COMPANIES THAT MAKE

hard-drive innards are disappearing. A decade ago 14 manufacturers competed to sell read/write heads. Now there's just one, Japan's TDK, because big drive makers like

Seagate Technology

Western Digital

Hitachi

Komag in April 2004. Western Digital, which we called a

two years ago, is up 80% vs. the S&P 500 index's 25%.

Investors should still buy shares of Western Digital. It controls a fifth of the hard-drive market, which extends to desktop and laptop computers, digital video recorders, servers, handheld electronics and more. The Komag purchase should give the company cost and supply advantages at a time when orders are surprisingly strong and average selling prices are topping projections. And while Wall Street still seems enamored with newfangled flash memory, awarding Sandisk, for example, a market value of more than three times past-year sales, ho-hum disk drives are still plenty profitable for Western Digital, and its market value is less than one times trailing sales.

That earned the company a spot recently on our Price/Sales screen. It replaces the more popular price/earnings measure with one that long-term studies have shown to be a better predictor of stock gains. Sales are less subject to quarterly volatility than earnings, and they're more difficult for managers to manipulate, both of which make sales a reliable indicator of stock valuation. Our screen also looks for accelerating sales growth and positive profit margins. See the recipe of criteria for details and use our stock screener anytime to run the search for yourself. It recently identified Western Digital and seven other potential bargains from a starting database of 8,000 companies.

Lake Forest, Calif.-based Western Digital is the No. 2 hard-drive maker behind Seagate (which bought Maxtor last year). Sales for Western Digital are seen jumping 23% this year to $6.7 billion, partly on the Komag purchase, before slowing to a 5% increase next year. Even with the slower sales growth, Wall Street estimates the company will grow its earnings per share by 13% a year over the next five years, well faster than the broad market.

Lower production costs will help. Komag had previously supplied an estimated 30% to 40% of Western Digital's hard-drive media. Now the company plans to produce 70% to 80% of its media from within. That is expected to boost gross margins by up to three percentage points a year, operating margins by two percentage points and net margins by a point and a half, the company says.

The acquisition closed on Sept. 5. For the deal to pay off for investors, analysts say, Komag will have to continue producing media at full capacity rather than just supply Western Digital. Early signs are promising. Seagate and Hitachi, both Komag customers, plan to keep buying media from Western Digital through at least the end of next year. And management says it's seeing improving demand, particularly in Europe, and a shift to higher-capacity and more lucrative drives. On Sept. 10 the company announced that sales for its fiscal first quarter, which ends Sept. 28, will total $1.60 billion to $1.65 billion, up from the outlook of $1.45 billion to $1.50 billion it offered in July. It boosted its gross margin projection to 17.5% from a range of 15.5% to 16.0%, and said earnings should total 61 cents to 65 cents a share, up from an earlier projection of 43 cents to 47 cents. Also, the company said Komag will add to earnings starting in the fourth quarter of fiscal 2008 instead of the first of 2009 next summer instead of next fall.

At a price/sales ratio of 0.9, Western Digital shares come at a discount of about 20% to Seagate, despite Western Digital having better profit margins, and a discount of nearly half the S&P 500 median. The stock's run-up since our last story notwithstanding, that seems cheap to us.