View Full Version : SOTD: STX Seagate - Catch a falling knife

09-15-2005, 02:58 PM
STX is the leading manufacturer of hard drives. It has about 50% of the world share. IMO there is an incredible buying opportunity right now.

-Market leader, unquestionably the best technology in the field
-Very cheap relative to earnings and projected growth. Trailing P/E is 10.7, forward P/E 7.3, PEG 0.60.
-Priced cheaply relative to competitors in HD manufacture: WDC is at 14.4 trailing P/E, 10.2 forward. MXO is currently unprofitable, with a forward PE of 16.1. This is the reverse of the typical within-industry pricing: usually the market leader is priced higher than the competitors.
-2% dividend
-Has about $2.50 in cash/share net of debt

-Hard drive sales may slow in the future. The big news that pushed it down recently is that Apple's new Ipod Nanos will have flash memory instead of Seagate's 1 inch HDs. This had been a big growth segment for STX, but it seems to be a fairly minor part of its overall sales portfolio. Beyond the Ipod, there are concerns that flash memory will generally catch up with HDs in terms of storage for many consumer applications.
-Currently on a nose-dive. I'm not a chart reader at all, but any kind of momentum strategy would tell you to stay the hell away from this stock.

I'm not real concerned with the chance of a further short term drop. If it does drop further, I'll probably buy more.

The bigger concern to me is the possibility that hard drives are in long-term decline. I tend to think that as hard drives increase capacity and decrease size and cost even further, new applications will evolve. Things like cell phone-camcorders would require the greater storage capacity, or generally any type of item which is more sensitive to cost than size. Right now I think the market is overreacting to the Apple news.

09-15-2005, 04:04 PM
i have a position right now. much research/analyst opinion convinced me that $15 is just about the bottom for this stock (via cash and revenue calculations) with an upside of 5-10 points, but it is not short-term. expect to hold on to it for at least 6 months.

09-16-2005, 08:43 AM
Recent note from Goldman Sachs...

Many of the yellow flags that we raised in our June 28 downgrade of STX (U/N) are beginning to show up in the results of companies throughout the HDD supply chain. Specifically for STX, after raising numbers multiple times per quarter earlier in the year, weak 1" demand, a more competitive enterprise HDD segment, and component shortages are likely to result in little, if any, upside in Seagates September quarter. Although the stock is down almost 12% in the last three months, operating margins for STX are still well above normalized levels, all at a time when capacity is still entering the industry, biasing risk/reward to the downside. We maintain an Underperform rating within a Neutral coverage view.