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Seagate Technology: Can the Bull Continue after 190% Price Increase?
Posted by: Anh Hoang (IP Logged)
Date: September 7, 2012 01:31PM

Seagate Technology (STX) is the leading provider of electronic data storage products. Its principal products are hard disk drives, commonly known as disk drives, hard drives or HDDs. Around 70% of products were sold to OEMs, 20% to distributors and the rest to retail customers segment. Over the last three years, more than 50% of the business came from Asia Pacific, 26%-29% came from Americas, and the rest came from EMEA region.

In the last 10 years, STX has been consistently profitable, except for the loss incurred in the fiscal year ended July 2009. The loss was caused by $2.3 billion impairment goodwill charge. The firm has been generating positive operating cash flow and free cash flow for 10 years.

USD millions 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
NI 641 529 707 840 913 1,262 -3,086 1,609 511 2,862
OCF 882 635 1,428 1,457 943 2,538 823 1,932 1,264 3,262
FCF 366 30 737 449 37 1,608 190 1,293 421 2,626

STX’s share price advanced nearly three times in 52 weeks. It was trading at $10.7 in the beginning of October last year, and it is $32.5 now. The whole company is worth nearly $13 billion. The market is valuing STX at 5x its earnings, 3.7x book value and 4.4x cash flow. The dividend yield is 3.9%.

David Einhorn of Greenlight Capital, in his first quarter 2012 letter, was bullish on STX. The reason for David Einhorn to be bullish on STX is the industry shortage, that can push the EPS of STX to the range of $10-$15 per share, making the forward multiples of the company low: “STX was the other significant winner during the quarter. It is STX’s normal practice on earnings calls to provide financial commentary looking ahead only one quarter. However, in January, STX shared its financial outlook for all of calendar year 2012, forecasting revenues of $20 billion. The prior consensus was for less than $15 billion. A good chuck of the increased forecast comes from higher pricing enabled by the industry shortage following the floods in Thailand last year. STX also announced that it would be using some of its excess cash to ramp up its stock repurchase program, with a target of decreasing outstanding shares by 25%. When business conditions eventually normalize, the lower share count will enable STX to generate higher EPS. Though the shares advanced from $16.4 to $26.96 during the quarter, the share price remains at a very low multiple of both near-term and longer-term earnings. Based on our somewhat more conservative revenue outlook in 2012, we expect earnings to reach $10-$15 per share this calendar year, before settling at an average of about $5 per share in future years when the industry shortage will have ended.”

Insider trade: Since August, the chairman and CEO, lead independent director, treasurer, CFO and CEO have been actively selling out company shares, with the combined value of more than $50 million. Notably, on August 27, Stephen Luczo, chairman, president and CEO sold more than 600,000 shares at $33.77 per share. The transaction was worth around $20.5 million.

My take: STX is trading at the relatively low valuation compared to industry standard (13.8x P/E and 7.7x P/CF), and with its own P/E 5-year average of 9.2. Investors, when already having STX in their portfolio, can still hold it for the long run. However, STX is experiencing industry headwinds for HDD companies. In the recent quarter, STX had a slowing economic growth and shaky sales of PCs as consumers shift toward tablets and smartphones. According to Thompson Reuters, the company issued first quarter 2013 revenue guidance of $4 billion, below the analyst estimate of $4.68 billion. Yesterday, Needham & Co downgraded the stock into hold, noting slower demand for its hard drives and storage devices and rising inventory levels in the industry. Personally, I would rather see the stock price get cheaper before considering initiating a position.

Stocks Discussed: STX,
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