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Seagate: Driving Higher

One investment firm analyst says the Street is underestimating the earnings potential for this maker of hard disk drives.

Shares of Seagate Technologies (STX), a leading maker of hard-disk drives for PCs as well as consumer electronics, surged 5% on Friday following a bullish outlook from Goldman Sachs analyst Laura Conigliaro. She says the company's profits will likely be much stronger this year than the Street is expecting.

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Conigliaro upgraded the stock to "outperform" and now lists it as one of her top picks for the year (along with EMC Corp., Hewlett-Packard and IBM). What makes the stock appealing, she says in a research note, is that analysts are underestimating the company's potential, and the shares are trading at a compelling price. "We see the prospect of substantially rising earnings estimates as a powerful driver for Seagate's shares," she says.

Conigliaro thinks Seagate will be able to earn $2.05 per share in calendar 2006, compared with the consensus estimate of $1.80, according to Thomson First Call. And she says that even her estimate may be too low.

Conigliaro expects tech spending by both consumers and businesses to pick up a bit this year, which would benefit technology-hardware companies as a group. She expects Seagate will enjoy strong sales volumes, as well as stable pricing for its products. That's notable because tough competition continually puts pressure on disk-drive makers to sell their products cheap. Better pricing should lead to better margins, she says.

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Conigliaro notes that the company is broadening its offerings of disk drives for consumer electronics -- generally viewed as a promising area for growth. The firm's drives are included in everything from digital music players to video game consoles. She says notebooks and consumer electronics both "offer major share-gaining possibilities" for Seagate. And she says its desktop business should enjoy share gains or improved profitability as well.

Seagate announced in December that it plans to acquire disk-drive maker Maxtor Corp. Conigliaro says the company's post-merger forecast doesn't appear positive enough. She says that although combined company will likely lose some of its market share once the deal is completed, losses will be limited, considering Seagate's technology advantages and the fact that there aren't that many other companies to which customers can turn.

At $24, the stock trades at 13 times the consensus calendar 2006 earnings estimate. Conigliaro thinks the shares are worth $30.

--Lisa Dixon

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