Is Seagate’s Stock a Buy Now?

With shares of Seagate Technology Public Limited Company (NASDAQ:STX) trading at around $35.85, 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

Seagate Technology. Stock Chart - STX Interactive Chart - Yahoo! Finance

Seagate’s stock dropped around 5 percent last night, which was mostly due to rising costs and poor guidance. In regards to guidance, Q3 revenue is expected to be between $3.25 and $3.45 billion. The street consensus was for $3.48 billion. As far as reported Q2 earnings are concerned, the results were a little better than expected. Q2 EPS came in at $1.30 versus an expectation of $1.28. Revenue came in at $3.7 billion versus an expectation of $3.5 billion. Seagate shipped 58 million disk drive units. As we all know, Wall Street isn’t about “What have you done for me lately?” but “What will you do for me in the near future?”

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CEO Steve Luczo stated that the company will manage business conservatively based on demand. In other words, demand is subpar at the moment. He also stated that the company will focus on profitability. A CEO making this statement is no different than the average working individual stating that he will put pants on in the morning. So, that statement is a non-factor. A final note related to Mr. Luczo’s statements is that Seagate will effectively invest for market leadership in storage for mobility, cloud, and open source.

In related news, Seagate is investing $40 million into Virident, a storage class memory specialist company. This will allow Seagate to offer a complete line of flash-based products to OEM & distribution partners. The risk/reward ratio on this deal is good.

Let’s take a look at some important numbers for Seagate before forming an opinion on the potential direction of the stock price…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Seagate is normal, but it’s weak compared to competitors SanDisk Corp. (NASDAQ:SNDK) and Western Digital Corporation (NYSE:WDC).

Debt-To-Equity

Cash

Long-Term Debt

STX

0.81

$2.47 Billion

$2.87 Billion

SNDK

0.23

$2.88 Billion

$1.70 Billion

WDC

0.26

$3.82 Billion

$2.13 Billion

 

T = Technicals on the Stock Chart Are Mixed

Seagate has been a top performer over the past three years, but when a company reports weak demand and rising costs, it’s definitely possible for trends to reverse, and in short order.

1 Month

Year-To-Date

1 Year

3 Year

STX

22.40%

20.51%

85.90%

117.80%

SNDK

16.00%

13.82%

6.02%

72.03%

WDC

17.68%

14.83%

33.40%

25.19%

 

At $35.85, Seagate is currently trading above all its averages.         

50-Day SMA

29.87

100-Day SMA

29.81

200-Day SMA

28.97

 

E = Earnings Have Been Steady

Earnings have improved considerably since the financial crisis. 2012 was much stronger than 2011 in regards to earnings as well as revenue. Based on the company’s predictions, it looks like 2013 might look more like 2011 than 2012.   

2008

2009

2010

2011

2012

Revenue ($)in billions

12.71

9.81

11.40

10.97

14.94

Diluted EPS ($)

2.34

-6.40

3.14

1.09

6.49

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

2.81

3.20

4.45

4.48

3.73

Diluted EPS ($)

0.32

1.28

2.48

2.41

1.42

 

T = Trends Does Not Support the Industry

Customer demand forecasting has been deemed challenging. In some cases, determining a trend is this simple. Current trends do not support the industry.

Conclusion

Seagate does have several positives, which include very strong margins, an ROE of 110.87 percent, a yield of 4.10 percent, over $4 billion in operating cash flow, good valuation with a Forward P/E of just 6.68, and steady profitability. On the other hand, there are several negatives as well, which include weak demand, costs rising faster than revenue, and heavy insider selling over the past six months. In addition to that, there are many analysts on the Sell side, and the short position is over 12 percent. These aren’t necessarily negatives for the company, but they do indicate a lack of confidence in the future performance of the stock.

Seagate is a solid company that should eventually make its way through this rough patch. However, for now, it’s a WAIT AND SEE.

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