largest industrial company--joined forces with Western Digital last week to announce an unusual technology-sharing agreement, the financial world took notice, analysts said.

The agreement calls for AT&T to be Western Digital's sole outside supplier of computer chips, providing the company with at least $50 million worth of silicon wafers a year. The companies also agreed to combine their technological expertise to develop and produce advanced computer components.

Can Get Cheaper Chips

As a result of the arrangement, Western Digital can obtain chips at less expense and introduce products six months to a year before its competitors, according to Mark Reagan, a semiconductor analyst at Dataquest Inc. in San Jose.

Buoyed in part by news of the pact, Western Digital shares closed on the American Exchange Friday at $24, up 62.5 cents for the week, but well below the company's 52-week high of $32.625 per share reached in May.

Analysts said the stock has fallen steadily for several months because Western Digital has been lumped together with computer manufacturers and suppliers who have lost favor in the market.

"Investors have seen some bad news about the industry, and they're ready to walk away," said Prudential Bache Securities semiconductor analyst Richard Whittington.

Whittington and others said investors who lost faith in Western Digital failed to recognize that the company isn't comparable to other firms in the industry. Most companies either make a few parts for computers or produce the finished products.

Western Digital, in contrast, manufactures a wide range of circuit boards and other components used to control the basic functions of personal computers, such as data storage and video display. Its generic "board-level" products are found inside computers carrying many brand names.

Comparison With Delco

Western Digital Chairman Roger Johnson recently compared his company to Delco, the company that makes components for General Motors automobiles: "Someone else can assemble the finished product. I don't mind building all the spark plugs, the batteries, the starters and the tail pipes."

Although Western Digital's revenues are tied to sales of personal computers, Johnson has been able to spur growth in down cycles by introducing new products and developing new markets.

Western Digital's revenues have risen steadily from $50.2 million in fiscal 1983 to $462.5 million in fiscal 1987, which ended June 30. Its earnings have climbed from $1.5 million to $48.2 million in the same five years.

Some analysts are recommending purchase of Western Digital stock, which they expect to appreciate as a result of the increased attention focused on the company. But they warn that the price may be continue to be constrained by concerns about Western Digital's ability to maintain its past rate of sales and earnings increases.

Lowered earnings estimates have been responsible for recent price weakness, analyst Vleeschhouwer said. Two weeks ago, First Boston lowered its earnings estimate for fiscal 1988 to $2.30 a share from $2.40. Other firms are projecting earnings of $2.20 per share.

Vleeschhouwer said the impact of the AT&T pact should begin to show up in Western Digital's financial results for the quarter ending March 31, 1988.

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