07.16.08 

stx: JUNE IN LINE WITH SURPRISINGLY POOR MARGINS AHEAD DESPITE SEASONALLY STRONGER REVENUE AND EXPECTED DEMAND
Seagate reported a June quarter essentially in line with expectations and guided to much lower implied gross margins despite September revenue at or around expectations. We have updated our model to reflect our renewed assumptions, and management's guidance for September. Our target price of $38 remains unchanged, and reflects 13x our CY:09 EPS estimate. Contact Us for Full Report - PDF

04.16.08 

stx: EXITING MARCH, INDUSTRY SHOWING SIGNS OF CONCERN; SEAGATE IS STILL AT TROUGH FORWARD MULTIPLE DESPITE INCREASED RISK TO FORWARD FORECASTS
Seagate reported March quarter results of $3.1B in revenue and $0.70 in adjusted pro forma EPS, slightly below forecasted revenue, but within EPS guidance and $0.01 less than our forecast. Exiting the March quarter, Seagate (and the industry) experienced a slowdown in demand for 3.5' and some 2.5' products, resulting in some inventory build and presenting the typical cautious signs to us, ahead of likely large price declines in the following quarter and often the subsequent quarter as well. Inventory in the channel increased to 4 weeks for Seagate and approximately 6 weeks for the industry based on Seagate's vantage point. However, even with the initial signs of industry problems, Seagate's management did a very respectable job in March, in our opinion, by not competing on price at the end. Management has factored in a 7% like-for-like price decline along with an average 5% unit decline for June. We believe that although Seagate is not seeing any signs of an enterprise/corporate slowdown or reluctance, demand risk for PCs and consumer related storage is to the downside at this point, and June and beyond could ultimately prove to be too optimistic with Seagate currently planning for normal seasonal conditions heading into September and for only 5% unit declines for June. We are adjusting our target price to $38 (from $40), which is 14x our newly introduced CY:09 EPS. Currently, Seagate trades at 7.9x our CY:08 EPS estimate and 7.3x our CY:09 EPS estimate, having ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. Contact Us for Full Report - PDF

03.27.08 

stx: MODEL UPDATE POST POSITIVE PREANNOUNCEMENT
We have updated our model to reflect new capital structure assumptions post Seagate's recent positive preannouncement. We feel that fundamentals (e.g., gross margin and profitability) are only slightly better than the original guidance in CQ1, but most of our forward model changes come from updated buybacks completed so far, which affect CQ1 and CQ2 shares outstanding. Our target price moves from $36 to $40, which is 14x our updated CY:08 EPS ($2.88 versus $2.60 previously) estimate. Currently, Seagate trades at 7.6x our CY:08 EPS estimate and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. Contact Us for Full Report - PDF

01.18.08 

stx: CQ4 RESULTS AND DERIVATIVE IMPLICATIONS
Seagate's December quarter results last night of $3.42B in revenue and $0.82 pro forma EPS (w/o $0.05 restructuring charge), were roughly inline with our estimates of $3.45B and $0.74, with some upside coming from the higher 26% gross margin. The guidance for the March quarter is $3.2-3.3B and $0.62-0.66 pro forma EPS, versus our previous estimates of $3.35B and $0.62, respectively. The industry and the Company appear to have experienced a very strong quarter in terms of demand, with units industry-wide estimated up 9% q/q. Seagate's one major blemish, in our opinion, was a significant loss in mobile market share, which the Company took responsibility for, blaming strategic mis-planning during the March to June crunch last year. The Company stated that it expects to catch-up with eight OEMs qualified for the 2.5' 125GB/platter drive for March and following on to the 160GB/platter the following quarter to return to the industry's aerial density curve. We are maintaining our $36 price target, which is 14x our updated CY:08 EPS ($2.60 versus $2.44 previously) estimate. Currently, Seagate trades at 8.1x our CY:08 EPS estimate, and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. We believe that the Company is managing well and planning for any potential macro slowdown in demand, but with capacity tight, no slowdowns indicated from customers yet, and no increases in capex planned other than media and substrate programs already announced, we believe that Seagate is well positioned and at a low valuation relative to historical and forecasted earnings. As such, we believe that Seagate is a good value name in technology to own through this rocky market. Contact Us for Full Report - PDF

