Novice Investing - Storing Komag in Your Memory

Date: Monday 01st 2008f December 2008 05:36:39 PM

Storing Komag in Your Memory - 05/29/2007

By: Hari Wibowo

The quest to find undervalued investments bring us to Komag Inc. (KOMG), the manufacturer of thin-film media used in your hard disk. Komag's customers include Seagate Technology (STX), Western Digital (WDC) and Hitachi Global Storages. In fiscal year 2006, Komag added Samsung as a customer. With this addition, Komag claims itself as having nearly all aluminum market for thin-film media. With all these big customers, Komag's revenue is concentrated in a few companies. Seagate and Western Digital represents roughly 36% and 37% of revenue respectively. Meanwhile, Hitachi contributed to 23% of Komag's revenue.

You may be wondering what a thin-film media is. In brief, this is a thin layer of magnetic material applied to the surface of your hard disk. These applications can be used for disk drives in your PC, notebook, servers and communication infrastructures. As the world becomes digitized, the demand for storage will increase modestly.

Looking at analysts' estimate, it is tempting to add Komag to your portfolio. Analysts expect Komag to earn $ 3.10 per share for 2007. While it is down from $ 4.91 per share in the past twelve months, Komag stock is trading at around $ 23 per share! Coupled with positive net cash of $ 89.5 Million (or $ 3.23 per share), Komag is poised to move higher.

As mentioned above, 96% of Komag's revenue came from three hard disk drives companies. They compete with flash disk manufacturers among others for market share of storage applications. Currently, Seagate and Western Digital seems to be struggling on their end, which contributed to Komag's woes as well. In addition, these customers had started to produce thin film media that Komag supplied, which is not a good sign. All that doesn't leave Komag without any bullets. Komag does have several competitive advantage in the field which includes close proximity to its customers' manufacturing location and its own low cost manufacturing site in Malaysia. It has moved its manufacturing base completely to Malaysia since 2001. Over 90% of Komag's employees are now based in Malaysia while the rest is located in the R&D operations in the US.

Komag's goal is to help its customers compete better than its competitors, flash disk drive manufacturers. For that reason, Komag needs to develop technology to increase storage size, without increasing the actual size of the hard disk itself, while lowering cost per unit storage. For that reason, Komag has introduced Perpendicular Magnetic Recording (PMR) in 2006. While PMR currently increases cost for the cost-sensitive PC industry, it is starting to be used in the enterprise storage market where the demand for storage is insatiable.

That is a brief introduction of Komag. You could actually read it from its 2006 annual report here. Next time, we will construct a pro forma income statement for Komag to determine its investment prospects.

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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 Komag Inc. (KOMG) or any other securities.

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