Why it was purchased: The position in Western Digital (NASDAQ:WDC), a hard-disk-drive company, was initiated in December 2016, a year after the company acquired SanDisk, a flash memory (NAND) company. (SanDisk had been in the portfolio). In addition to deal synergies, the acquisition seemed likely to render Western Digital’s gross margin profile less cyclical than it had been in the past, as an improved industry structure could potentially lead to higher trough margins in Western Digital’s cyclical growth.
Why it has not worked this year: The stock underperformed from late March through late September due to concerns that NAND sales and margins had peaked.
Why it was still in the portfolio: NAND margins were down, but the Fund’s investment thesis—that changes in industry structure could lead to sustainably higher margins—appeared to be playing out. Based on the prices paid in recent acquisitions of NAND businesses, we believed that Western Digital’s shares were undervalued. The company initiated a share repurchase program representing approximately 30% of its market cap, and it provided a 3.5% dividend yield.
From First Eagle Investment (Trades, Portfolio)'s First Eagle Fund of America's third-quarter 2018 shareholder commentary.
