10.10.08 

DROPPING RESEARCH COVERAGE
We are dropping research coverage of the following companies as the analyst is no longer with the firm: Seagate Technology (STX), Western Digital Corp. (WDC), Hutchinson Technology, Inc. (HTCH), Universal Electronics, Inc. (UEIC), Apple, Inc. (AAPL), Dell, Inc. (DELL). Contact Us for Full Report - PDF

05.05.08 

STOCK SCREEN AND MODEL PORTFOLIO UPDATE
Looking at performance through the end of April, our hardware and semiconductor model portfolios recovered from the lows reached in March, but are still down sharply for the year. Our technology hardware basket is down roughly 20% YTD while our semi basket is down roughly 10%, which is about where the NASDAQ lies as well. The model hardware and semiconductor portfolios forward PE ratios have also bounced off the 5-year lows hit in March, with the semis bouncing much higher so far off of the bottom (see Exhibits 2 and 3). We have also refreshed our individual stock screening of approximately 100 companies in our broader hardware and semi universe, and limited digital home players and some new names screen out now along with some that remain on the top of our screen still this year. SANM, 992-HK (Lenovo Group), STM, KLIC, NNDS, and DISH still screen out as some of the most attractive on a straight valuation basis, but now FLEX and ARW are screening favorable and offer less risk than SANM. Also the HDD group screens very well with forward FCF yields at 11 to 15%-WDC(BUY), STX(BUY), HTCH (HOLD), and NTAP, ELX and LXK also screen out favorably for the first time this year. (see Part 4 for screens and discussion). Lastly, we also address a disruptive theme at one of our covered companies, Dell, after spending many hours with management at its two-day analyst event. Contact Us for Full Report - PDF

03.11.08 

STOCK SCREEN AND MODEL PORTFOLIO UPDATE
It goes without stating, but along with the broader market, our model hardware and semiconductor portfolios, as well as our formal rated coverage universe have gotten hammered in the first two months of the year. The model hardware and semiconductor portfolios are now trading at the lowest forward PE valuation of any time in the past five years (see Exhibits 2 and 3). All of the sector benchmarks and market indices we use are also at five-year low forward PE valuations except for the NASDAQ. We have also refreshed our individual stock screening of approximately 100 companies in our broader hardware and semi universe, and limited digital home players and most of the same names still screen out to us after the first week of March, especially if prices are little changed from the end of January. SANM, 992-HK (Lenovo Group), STM, NSM, KLIC, NNDS, DISH screen out as most attractive on a straight valuation basis (see Part 3 for screens and discussion). Contact Us for Full Report - PDF

01.28.08 

INTRODUCING MODEL TECHNOLOGY HARDWARE AND SEMI PORTFOLIOS; REVIEWING STOCK PERFORMANCE; LOOKING AHEAD WITH STOCK SCREENS; DISRUPTIVE THEMES ACROSS OUR BROADER UNIVERSE
We are introducing two model stock portfolios in the technology sub-sectors of hardware/storage and expanding our universe scope to include semiconductors as well. This is the first report in a series where we plan to continually screen for undervalued stocks within these sectors, review stock picking performance/alpha generation, and begin discussing disruptive themes and how to invest in order to capitalize on them. Using a broad hardware and storage universe, we are introducing a model hardware portfolio of: AAPL, DELL, EMC, GRMN, HPQ, HTCH, LOGI, RIMM, STX, SYNA, UEIC, and WDC. Our semiconductor model portfolio consists of: AMAT, ARMHY, BRCM, CREE, CY, IVAC, KLAC, LLTC, INTC, MPWR, MSCC, MRVL, MXIM, NVLS, QCOM, SNDK, TSRA, and TXN. We believe these baskets of stocks represent the most compelling companies in their respective sub-sectors and they should outperform the broader technology market (NASDAQ) as well as the sector specific indices (HWI and SOX) over time. A few of the disruptive themes we will be exploring include the emerging digital home and both the continuing advancement curve of semiconductor and magnetic storage technologies and their enabling of new hardware/devices that should change many traditional paradigms. Within an investment context, we have looked at stocks that directly capitalize on the digital home and the disruptive elements behind it, but too many legacy cable MSOs/satellite providers emerge currently-of which some could even be shorts if the Internet + wireless emerges as the main future distribution pipe-so for now we would focus on NNDS and UEIC as two of the best 'pure play' vehicles to invest in these trends. Lastly, we have screened a myriad of companies in our broader hardware and semi universe, and limited digital home players, and our conclusion on what looks most compelling at present based upon those screens are IVAC, NVLS, SANM, KLIC, NNDS, and DISH (see Part 4 for screens and discussion). Contact Us for Full Report - PDF