10.17.07 

stx: CQ3 RESULTS AND DERIVATIVE IMPLICATIONS
Seagate's September quarter results last night of $3.3B and $0.69 pro forma, by our calculation, were slightly higher versus the positive pre-announced range and our estimates of $3.2B and $0.64. The guidance for December quarter is $3.4-3.5B and $0.71-0.75 pro forma EPS, versus our previous estimates of $3.4B and $0.66. The industry and the Company appear to have experienced a very strong quarter in terms of demand, with units industry-wide estimated up 20% q/q. Seagate also initially appears to have taken some market share in the desktop and notebook categories as well. We are maintaining our $36 price target, which is 15x our updated C2008 EPS ($2.44 versus $2.40 previously) estimate. Currently Seagate trades at 11.0x our C2008 EPS estimate, and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. We are reiterating our Buy rating and believe that the shares will appreciate in the seasonally strong CQ4 period and in the current more favorable pricing environment than the past two quarters. Contact Us for Full Report - PDF

09.10.07 

stx: ESTABLISHING C2008 ESTIMATES AND REITERATING BUY RATING
We are updating our model post Seagate's analyst day last Friday to factor in the positive pre-announcement already made for the September quarter and are establishing estimates for C2008 as well. We are establishing C2008 estimates of $13.2B and $2.40 and are raising our F2008 (June FYE) estimates from $12.7B and $1.97 to $13.0B and $2.46. Additionally, we are raising our price target on the shares from $30 to $36, rolling forward our forward multiple of 15x on our new C2008 EPS estimate. Currently Seagate trades at only 10.5x our C2008 EPS estimate, and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. We are reiterating our Buy rating and believe that the shares will appreciate in the seasonally strong Q3 and Q4 periods and in the current more favorable pricing environment than the past two quarters. Contact Us for Full Report - PDF

07.20.07 

stx: UPGRADING TO BUY ON IMPROVING DEMAND AND H2 PROSPECTS; GROSS MARGINS AND PROFITABILITY HANGING IN DESPITE KNOWN AGGRESSIVE INDUSTRY PRICING
We are upgrading our rating on Seagate (STX) to Buy from Hold on an expected improving industry demand profile entering H2:07 and feel that Seagate can still make solid profits in a very aggressive industry pricing environment. We believe that Seagate should be able to maintain a 21.5-22.0% gross margin in the H2:07 even given the pricing environment and that it has set the bar sufficiently low with potential room to improve. We are encouraged by building PC demand worldwide on a host of notebook upgrades by every major PC OEM for the back-to-school and holiday season and at the opportunities to grow CE units the next two quarters as well. Seagate's June quarter results last night of $2.7B and $0.41 pro forma by our calculation (or $0.43 on a like-for-like basis with previous guidance) were slightly higher versus guidance and our estimates of $2.7B and $0.35. The Company is not giving FY:08 guidance due to the pricing environment but plans to offer more details on future financial metrics at its September analyst day. The guidance for September quarter is $2.9-3.0B and $0.40-0.44 pro forma EPS, versus our previous estimates of $2.9B and $0.44. We believe that the implied gross margins of 21.5-22% in September offer a reasonable level to assume for the next two quarters, with upside possible if unit demand accelerates enough to offset some of the ongoing aggressive pricing in 2.5' drives and in mid/high-capacity desktop drives. We are encouraged to hear that albeit early in CQ3, OEM notebook pricing shows modest signs of improvement and the June quarter exited with industry pricing less aggressive than earlier in the quarter in high-capacity desktop drives. Seagate currently trades at 12.2x our forward twelve month EPS estimate (FY:08) and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. We are establishing a price target of $30, which is 15x our updated FTM (FY:08) EPS estimate of $1.97. Contact Us for Full Report - PDF

07.12.07 

stx: Q2 EARNINGS PREVIEW AND THOUGHTS ON FY:08 GUIDANCE
Seagate kicks off earnings for our group and is scheduled to report its June quarter next Thursday July 19th after market close. We are estimating revenues and EPS of $2.7B and $0.35, which is roughly in line with consensus estimates of $2.69B and $0.36. With expectations low for any meaningful upside and possible downside in the June quarter due to continued aggressive industry pricing and seasonally slow PC demand, we believe that investors will remain focused on the outlook for FY:08 (June fiscal year), which Seagate is expected to give on its conference call in addition to the near-tem outlook for the September quarter. We believe that given the current pricing conditions in high capacity 3.5' drives and in 2.5' notebook drives, that it is unlikely that Seagate will be able to return to its previously stated goal of a 24-26% gross margin level. We are currently modeling blended gross margins of 22.5% for FY:08 and EPS of $1.96; consensus is $2.00, which likely assumes around a similar blended gross margin given how close the EPS is to our estimate. With evidence of an uptick in build rates already for PCs in mid-June and in July across the supply chain, Seagate and the industry should benefit from a better unit demand profile in CQ3 and CQ4, but we are still on the sidelines regarding the stock, and are maintaining our current Hold rating due to further potential downside risk to forward (FY:08) estimates and continued margin pressure from intense pricing competition. Seagate currently trades at 11.6x our forward twelve month estimate (FY:08) and has ranged from 7x to 43x forward earnings, with a mean of 15x and a median of 12x, over the past four years. Contact Us for Full Report - PDF

