# Seagate (stx):  Stinker or Opportunity?



## jpr62902

I'm kicking myself for not buying it just north of $25 back in December.  Now there's almost a 10% pullback after their earnings announcement last night (which beat expectations).  So waddya think?  Entry point @ $34-ish, or is this another horse and buggy enterprise?  Is HDD technology really becoming extinct or is demand just shifting from consumer to commercial (i.e.: cloud services vendors)?

Fundamentally, great ratios _right now_ with a nice 4+% dividend.

Thoughts?


----------



## waybomb

Study the balance sheet.
Remember, I go on balance sheet, not earnings. So I am biased.

Me, I wouldn't. But I only looked at a few highlights of bs.

Good Luck.


----------



## jpr62902

waybomb said:


> Study the balance sheet.
> Remember, I go on balance sheet, not earnings. So I am biased.
> 
> Me, I wouldn't. But I only looked at a few highlights of bs.
> 
> Good Luck.


 
They've got a pretty good balance sheet with 2.4 billion _in cash_ and only 2.9 billion in debt.  What's so bad about that?


----------



## waybomb

OK, I just took a harder look. BS is ok. Not stellar. 

I'm sure there will be an uptick in stock price first thing in the am, but I bet this one will waffle around for a while, but stock price will continue a down creep. 

Well, no, you go ahead and bet, I'll watch! 

Ya gotta run with your gut jpr. Don't listen to me.


----------



## waybomb

Well, here's one of my regular watches that agrees with YOU, JPR.

http://seekingalpha.com/article/114...onsolidation?source=email_rt_article_readmore

*Disclosure: *I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  *(More...)*

           Seagate (STX)  is the largest player in the global hard disk drive industry, which has  been characterized by cycles of peaks and troughs. There is little  differentiation in the hard drive industry, which means that customers  buy mainly based on price per storage unit. However, Seagate stock has  surged by more than 100% over the last couple of years, as the industry  has consolidated around two players. A spate of M&A has made Seagate  and Western Digital (WDC)  the two dominant players in the industry. The earnings for both  companies have spiked due to improving margins and revenue. Seagate has  rapidly increased both dividends and buybacks as it has returned the  windfall gains to investors. Though both the earnings and stock price  have gone up, the valuation multiples have not meaningfully expanded,  due to investor fears about this being a temporary peak in the HDD cycle  and the threat from NAND Flash memory. This means that the stock is  still quite cheap despite the stock price outperformance.
*Why you should buy Seagate*


*Industry Consolidation -* The hard drive industry has consolidated, with Seagate buying Samsung's hard drive unit for $1.4 billion in stock and WDC buying the 3rd biggest player Hitachi's HDD  unit. This has left STX and WDC with a lion's share of the market, with  Toshiba a distant third. Pricing pressures have reduced leading to  improving margins and profits. We do not think there is any immediate  threat of greater competitive intensity, as the companies do not want to  enter a mature sector.
*Cheap Valuation* -  Seagate valuation is cheap, despite the stock price surge as the  company's revenue and profits have increased dramatically. Seagate  trades at a forward P/E of 5.5x  and a P/S ratio of 1x. This is quite cheap compared with the rest of  the technology sector. The dividend yield at 3.4% is also quite good  given that the company is buying stock. The payout ratio at ~13% remains  quite low and provides a big cushion in cases of earnings decline.
*Huge Buybacks*  - Seagate has reduced its share count considerably, using most of its  cash flows to buy back its own stock. This has been a great strategy as  STX shares have touched new all-time highs. The company spent almost 70%  of its Operating Cash Flows [OCF] to buy back shares in FY12 and  expects to spend 55% of its OCF to buy back shares in FY13.
*Margin Improvement -*  In 2011, Seagate has reported the best gross margin in the last decade  due to the better industry environment. The company had a gross margin  of 31.4% in 2011, compared with the 14% to 28% range in the last decade.  Operating Margins have also increased dramatically to ~21%, as the  company has managed to reap the benefits of higher pricing power.
*Digital Content is being created faster than ever* - Digital content is being created at an ever increasing rate  (50% annually), with the proliferation of digital devices like tablets  and smartphones. While NAND memory represents an alternative to HDDs,  the cost of a HDD is almost ~20 times lower than SSDs currently. This  means that HDD will continue to remain the cheapest and most convenient  way to store digital content at least in the medium term.
*New Digital Storage Products to offset traditional PC HDD growth decline*  - Seagate is coming out with newer products, to offset the decline in  the traditional HDD used in PCs. The company has come out with a network home storage solution and wireless storage  products. With Smart TVs, tablets and smartphones not having big HDDs  like PCs, the data being created or consumed will have to be stored  somewhere. Seagate has also introduced solid state drives (SSDs) and  hybrid drives, consisting of a mix of NAND and magnetic disk drives to  diversify from its traditional HDD business. The company announced a  partnership with Virident Systems, a startup that sells devices that  plug into servers and store data on flash memory chips. STX will also  invest $40 million in Virident as a part of the deal.
*Risks*