06.29.07 

SEAGATE AND HITACHI DRIVE KOMAG INTO WD'S ARMS; GOOD DEAL FOR WD AND THE INDUSTRY
Western Digital ('WD', WDC: Hold) announced its plans to acquire Komag (KOMG: Hold) for approximately $1B, or $32.25 per share in a cash deal that values Komag at approximately 1x revenues, and at a 9% premium to its closing price. Komag also announced its second negative shortfall for the current June quarter in a separate release, saying it expects quarterly revenue to be down at least 30 percent from the first quarter to $185M or less. We believe this deal makes tremendous sense for WD and that Komag is selling at a fire-sale price. We also believe that the internal media production ramps from both Seagate (STX: Hold) and Hitachi forced Komag into this sale, as the outlook remains bleak, in our view. We think that Komag investors will be disappointed at the low valuation for the intrinsic worth of the company, given its recent investments in capacity and PMR technology, but think the deal will likely get pushed through given the Board support and cash tender offer structure with no shareholder vote. WD is getting vertical integration in media, which it believes will give it a longer-term 250bp boost to gross margins and a 100bp boost to net margins after the initial dilution, which is expected to last through FQ4:09. This is a significant transaction for WD to swallow, especially if Seagate and Hitachi walk away from both the media and substrate agreements in place with Komag. WD is modeling for this to happen and is guiding to a $25-30M/quarter hit to gross margins for the three quarters after the deal closes if it is faced with underutilized capacity. WD is also guiding to a $60-80M/quarter increase in operating expenses, $20-30M of which will be the amortization of intangibles, $20M increased R&D spend on media, and a $20-30M overall increase in SG&A (described as transitional costs) as the balance. Additionally, WD plans a normalized 70-80% internal media range over time and still plans to buy media from the merchant market (e.g. Showa Denko, mainly). Contact Us for Full Report - PDF

06.19.07 

HDD INDUSTRY: TAKEAWAYS FROM MEETINGS WITH WESTERN DIGITAL, SEAGATE, AND HITACHI; PRICING TRENDS STILL TOUGH
We recently met with senior management at Seagate (STX: Hold) and Western Digital (WDC: Hold), and marketing/communications representatives from Hitachi Global Storage Technologies (HGST). We believe that pricing trends remain aggressive in 2.5' drives and high-capacity desktop drives, with much of the outcome of the June quarter to be determined in the final week of June. Looking past June, we believe investor concerns remain about pricing levels entering the seasonally stronger period for unit demand; for example, if pricing in 2.5' notebooks enters Q3 at such depressed levels, it will likely take some of the expected profitability out of the industry and its participants in the H2. Beyond near-term pricing concerns, we also got an update on Hybrid HDD strategy/philosophy, component environment updates, and strategic comments from WD and Seagate that investors should find interesting. Contact Us for Full Report - PDF

05.24.07 

HDD INDUSTRY: DATAPOINTS AND UPDATE ON QUARTERLY TRENDS
Seagate (STX: Hold) and Western Digital (WDC: Hold) both presented at a competitor's conference this week and offered an updated outlook on their business and industry trends. The June quarter in terms of pricing and units appears to be tracking in line essentially, but will largely depend on June to be able to meet already lowered guidance from both companies post the March quarter results. Also notable, Western Digital filed an 8-K this week with an updated capex plan for future head investments (additional $400M over the next 3 years at $200M/$100M/$100M planned annual increments) and announced a new industry leading capacity 2.5' 250GB drive which is now shipping. Additionally, we have done a round of pricing checks ourselves, which show continued aggressive double-digit pricing declines in 2.5' drives and evidence of some greater discounting at retail for Seagate particularly. Although trading at near trough valuations, we would not buy either shares for the anticipated traditional H2 seasonal improvement in units and margins until there is evidence that price declines have moderated and PC desktop demand is improving, allowing for actual unit, margin, and profitability acceleration in H2. Contact Us for Full Report - PDF

01.22.07 

HDD INDUSTRY: EARNINGS PREVIEW AND THOUGHTS ON Q1 AND 2007
We are previewing our expectations for the HDD industry players we cover and offering some thoughts on guidance ahead of expected earnings reports this week from Seagate (STX: Buy), Western Digital (WDC: Buy), Hutchinson Technology (HTCH: Sell), and possibly Komag (KOMG: Hold). Contact Us for Full Report - PDF

01.11.07 

OBSERVATIONS FROM CES SUPPORT BULLISH SECULAR THESIS ON HDD INDUSTRY; STX IS OUR FAVORITE NAME IN THE GROUP
We have attended the Consumer Electronics Conference (CES) in Las Vegas during the past two days and want to share some observations that support our bullish secular thesis on storage and on the HDD industry specifically. Additionally, we had a chance to spend some time speaking to management at Seagate (STX: Buy), and remain very bullish about the opportunities ahead for the Company. We are impressed with the new branding strategy of the Maxtor and Seagate retail products and continue to think there is a good opportunity for Seagate to expand and profit from the growing direct segment. Contact Us for Full Report - PDF