04.18.07 

stx: DOWNGRADING TO HOLD FROM BUY; EXTREMELY DISAPPOINTING GROSS MARGINS AND JUNE OUTLOOK; CONFIDENCE SHAKEN DUE TO C2007 GROSS MARGIN MODEL AND POOR CAPITAL MANAGEMENT
Seagate reported March quarter results last night of $2.8B and $0.47 with adjusted gross margins of 21.6% (backing out a $32M benefit from the elimination of the variable comp plan), in line with pre-announced revenue of $2.8B and a very large margin shortfall versus the previous 24-24.5% guidance. The new guidance for June is $2.65-2.75B and $0.34-0.38 pro forma EPS, versus our estimates of $2.74B and $0.48. The margin in the quarter and the outlook are a concern going forward to us. With pricing already very aggressive in 2.5' drives, Seagate believes the industry also experienced a 14%+ q/q decline in high-capacity 3.5' drives as well, versus a normal and expected 4-7% decline, mainly due to irrational pricing from a Japanese competitor(s) (we believe Hitachi), and most of which we believe occurred in late-March. Additionally, unit demand in 3.5' was softer overall, largely in part to the desktop PC market, specifically in US consumer. Seagate remains fundamentally undervalued in our opinion, but conditions in the industry are getting marginally worse, not better, in our view. We believe weakness/seasonality in US consumer PCs will continue into CQ2 and we are concerned that the 'new' ultra-aggressive pricing outside of just 2.5' drives may continue as well. Management appears to have lost confidence in the 24-26% margin goal, at least in the near-term, and we believe they have done a poor job of capital management as well-buying back so many shares at much higher levels-they now sound apprehensive about continuing to deploy the $1.175B still available, even at these levels. We are downgrading our rating on the shares to Hold from Buy, and need to see positive catalysts in terms of stronger than seasonal CQ3, CQ4 PC demand, a stronger enterprise demand picture, or aggressive pricing abating in either 3.5' or 2.5' drives before we would recommend investors buy the shares, after the very quick turn of conditions in the industry becoming increasingly visible to us in the past 4-5 weeks. Contact Us for Full Report - PDF

04.10.07 

stx: PRE-ANNOUNCES CQ1 REVENUE AND MARGIN SHORTFALL CITING WEAKNESS IN DESKTOP DEMAND AND PRICING
Last night Seagate pre-announced a revenue and margin shortfall for the March quarter compared to previous guidance. The Company cited 'lower than expected industry demand for 3.5-inch ATA disc drives and a more aggressive than planned pricing environment for high capacity 3.5-inch ATA disc drives,' which became evident towards the end of March. The new revenue guidance is $2.8B versus a previous $2.9B-3.0B, and for margins to be lower than the previous 24-24.5% guidance. Seagate also stated that it believes that inventories remain under five weeks in the distribution channel and that it has held its market share constant from last quarter. Seagate will report its results on Tuesday April 17, 2007. The weaker demand cited for desktop drives (we believe very soft CQ1 PC sales) will likely not come as a surprise to most investors, but our checks throughout the quarter indicate a much more aggressive pricing environment in 2.5' notebook drives. It is possible that during the last two weeks of March weak demand led to a flush out of inventory, thus affecting desktop pricing adversely, but we believe that notebook pricing (not cited in the pre-announcement) was much more of an important factor in CQ1. Looking forward we are reducing our forecast for CQ1 as per the updated guidance and are taking a more conservative approach to CQ2 given the trends in weak/seasonal PC sales with no meaningful Vista impact evident yet, and continued aggressive pricing expected in 2.5' drives. Seagate remains very undervalued, in our opinion, even after adjusting assumptions leading to marginally lower forecast estimates. We are maintaining our Buy rating on the shares, and will continue to search for positive catalysts in what is expected to be a seasonal CQ2. We don't expect Seagate's multiple to revert back to the four year median of 15x forward EPS until specific catalysts can be identified to get investors excited again about aggressively buying shares, despite a very attractive valuation. Our price target is now $33 (down from $36), which is 15x our updated C2007 EPS estimate of $2.22 (down from $2.41). Contact Us for Full Report - PDF

