Is Seagate a Sensible Investment?

With shares of Seagate Technology Public Limited Company (NASDAQ:STX) trading at around $36.84, is STX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

There’s a lot of bullishness sentiment ahead of earnings. While it’s definitely possible that all these optimists are correct, it’s a bit frightening. However, it doesn’t matter. The reason it doesn’t matter will be explained in the Trends section. For now, here’s a quick look at positives and negatives for the company.

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Positives:

  • 4.20 percent yield (higher than peers)
  • Beat expectations last quarter
  • Strong cash flow
  • Margins still strong despite recent contractions
  • Dominant HDD position
  • Strong storage demand from enterprises

Negatives:

  • Analysts don’t favor the stock: 3 Buy, 18 Hold, 4 Sell
  • Average selling price declines
  • Subpar debt management
  • Slowdown in desktop and notebook computers

The chart below compares fundamentals for Seagate, SanDisk (NASDAQ:SNDK), and Western Digital Corporation (NYSE:WDC). Seagate has a market cap of $13.17 billion, SanDisk has a market cap of $12.72 billion, and Western Digital has a market cap of $13.21 billion.

STX

SNDK

WDC

Trailing   P/E

4.76

27.31

6.97

Forward   P/E

6.70

11.13

6.98

Profit   Margin

19.80%

9.05%

12.15%

ROE

101.19%

6.54%

25.13%

Operating   Cash Flow

$4.36 Billion

 $936.33 Million

  $3.56   Billion

Dividend   Yield

4.20%

N/A

1.90%

Short   Position

8.40%

N/A

2.80%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Seagate is weaker than the industry average of 0.20.

Debt-To-Equity

Cash

Long-Term Debt

STX

0.96

$1.87 Billion

$2.82 Billion

SNDK

0.24

$3.31 Billion

$1.72 Billion

WDC

0.24

$4.06 Billion

$2.01 Billion

 

T = Technicals Are Strong   

Seagate has outperformed its peers over a three-year time frame. This is in addition to offering the highest yield.

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1 Month

Year-To-Date

1 Year

3 Year

STX

0.37%

20.61%

29.39%

109.10%

SNDK

-4.60%

20.53%

39.52%

24.77%

WDC

9.92%

30.79%

48.41%

31.13%

 

At $36.84, Seagate is trading above all its averages.

50-Day   SMA

34.64

100-Day   SMA

33.49

200-Day   SMA

31.57

 

E = Earnings Have Been Inconsistent               

Seagate’s annual earnings have been up and down over the past several years. Revenue has been just as inconsistent.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

12.71

9.81

11.40

10.97

14.94

Diluted   EPS ($)

2.36

-6.40

3.14

1.09

6.49

 

When we look at the previous quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings both declined on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

3.20

4.45

4.48

3.73

3.67

Diluted   EPS ($)

1.28

2.48

2.36

1.42

1.30

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The good news is that there has been increased usage in digital content. The bad news is that the U.S. consumer is weak and there has been slowing demand in emerging markets. However, the scariest factor, and the reason earnings don’t matter, goes deeper.

Some people believe in the current stock market rally while others feel it’s unsustainable. While the rally has potential to continue, it would be difficult to make a solid argument that it’s sustainable. Taxes have increased, employment is weak, and deleveraging is imminent. Many companies throughout the broader market are improving earnings by cutting costs. They’re not growing. The big problem here is the first thing they cut is employees. If that’s the case, then employment weakens further, which then leads to a reduction in consumer spending.

Once again, the market has the potential to continue its momentum as long as Ben continues to be as creative as Oscar Wilde. However, if the market begins to unwind, then this industry, and Seagate in particular, is a dangerous place to be. There is no resiliency. For example, on Jan 2, 2008, Seagate’s adjusted close was $17.89. On December 1, 2008, Seagate’s adjusted close was $3.78. Those who bought at or near such levels made a bold and superb move. Though there is still room to the upside, greed can lead to trouble.

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Conclusion

Seagate is a good company. On a company-specific basis, it simply needs to catch up a little on the technological end. Seagate is likely to figure out solutions if it finds itself behind the pack. The real concern is the industry’s extreme sensitivity to a steep market correction. Since capital preservation is always the priority here, Seagate is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.