Novice Investing - Driving Seagate Stock

Date: Monday 01st 2008f December 2008 05:38:47 PM

Driving Seagate Stock - 08/09/2006

By: Novice Investing Staff

The biggest US hard drive disk maker, Seagate Technology (STX) announced fourth quarter earning of $ 0.01 per share compared with 55 cents per share a year earlier. The fourth quarter result includes $ 146 Million charges related to the Maxtor purchase and $ 72 Million from Maxtor's operating losses. Excluding certain items, Seagate earned a profit of $ 241 Million or 49 cents per share.

For 2007 fiscal year (ending on June 2007), Seagate forecasts earning per share of $ 1.90 - $ 2.00 versus $ 2.14 per share estimate. We believe that the forecast is made based on its fourth quarter earning where average selling prices decline by 7 percent. Meanwhile, the need for digital storage will continue to increase as the world population embraces personal computers and the internet. At worst, even if the demand for digital storage increases by a mere 7 percent, Seagate can still post a flat revenue year over year.

There are also several other positives for the company. If it can integrate its Maxtor purchase efficiently, it will realize a sizable amount of cost savings. For example, Seagate plans to reduce about 6000 of its workforce, relating to the Maxtor's purchase. Assuming a conservative $ 3000 monthly salary, that reduction in work force will produce $ 21.6 Million in cost savings. Furthermore, we have discussed this back on December 2005 where if Seagate can bring its Maxtor product line's gross profit to 15% (From 10% prior to the acquisition), then it represents a $ 197 Million in additional profit. This assumption is reasonable considering that Seagate has achieved 20% gross margin consistently. Other integrations such as R&D deployment and supply chain efficiencies will wring out significant cost savings for the company. Back on December 2005, Seagate management predicted $ 300 Million in cost savings, which we believe is attainable.

In recent quarter, Seagate has around 500 Million shares outstanding. Assuming all $ 1.8 Billion of Maxtor purchase is financed with Seagate stocks, share counts will increase to 580 Million shares. That $ 300 Million in cost saving will be equal to 52 cents per share increase in additional earning despite the dilutive effect of the acquisition. In the past, Seagate

can earn roughly $ 700 Million before Maxtor's purchase. With Maxtor's acquisition, total earning will be roughly equal to $ 1.0 Billion or $ 1.72 per share. Therefore, Seagate's guidance of $ 1.90 - $ 2.00 for fiscal year 2007 has already incorporated this cost saving from Maxtor.

At around $ 20 per share, Seagate is almost fairly valued barring any significant changes in fundamental. Thus, we need to wait for better price entry for this investment to work.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Seagate Technology (STX) or any other securities.

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