Investors appeared disgusted by Seagate Technology’s (STX, Financial) full-year 2017 performance as shares crashed 16.5% post announcement.
The $9.6 billion Ireland-based data storage company reported a (-)3.5% revenue decline in fiscal 2017 to $10.8 billion and an impressively contrasting 211% rise in profits to $772 million (7.2% margin vs. 2.2% in 2016).
Seagate managed to squeeze out more profits as its overall operational expenses declined by 9.3% to $9.7 billion.
“The results of our performance this fiscal year reflect improved year-over-year profitability of our storage product portfolio and business operations. Although the near-term dynamics of technology shifts present demand variations for the storage industry from time to time, we continue to see growing storage demand in the long run driven by the proliferation of data growth from new technologies, emerging industries and growing businesses. We believe we have the vision, products, technology and experience to ensure our long-term success and shareholder value.” –Â Steve Luczo, Seagate’s chairman and CEO
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Valuations
Seagate is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 13.3 times vs. 21.7 times, a price-book (P/B) ratio of 6 times vs. 1.7 times and a price-sales (P/S) ratio of 0.87 times vs. 1.14 times.
The company also had an appealing trailing dividend yield of 7.59% with a 104% payout ratio.
Average fiscal-year 2018 revenue and earnings-per-share estimates indicated forward multiples of 0.94 times and 8.1 times.
Total returns
Seagate underperformed the broader Standard & Poor's 500 index so far this year brought by its (-)11.97% total returns vs. the index’s 11.88%.
Seagate Technology
Seagate Technology was incorporated in 1978 as Shugart Technology. Since 2010, the company has been incorporated in Dublin, Ireland, with operational headquarters in Cupertino, California.
According to filings, Seagate is a leading provider of electronic data storage technology and solutions.
The company’s principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs.
In addition to HDDs, Seagate produces a broad range of electronic data storage products including solid state hybrid drives (SSHD), solid state drives (SSD), PCIe cards and SATA controllers. The company’s storage technology portfolio also includes storage subsystems and high performance computing solutions.
Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, and most SSDs use NAND-based flash memory.
In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.
Moreover, Seagate’s products are designed for mission critical and near line applications in enterprise servers and storage systems; client compute applications, where the company’s products are designed primarily for desktop and mobile computing; and client noncompute applications, where the company’s products are designed for a wide variety of end user devices such as digital video recorders, personal data backup systems, portable external storage systems, digital media systems and surveillance systems.
The company also has Cloud Systems and Solutions for building on the Seagate legacy to extend innovation from the device into the information infrastructure, onsite and in the cloud.
Seagate’s approach to data management supports HPC, open source and software-defined solutions. Its portfolio includes HPC storage solutions, modular original equipment manufacturers storage systems and scale-out storage systems.
In fiscal year 2016*, 54% of Seagate’s revenue were generated in Asia Pacific, 29% in Americas, and 17% in EMEA.
According to filings, Seagate has concluded that its manufacture and distribution of electronic storage solutions constitutes one reporting segment.
Nonetheless, the company derived 12% of its full-year 2016 revenue from Dell Inc. while Hewlett Packard Enterprise (HPE, Financial) and HP Inc. (HPQ, Financial) each generated not more than 10% of Seagate’s revenue.
Sales and profits
In the recent three years, Seagate registered average decline in revenue of (-)7.4%, profit increase of 45.5%, and margin average of 7.4%.
Cash, debt and book value
As of June, Seagate had $2.54 billion in cash and cash equivalents and $5.02 billion in debt with debt-equity ratio 3.68 times vs. 2.6 times the year prior (July 2016). Overall debt rose by $930 million year over year while equity declined by (-)$229 million.
Of Seagate’s $1.24 billion assets 16.4%Â were identified as blue sky elements (goodwill and intangible assets) while book value has decreased by (-)14.2% year over year to $1.36 billion.
Cash flow
Brought by its higher profits, Seagate’s cash flow from operations increased by 14% to $1.92 billion in 2017. Capital expenditures were $434 million leaving the company with $1.48 billion in free cash flow compared to $1.09 billion in 2016.
Seagate allocated 69% of its free cash flow in shareholder payouts – dividends and share repurchases while having raised $916 million in debt (net repayments).
The cash flow summary
In the recent three years, Seagate has accumulatively allocated $1.77 billion in capital expenditures, generated $4.48 billion in free cash flow, raised $992 million in debt (net repayments) and provided $4.6 billion in shareholder payouts at an average free cash flow payout ratio of 109.1%.
Conclusion
Seagate’s improved cost management led to an impressive profit rise in the recent fiscal year. Although most investors may want more business segmentation (such as HDD, SDD sales and profits) from the Irish technology company, Seagate does seem to have its products interrelated therefore may be cost effective to just keep its discussion brief.
Meanwhile, the company carried a significantly leveraged balance sheet while having maintained its generous shareholder payouts in recent years.
Analysts have an average price target of $40.76 per share vs. $32.34 at the time of writing. Applying three-year revenue decline and P/S multiple averages followed by a 25% margin indicated a figure of $29.4 per share.
In summary, Seagate is a pass.
*Information for 2017 was not available at the time of writing.
Disclosure: I do not have shares in any of the companies mentioned.
