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VIEW: NEUTRAL
Seagate Technology Plc, an American company is one of the world’s largest manufacturers of hard disk drives. Incorporated in 1978 as Shugart Technology, Seagate is currently incorporated in Dublin, Ireland and has its principal executive office in Cupertino, California. It designs, manufactures, markets, and sells hard disk drives for enterprise storage, client compute, and client non-compute market applications worldwide. The company’s products are used in enterprise servers, mainframes, and workstations; desktop and notebook computers; and digital video recorders, gaming consoles, personal data backup systems, portable external storage systems, and digital media systems.
Sector: Technology Industry: Data Storage Devices
Highlights:
The Seagate Technology Plc (STX) closed Friday’s(26th Oct) trading session at $27.91 Its 52-week low is $15 and 52-week high is of $35.71.Technical indicators for the stock are NEUTRAL.
GROWTH AND BALANCE SHEET
The company’s Year on year, both dividends per share and earnings per share excluding extraordinary items growth increased 377.78% and 493.10%, respectively. The positive trend in dividend payments is noteworthy since very few companies in the Computer Storage Devices industry pay a dividend. Additionally when measured on a five year annualized basis, dividend per share growth ranked highest relative to its industry peers, while earnings per share growth is above the industry average. However Year on year ‘STX’ revenues grew36.17% from 10.97bn to 14.94bn while net income improved 460.08% from 511.00m to 2.86bn.
VALUATION
STX has a market cap of $11.13 billion. A P/E of 3.69 is less than industry average of 13.79. The stock is currently trading near to its fair value of $29.00. The beta of 2.69 implies high volatility of the stock with respect to the S&P 500.
RECOMMENDATION for next 6 months: Overall view is NEUTRAL on Seagate Technology Plc stock. Seagate shares have been highly volatile in the last 5 years, trading at huge premiums as well as at considerable discounts to the industry. Using P/E (TTM), we find that the current 91.9% discount to the peer group is well below the historical average, indicating upside. However, while the company may be well positioned versus its peers and its long term outlook may be very strong, this is not a segment of the broader technology market that we would recommend to investors at this point. Mainly because the hard drive industry is highly dependent on PC demand, which is likely to remain weak in the near term. While demand for SSDs is on the rise and Seagate s position in the market is growing, we believe that some caution is in order. Seagate’s earnings potential for the next five years is weaker than the industry average.
We therefore have a Neutral rating on Seagate with a price target of $29.00, representing a P/E multiple of 4.3x our 2013 EPS estimate, a 93.3% discount to the industry average.
So the current recommendation is to Hold the stock.
|
VALUATION |
STX STOCK |
||||
| Market Cap: |
11.13B |
Beta | 2.69 | ||
| Enterprise Value |
11.54B |
1 Month Stock Returns |
-6.77% |
||
| P/E |
3.69 |
Year to Date Stock Returns |
70.82% |
||
| PEG Ratio |
0.34 |
1 Year Stock Returns |
62.03% |
||
| Price/Sales |
0.75 |
3 Year Stock Returns |
95.36% |
||
| Price/Book |
3.20 |
52-Week Change |
52.70% |
||
| Enterprise Value/Revenue |
0.73 |
S&P500 52-Week Change |
12.14% |
||
| Enterprise Value/EBITDA |
2.64 |
52-Week High |
35.71 |
||
| Dividend Yield |
4.50% |
52-Week Low |
15 |
||
| 50-Day Moving Average |
29.25 |
||||
| Held by insiders |
12.54% |
200-Day Moving Average |
28.72 |
NEWS and CALENDAR
Wednesday, October 31, 2012- Seagate Technology Plc (NASD:STX) today reported financial results for the quarter ended September 28, 2012; a significant rise in profit for the first quarter, as revenues climbed 33 percent from last year.Net income attributable to the company surged to $582 million or $1.42 per share from $140 million or $0.32 per share in the year-ago quarter.
On a non-GAAP basis, net income was $594 million or $1.45 per share for the recent quarter, while it stood at $146 million or $0.34 per share in the prior year. Revenues increased to $3.73 billion from $2.81 billion in the prior-year quarter.
STX’s Strengths
STX’s Weakness
Opportunity for STX
Threat for STX
| Competitor Comparison | |||||||
| STX | SNDK | WDC | NTAP | Industry | |||
| Market Cap: | 11.13B | 10.50B | 8.66B | 10.08B | 162.63M | ||
| Employees: | 57,900 | 3,939 | 96,002 | 12,149 | 1.82K | ||
| Qtrly Rev Growth (yoy): | 0.33 | -0.10 | 0.50 | -0.01 | 0.19 | ||
| Revenue (ttm): | 15.86B | 5.09B | 13.82B | 6.22B | 502.64M | ||
| Gross Margin (ttm): | 0.33 | 0.35 | 0.31 | 0.59 | 0.29 | ||
| EBITDA (ttm): | 4.37B | 1.09B | 3.46B | 855.50M | 10.27M | ||
| Operating Margin (ttm): | 0.22 | 0.15 | 0.18 | 0.11 | -0.05 | ||
| Net Income (ttm): | 3.30B | 485.08M | 1.89B | 529.70M | N/A | ||
| EPS (ttm): | 7.60 | 1.97 | 7.61 | 1.42 | N/A | ||
| P/E (ttm): | 3.69 | 22.04 | 4.63 | 19.58 | 18.33 | ||
| PEG (5 yr expected): | 0.34 | 1.71 | 0.86 | 1.08 | 0.82 | ||
| P/S (ttm): | 0.75 | 2.10 | 0.63 | 1.64 | 0.77 | ||
Stock valuation model
The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental factors in order to rank a stock.