03.08.07 

stx: RECENT SELLOFF ON 1.8' DRIVE FEARS IS OVERBLOWN; REITERATING BUY RATING AND $36 PRICE TARGET
Seagate recently presented at two investor conferences and gave some more incremental color on the planned ramp of its new 1.8' drive. We believe market concerns over the fate of the 1.8' Seagate drive and its impact to revenues/EPS are overblown and we would be buying STX aggressively on the weakness at current levels. The market took off approximately $1B of market cap last Friday alone, as investors likely quickly assumed that not only will Apple likely not choose Seagate as a new dual supplier in future high-end iPods (they are not in now and have nothing assumed in guidance), but that HDDs in all portable handhelds will be eliminated very quickly. We believe that the precipitous drop in NAND pricing in 2007 will accelerate or 'pull in' the expected transition/migration of Flash based MP3 players and other consumer electronic devices but it will not kill the 1.8' category for HDD-based devices. From our perspective, we expect a Flash-based 16GB MP3 player to be a viable product for someone like Apple to introduce this year. Our semiconductor analyst Daniel Amir estimates the approximate cost of a 16GB solution at $2.5/GB or ~$40, or even slightly less. The 1.8' drive from Seagate, we estimate to cost approximately $0.8/GB at 30GB, or approximately $1/GB at 60GB. It is clear to us that HDDs have a cost/GB advantage and that the migration to 100% Flash will take time. We do expect to see Flash-based 16GB MP3 players this year, likely moving to 32GB by the end of 2008. We also expect video applications in high-end handheld devices to demand >60GB of storage, so we continue to expect at least one HDD-based model at Apple for the foreseeable future. Seagate has recently stated that it expects a slow ramp of the new 1.8' product this year and that it should only represent ~3-4% of revenues in the December 2007 quarter. We estimate that this means approximately 2.5-3M drives in CQ4 and therefore conclude that investors have assumed no new program at Apple. We believe investors should be buying STX on the large pullback, because the 1.8' drive is a small program for Seagate, it is not dead-on-arrival even without Apple (which could still happen), and the 'pull-in' of NAND-based devices will not affect our estimates. We remain comfortable with our revenue and earnings forecast, the current progression of pricing and mix in the quarter, and we believe valuation at 10.2x C2007E EPS is compelling, with a double-digit revenue growth forecast this year, and are reiterating our Buy rating on the shares and our $36 price target, which is 15x our C2007 EPS estimate of $2.41. Contact Us for Full Report - PDF

01.24.07 

stx: SOLID QUARTER; ESTIMATES INCREASING LARGELY ON BUYBACKS
Seagate reported December quarter results of $3.0B and $0.39 pro forma EPS, compared to our estimates of $2.9B and $0.31 pro forma EPS. The upside in CQ4 came from strong 7.3% sequential revenue growth, slightly better gross margins, which we are pleased to see, and lower SG&A expense versus our forecast. Better than expected desktop pricing appears to be the main driver of upside, in addition to strong CQ4 seasonal demand in general. Looking ahead, the Company is guiding for a fast ramp to better gross margins in CQ1 and CQ2 of 24.5% and 25%+ now that Maxtor's drag is gone with manufacturing fully transitioned to Seagate's lines in December. We calculated that inventory levels also improved to an estimated 32.4 days outstanding after hitting a recent high of 36.1 days in September. We believe valuation at 11x C2007E EPS is compelling with a double-digit revenue growth forecast this year, and a massive share buyback program in place, and are reiterating our Buy rating on the shares and are revising our price target to $36 (from $37), which is 15x our updated C2007 EPS estimate of $2.41. Contact Us for Full Report - PDF

12.18.06 

stx: DRIVING AHEAD; INITIATING COVERAGE WITH A BUY RATING
We are initiating coverage of hard disk drive manufacturer, Seagate Technology, with a Buy rating and $37 price target. The integration of Maxtor is nearly complete and margins are expected to rise. Aggressive OEM pricing and ample supply are well known. We believe valuation at 11.5x C2007E EPS is compelling with a double-digit revenue growth forecast next year, and a massive share buyback program in place. Contact Us for Full Report - PDF