*PC Decline -*  The traditional desktop and laptop industry is witnessing a unit  shipment decline because of cannibalization by tablet and smartphone  growth. The big players of the PC ecosystem like HPQ (HP), Microsoft (MSFT), Intel (INTC) etc. have seen sharp price declines  because of this reason. STX has not been affected till now, as  consolidation in the HDD industry has more than made up for the PC unit  declines. However, STX faces secular headwinds to its main bread and  butter PC HDD segment. Industry shipments declined 3% sequentially in the current quarter (Q412) driven by the notebook market, as all other segments demonstrated quarter-over-quarter growth.
*Cloud Computing Growth improving Storage efficiency* - Cloud Computing  is decreasing the need for storing data at the consumer level. With  data and applications residing in the cloud, there is less need for data  to be stored in multiple places in an enterprise. The increase in  storage efficiency is a headwind for digital storage suppliers like  Seagate. However, we think this threat is limited because it is not  possible for users to store the gigabytes of their personal content on  the cloud. There will always be the need for cheap long-term storage to  store the increasing amount of personal digital content like photos,  music and movies.
*Stock Price Performance -*  Seagate is trading near its all-time peak stock price of $37, due to the  dramatic increase in revenue and profits. The stock shows high  volatility due the cyclical nature of the HDD industry. This has meant  that the wise way to trade, is to buy during cyclical lows and sell  during a cyclical peak. The industry is currently at a cyclical peak,  with the two dominant players showing the best margins in a long time.  This makes the investment case less compelling. The stock has  outperformed the technology sector as well as S&P 500 by a wide  margin showing a positive return of ~80% in the last year.
*Summary*
The  biggest risk with Seagate is whether the margin and revenue improvement  marks a cyclical peak. We don't think STX faces the threat of new  entrants into the HDD industry. The biggest risk is substitution of HDDs  by solid state drives (SSDs) and lower HDD sales due to PC unit  declines. However the low valuation means that the stock is already  discounting at least some of these risks. Given the earnings yield of  ~20%, investors can recover their entire investment in just five years,  even without the company not growing at all. Seagate remains a good  investment in our view despite the stock price increase, as the company  will continue to benefit from changed industry dynamics. The stock has  corrected slightly after announcing a weak demand environment  in the current quarter. We would be looking to buy Seagate on dips,  given that the stock price is touching new all-time highs. We think  another good memory investment might be Micron Technology (MU)  because of the ongoing consolidation in the DRAM and NAND industry. MU  potentially represents Seagate of a year ago when the stock rose by  ~80%.

                                                                     This article was sent to 4,058 people who get email alerts on STX.
      Get email alerts on STX


----------



## jpr62902

I read that too, Fred. It's what made me wonder whether the HDD market really is a dwindling one, versus an evolving one. I was hoping some IT guys would chime in on that notion.

Edit:  Oops.  That article is a more recent one that hits on what I was wondering when I posted this thread.  I read _Seeking Alpha, Motley Fool, Bloomberg_ and others daily.


----------



## waybomb

A new seekingalpha article on Seagate.

http://seekingalpha.com/article/118...-long-term-case?source=email_rt_article_title


----------



## jpr62902

Yup.  Read that one, too.  That author writes some pretty good technical stuff.  Earlier this week, he wrote an informative article on either Microsoft or Intel.

As for STX, I'm thinking the market's gonna pull back in coming weeks with the sequester looming.  Then, maybe I can get in around $30 or so.


----------



## jpr62902

Bimp.

 So I never pulled the trigger on Seagate and it shot all the way up to $68 by December, 2014.  It stayed on my watch list and it taunted me every day the price went higher.  

 Then the HDD market started to dry up.

 It closed today at 27.11, over 60% off its December, 2014 high and headed lower.

 Moral of the story?  Waybomb said it best: Trust your gut.  I never fully trusted the notion that HDD's would be in increasing demand because of the growth in cloud computing.  That skepticism kept me from investing in what now looks like quite a stinker.

 Thanks, Waybomb!


----------



## EastTexFrank

I've been very suspicious of the market in the last few years that I have been wary of any new investments.  On many stocks there seems to be a definite intent to influence the market.  Large investment concerns who control millions and billions of dollars start buying a particular stock, drive the price way on up there for no good reason and then dump their holdings and the stock price collapses ... but only after they have got out of it.  They make their money but the little guy, like you and me, gets burned.  

As I said, I'm very wary in today's market.  There's more sh*t in play than just buying and selling stock ... or maybe I'm just getting paranoid.


----------



## waybomb

Send me 10% of the 60% I saved ya!

Ever since you brought this up, I've been watching Seagate. In wallstreetbreakfast today, one of the regulars speculates Seagate will be no more within 10 years.


----------



## jpr62902

waybomb said:


> Send me 10% of the 60% I saved ya!
> 
> Ever since you brought this up, I've been watching Seagate. In wallstreetbreakfast today, one of the regulars speculates Seagate will be no more within 10 years.


 
 STX just reinforces all my concerns with tech stocks.  The environment changes so quickly, you have to watch them like a hawk.  Qualcomm's another example.  They were dominating in mobile devices just 2 years ago, but now Intel's eating their lunch and QCOM's down a third.

 Apple's a bit of a rollercoaster even though they're a duopoly partner with Samsung.

 Intel missed the mobile explosion and they're just now catching up.

 These are BIG companies.  Their share prices should be more stable, but the nature of their industry is so dang fickle, the betas are just intolerable.

 Microsoft's about the only one that hasn't _recently_ blown up.


----------



## waybomb

Hey JPR - thanks for the tip! I would have never looked at Seagate.
Almost a 14% gain today.
72.8% since I jumped in, July 2016.


----------



## jpr62902

P\E ratio north of 33.  Waaaaayyyyy too high for an older tech stock, IMHO.   But good for you!


----------



## waybomb

Agree.  Already put it my sell in the am.  My Txt took a shit today and is a good buy methinks.


----------

