WESTERN DIGITAL

and at $23

. It's about $30 now.

Despite the run-up, Western Digital turned up recently in SmartMoney's pickiest stock screen. The Three-Point Value search looks for companies with modest price/earnings, price/sales and price/cash-flow ratios. In doing so it uncovers companies that appear cheap relative to both cash and paper profits, and helps ensure that those profits are coming from plentiful orders, not just one-time windfalls. Run the search for yourself anytime using SmartMoney's stock screener and the full list of demands. Eight companies in all recently made the cut.

Based in Lake Forest, Calif., Western Digital controls about one-fifth of the hard-drive market, including computers, television recorders and handheld devices. Last June it bought Komag, a leading maker of the magnetic discs at the heart of hard drives. This column noted in September that independent makers of hard-drive innards are disappearing fast, and that the Komag purchase should give Western Digital cost and supply advantages. It also pointed out that investors were enamored with flash memory makers and ignoring ho-hum hard-drive companies, awarding SanDisk, for example, a market value of three times trailing sales, but Western Digital one of less than one times trailing sales.

Over its past two quarters Western Digital has grown unit shipments of notebook drives by an average of 195%, suggesting it is taking significant market share. Analysts say competitor Seagate Technology has missed out on the latest product cycle because of a lack of competitive, high-capacity (250 and 320 gigabyte) notebook drives, while Hitachi's drives are comparatively costly. Hence, a profit boon for Western Digital: Per-share earnings for its fiscal year ending June 29 are expected to more than double.

Also, investors seem to be getting over the flash infatuation. SanDisk shares have been sold down to 1.3 times sales, while Western Digital is now just a smidgen over one times sales. And rightly so. After all, Western Digital has turned more than 10 cents of each sales dollar into operating profit over the past year, vs. less than seven cents for SanDisk.

The stock, as suggested by its recent appearance on our screen, still looks cheap. It goes for 11.7 times this year's forecast. That's a discount of a quarter or so to the broad market. It's also about what the stock went for at the time of our last recommendation. So the case for another recommendation of the stock is seemingly clear except for one caveat: It might be difficult for Western Digital to come up with an encore.

This year is shaping up to be a perfect storm of improvements from the Komag purchase, fumbles by competitors and strong end demand for computers. But the anniversary of the Komag purchase, which has flattered year-over-year results, is coming up. Seagate has regained its footing and now expects to ship 250-gig notebook drives in the June quarter. Computer sales remain decent, but for how long in a slowing economy? All told, Western Digital still looks cheap, but that's because soaring profits have done much more to drive the stock than the closing of a valuation gap with the broad market. Next fiscal year Western Digital is expected to increase its per-share earnings just 1%. Absent a continuance of giant upside earnings surprises, shares might stall out for a while.