Today I sold my long term holding of Western Digital (WDC). It was a good holding for a long time but recent events in the fundamental metrics of the company brought me to this juncture. Add in the retirement of the CEO and it indicates at least rough sailing for a while. I still like the company, but signals are indicating it's a good time to be on the side lines.
The two major events that are putting pressure on WDC are past M&A and the industry’s economics.
A few years back they bought San Disk which was a good strategic move to diversify into solid state drives. Unfortunately, they really upped their financial leverage to do so. Then, they fought through a battle with the Toshiba joint venture. Finally, at the same time that they need to reduce their debt leverage, their markets experienced difficult economics.
Their sales have seen some pressure since Q2 of 2018 as they have dropped off some (Their LT numbers are in the attachment). Gross margins are under pressure which indicates to me discounting is occurring to move product. Operating margins have been trending negative in recent quarters and net income has been under pressure since the San Disk and Toshiba events. Interest expense is coming down, but not fast enough given the industry’s current economic condition. The debt load of the company is coming down, but, again, it might not be fast enough.
Comparing WDC to the market, WDC is dropping in price when many stocks are richly priced. Hopefully, WDC is not suffering from the "Innovator's Dilemma". If the upward current in the market makes a swift change, I don’t want to be left holding the bag.
In my view, it is a great time to be taking a seat on the sidelines!
