Western Digital (WDC) Q2 Earnings: What's in the Cards?

Western Digital CorporationWDC is set to report second-quarter fiscal 2017 results on Jan 25, after the closing bell. Last quarter, the company posted a positive earnings surprise of 12.38%. In the past four quarters, the company has posted an average positive earnings surprise of 5.87%.

We also note that Western Digital has outperformed the Zacks Computer-Storage Devices industry in the last one year. Western Digital shares have increased 71.0% as compared with the industry's gain of 52.1% during the same period.

Let's see how things are shaping up for this announcement.

Factors at Play

Western Digital is counting heavily on the acquired SanDisk division to keep the company afloat amid a challenging business environment. Notably, the company derives the bulk of its revenues from the sale of hard-disk drives (HDDs), which are used mainly by PC manufacturers. However, the persistent decline in PC sales has been hurting its HDD shipments over the past several quarters, which in turn has dented top-line growth.

As a result, Western Digital has been shifting its focus to the rapidly growing flash and cloud storage businesses to boost its top line. Addition of SanDisk is expected to open up newer growth avenues and aid the company to gain traction in SSD.

Going forward, the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the other positives. Additionally, higher demand for storage is anticipated to lead to a positive earnings surprise in the to-be reported quarter.

In early Dec 2016, Western Digital raised its second-quarter fiscal 2017 outlook to reflect continued strong acceptance of its products, solid sales execution and favorable market conditions. The renewal of the eight-year cross-license patent agreement with Samsung is a significant positive in our view.

Western Digital Corp. Price and EPS Surprise

Western Digital Corp. Price and EPS Surprise | Western Digital Corp. Quote

We remain encouraged by the company's launch of a string of storage devices under the mobile and cloud segment. Further, Western Digital's entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are expected to be growth catalysts, going forward.

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 : Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.65. Hence, the difference is 0.00%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Western Digital carries a Zacks Rank #1, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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 negative estimate revisions.

Stocks to Consider

You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Applied Optoelectronics AAOI , with an Earnings ESP of +15.87% and a Zacks Rank #1.

Applied Materials AMAT , with an Earnings ESP of +6.06% and a Zacks Rank #1.

Seagate Technology STX , with an Earnings ESP of +1.87% and a Zacks Rank #1.

You can see the complete list of today's Zacks #1 Rank stocks here.

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Western Digital Corp. (WDC): Free Stock Analysis Report

Seagate Technology PLC (STX): Free Stock Analysis Report

Applied Optoelectronics Inc. (AAOI): Free Stock Analysis Report

Applied Materials Inc. (AMAT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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