Novice Investing - Gate of Opportunity at Seagate?

By: Hari Wibowo
Industry Background
Seagate Technology (STX) is in the business of manufacturing, designing and marketing hard drives and other storages devices according to Yahoo! Finance. The products can be found at desktop personal computers (PCs), servers, network-attached storage (NAS) devices, video game consoles, digital video recording devices and satellite and cable set-top boxes. Competitors include Western Digital Corporation (WDC) and flash memory industries such as Samsung and Sandisk Corporation (SNDK)

Shares of Seagate and its competitors are being hammered due to competition fear from flash memory industries. A year ago, we covered Western Digital Corporation (WDC) as potential investment. At the time, share price were being hammered due to weaker demand. I believe the demand for storage is strong. However, flash memory is now threatening the hard disk industry. Being the leader in the hard drive industry, Seagate has seen its stock price fall 40% from its 52 week high. Has it fallen low enough to attract us to invest in Seagate? We shall see.

Quarterly Current ratio that is greater than one and is stable or rising.

STX	Sep 05	July 05	Apr 05	Dec 04
Current Ratio	2.18	1.97	2.02	2.02

Quarterly current ratio is stable at Seagate over the last four quarters. Analyzing the yearly trend gives similar result. The company would have enough liquidity for at least a year. Prodding out the balance sheet, as of Sep 05, Seagate had a $736 M of long term debt compared to the cash balance of $ 1.79 B. At this point of time, It is fairly safe to assume that risk of bankruptcy at Seagate is minimal.

Fair value of the stock is 3% above current free risk interest rate (10 yr bond)
As of 11/04 2005, 10 yr bond yields 4.66%. The stock needs to yield 7.6% to give it a fair value. P/E value for Seagate is therefore13.2. EPS for Seagate for fiscal year '06 is predicted to be $ 1.34. For more details about EPS calculation, please go here. The fair value for Seagate's business (real price) is therefore $ 17.69. Meanwhile, Cash per share for Seagate is $ 3.73/share and Long Term Debt per share = $ 1.53/share. Real price = stock price - (cash+ short-term investment)+ long-term debt. Stock price = $ 17.69+ $ 3.73 - $ 1.53 = $ 19.89/share.

50% potential stock price appreciation within a year.
Current price for Seagate Technology is $ 15.57/share. With fair value of $ 19.89/share, Seagate does not give us 50% potential price appreciation. However at a price of $ 13.26/share, it represents a 50% potential stock appreciation.

Conclusion
For now, I believe that it is prudent to be patient and wait until Seagate sells at $ 13.26/share. Once it reach that price, the portfolio should consider buying Seagate. Until then, we will wait for the right price while looking at further development at the company.

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 other securities.