Good news can be bad news if it's not good enough, Western Digital Corp. discovered Thursday, when its stock price fell 14% despite record quarterly results announced the day before.
Even though the Irvine-based disk drive maker posted earnings of 85 cents a share, above Wall Street's projection of 80 cents, analysts were concerned about a slight decline in the company's gross profit margin and about the industry's overall prospects.
Other disk drive makers' shares were also down in Thursday's trading, including those of market leader Seagate Technology Inc., which also posted strong quarterly results this week.
Michael J. Geran, an analyst with a division of brokerage Donaldson, Lufkin & Jenrette in Jersey City, N.J., said that Western Digital's stock slide reflects pessimism about the industry overall rather than Western Digital in particular.
"There's a lot of concern that the rate of increase, both in sales and volume, is going to level off for this quarter," said Geran, who nonetheless has a "buy" recommendation on Western Digital stock based on his long-term expectations for the company.
"If the rate of increase is only modest this quarter, you could be seeing a return to profitless prosperity," he said.
After three years of losses, Western Digital returned to profitability for its fiscal year ended in June.
For the latest quarter, the company said Wednesday, it had a profit of $42.6 million on revenue of $552 million. That was up dramatically from earnings of $12.5 million on revenue of $371 million for the same period a year earlier.
The company's stock lost $2.75 a share Thursday to close at $16.50.
Montgomery Securities in San Francisco lowered its recommendation Thursday from "buy" to "hold" for a number of disk drive makers, including Seagate, Quantum Corp. and Western Digital.
Analysts Paul Fox and David Grossman said in a report Thursday that they lowered their ratings mainly because differences among the companies' products are becoming less significant.
"We believe these stocks have very limited upsides when the number of competitors is rising," the analysts wrote. "And growth, while strong, will not accelerate enough to accommodate this increased competition."
Western Digital spokesman Robert Blair said that the company's profit margin declined because of steadily dropping prices for disk drives in general and that a component cost reduction planned for June will keep the company competitive.
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Western Digital Stock Drops
Just one day after Western Digital Corp. posted spectacular second-quarter highs in both net income and revenue, the company's stock dropped $2.75 to close at $16.50. The last time the stock was at that level was Dec. 12. Monthly closing prices:
Jan. 12, 1995: 16.50
Source: Bloomberg Business News; Researched by VALERIE WILLIAMS-SANCHEZ / Los Angeles Times