Novice Investing - The Soft Side of Hard Drive

Date: Monday 01st 2008f December 2008 04:37:35 PM

The Soft Side of Hard Drive - 10/19/2005

By: Novice Investing Staff

Hard drive disk maker, Seagate Technology (STX), gave disappointing guidance for the 2nd quarter of 2006 which will end on December 2005. It now expects to earn between 44-48 cents per share of EPS versus analyst's mean expectation of 55 cents.

While things look bad, it is a good time to look at the sector right now since the their stock price has fallen quite a bit. For example, Seagate Technology is trading at forward P/E of 7.5 at current price. Add in $ 1 Billion ($ 2.30 per share) of net cash from its balance sheet, Seagate is a lot cheaper than a 7.5 forward P/E.

Other competitors also trade at a cheap valuation including Western Digital Corporation (WDC) with forward P/E of 9 and $2.65 net cash on its balance sheet. The one that investors should avoid is Maxtor Corp (MXO) which has difficulty of making any profits despite the high demand of storage.

Given the expected $ 1.97 EPS for fiscal year 2006, Seagate certainly can give a potential return of 50%. However, they guide 7-10 cents lower for the 2nd quarter and probably it might earn lower for the rest of 2006 too. Looking at the trend of guiding down 10 cents per quarter, it is possible that STX can only earn $ 1.40- $ 1.50 for all of 2006. This is what they earn on fiscal year ending on June 2005. Given this new information, STX is still undervalued but not as much as one might think. Furthermore, the rise of flash memory as an alternative to hard drive, poses a risk to Seagate's product line.

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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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