Intrinsic value of the stock
Investors should hold the stock.
STX intrinsic value is $29.00 the current price is $27.91, that gives us a possible upside of 3.91%.
Financials
The financial health of the company the higher the better. In this parameter company is doing exceptionally well.
Sentiment
Investor’s sentiment for the stock
Earnings Consistency
According to this model, each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. STX’s, annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were
2.34,-6.40, 3.14, 1.09, 6.49 fails this test.
Total Debt/Equity
The company must have a low Debt/Equity ratio, which indicates a strong balance sheet.A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. STX’s Debt/Equity (82.40%) is considered high relative to its industry (22.30%) and fails this test.
Quarterly EPS Change
Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for STX is 15.51%. This should be less than the growth rates for the 3 previous quarters, which are 312.90%, 1140.00%, and 777.78%. STX passes this test, which means that it has good, reasonably steady earnings.
Annual Earnings Growth
One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. STX’s annual earnings growth rate over the past five years of 33.07% passes this test.
Current Price Level
Investors should keep an eye open for stocks that are trading within 15% of their 52-week highs, as it is likely to continue in its upward trend.
STX’s 52 week high is $35.71 current price is $27.91 which is 21.84% below the high; So fails the test.
P/E Ratio
The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.
STX’s P/E of 3.69 (using the current PE) pass this test.
Insider Ownership
Companies with the best prospects have strong insider ownership, which we define as 10% or more. When there is strong insider ownership, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 12.54% of STX’s stock. Management’s representation is good enough and passes this test.
Scorecard
COMPANY: STX
Intrinsic value of the stock 4
Financials 7
Sentiment 4
Earnings Consistency 3
Total Debt/Equity 2
Quarterly EPS change 8
Annual Earnings Growth 7
Current Price Level 2
P/E Ratio 8
Insider Ownership 7
52
SCORE
5.2
RECOMMENDATION:NEUTRAL
REASONS TO HOLD
Seagate is the second largest manufacturer of hard disk drives in the U.S. The company shipped 224 million units in fiscal 2012, compared to 199 million units in 2011 and 193 million units in 2010.Though the Thailand flood had an adverse impact on industry-wide shipments, there are signs that the situation will soon revert to the pre-flood level. IT research firm Gartner expects worldwide HDD shipments to grow at a 6.3% compound annual growth rate from 2012 through 2016, with revenue growing 2.8% over the same time period. Gartner also expects shipments to touch 368 million units in 2012, or a 4.4% increase from fiscal 2011, increasing to roughly 400 million units in fiscal 2013.So with an enriched product portfolio and higher mix of OEM business, Seagate will be well-positioned to capitalize on the opportunity.
Pricing remains challenging in the HDD market. Continuous price declines outweigh the positive of increased volume shipments. But, the Thailand flood in late 2011 led to supply chain disruptions that supported stronger prices. Moreover, the flooding in Thailand had the minimum impact on its facilities, while crippling manufacturing at competitors such as Western Digital and Toshiba. Hence, consistent production helped Seagate to meet the demand for HDDs, which led to huge volume shipments. Hence volume shipment, coupled with favorable pricing led to a dramatic surge in the company s fundamentals in the second and third quarters of fiscal 2012. Although the positive impact of the Thailand flooding is likely to wear off by the second half of the calendar year, research firm IHS iSuppli believes that HDD pricing may not reach pre-flood levels until 2014. The reason behind this could inclusion of many extra costs (for damage repairing, maintaining underutilized factories and pre-cautionary measures) into the ASPs. Another reason could be the steady demand for HDDs, which will be commensurate with the stabilizing production level. Thus, Seagate will capitalize on the opportunity and generate healthy revenue for the coming quarters.
In the long term, there are possibilities that the HDD market be overshadowed by the booming SSD market. But it will not be that easy to reduce the usage of HDDs. SSD storage is roughly 10-20 times more expensive than the same capacity of HDD. Hence, buying a laptop with SSD can be a buyer’s preference, but not a need. Many users may prefer HDD-featured laptops with higher capacity rather than going for a lower capacity SSD model for a higher price. Another thing that can drive the future of HDD is the PC industry. While the PC industry is weak due to soft consumer demand, corporate refreshes will continue. Moreover, Microsoft s Windows 8 launch will boost PC sales, increasing HDD shipments. Being one of the leading HDD suppliers with the most consistent supply, Seagate should be the supplier of choice for many. This apart, we should keep in mind the exponential growth of data exchange across the world. This growth has to be supported by commensurate data center expansion. Since most of the data centers and PCs use HDDs, the market is likely to thrive for years.
The HDD market has consolidated rapidly over the past few years. International Business Machines Corp, Hewlett-Packard Co. and Quantum Corp. were once key players, but had to leave the market due to the continued price declines. The price wars have induced many companies to get acquired.In order to grow market share, Seagate acquired CDC/Imprimis in 1989 and Conner in 1996. Maxtor,who acquired the Quantum disk drive business, got acquired by Seagate in 2006. After a gap of 5 years, the company again got active on the M&A front, snapping up Samsung s HDD business in December 2011 and a following it up with a controlling interest in LaCie, a French consumer storage device maker. The acquisitions will not only boost Seagate s existing range of HDD offerings, but also enrich the entire portfolio with a wide range of storage offerings, such as SSD, RAID arrays and optical drives. The Samsung deal will strengthen Seagate s position in 2.5 mobile and 3.5 desktop drives. Additionally, Seagate will now have better exposure at Apple Inc. as LaCie s drives are widely used by the tech giant. With such a diverse portfolio and rich customer base, it will be easy for Seagate to fight stiff competition and avoid the situation of getting acquired.
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