Seagate Technology (STX, Financial) has gobbled up more than 40% of the hard drive market with successful acquisitions dating back to 1992. And, despite more consumers moving to the “cloud” for storage, Seagate continues to strengthen its position.
Seagate Technology agreed to purchase Dot Hill Systems for about $700 million, in an all-cash transaction, in September. The acquisition will help boost Seagate’s cloud storage business and continue driving its earnings higher. Growth through acquisitions is not a bad strategy (think Berkshire Hathaway (BRK.B) or Valeant (VRX)) if it’s done right.
Financially speaking, Seagate generates a significant amount of cash per year ($2.87 billion) and spends very little on CapEx ($787 million), allowing it to pay out over 7% as annual dividends. In fact, over the last decade, the company has increased revenue by 50%, net income by 66% and bought back over 200 million of its own shares. The stock has moved up from $17 per share touching $69 intra-day late last year. Since then, the stock has been cut in half, giving investors that buy in at this price a better dividend payment and more lucrative upside potential.
2005:
- Revenue: $9.2 billion.
- Income: $840 million.
- Book: $9.05 per share.
- Dividend: 32 cents per share.
- ROE: 18%.
2010:
- Revenue: $10.9 billion.
- Income: $511 million.
- Book: $5.73 per share.
- Dividend: 18 cents per share.
- ROE: 19%.
2015:
- Revenue: $12.8 billion.
- Income: $1.4 billion.
- Book: $6.43 per share.
- Dividend: $2.16 per share.
- ROE: 52%.
Seagate has continued an upward march in sales and profit. The company has expanded its return on equity and EPS by steadily buying back stock. Total sales over the last decade were just over $122 billion, while total net income tallied more than $10 billion. Seagate continues to increase its investments in R&D to combat the weakness in the hard drive market, but for at least the next five to seven years, analysts believe the cost advantages the company enjoys will remain intact, while acquisitions become accretive to the bottom-line.
This means much higher profits for shareholders, too. If the trend continues along with the new higher dividend payments, I suspect that the company could earn $5 to $6 per share in the next few years and pay a total pre-tax yield of 21%. Obviously, I don’t know what the share price will be if those earnings numbers are achieved, but at 10x, investors could expect $50 to $60 per share. At 15x earnings, the price would be between $75 to $90 per share.
While Western Digital (WDC, Financial) has done a much better job growth-wise, I believe Seagate is a better bargain. This could change if Western Digital decides to match the dividend payout ratio of Seagate, at which point, the investor should buy both stocks.
Disclosure:Ă‚ I have no position in the companies mentioned.
