An Old Tech Lion Roars Back
Disk-drive maker Seagate Technology is making money hand over fist. But how long can it keep it up?
Severe monsoons in Thailand set the stock of disk-drive maker Seagate Technology (symbol STX) adrift last year, as the company’s suppliers were literally swamped with floodwater and unable to produce the components necessary to fill Seagate’s orders. But Seagate has been cruising lately, thanks to industry consolidation and pent-up demand for its disk drives.
Its stock has tracked the improved outlook. The shares, which fell to about $9.50 last October, now trade at $30 (prices and related data are as of May 4). But analysts say the stock is still cheap and could rise another 30% over the next 12 months. “You have this perfect situation in the company’s favor right now,” says analyst Shebly Seyrafi, of FBN Securities, a New York City–based brokerage firm. “The stock is very attractive at these prices.”
Seagate’s profits are soaring. The Cupertino, Cal., company said that it earned $2.48 per share, or $1.1 billion, in the quarter that ended March 31, up tenfold from the same period a year earlier. On average, analysts see Seagate earning $7.11 per share in the fiscal year that ends June 2012 and $9.42 in the June 2013 year. Based on the latter figure, the stock trades at a ludicrously low 3.2 times earnings.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But few think Seagate, which was founded in 1979, can maintain this blistering growth rate. In fact, analysts believe earnings will sag in the June 2014 fiscal year and therefore are setting modest price targets. One concern is that the past two years’ growth was skewed by one-time factors. The temporary shortage of disk drives caused by the flood not only fueled this year’s sales but also pushed up prices in an industry that is frequently beset by price wars. Seagate’s purchase of Samsung’s hard-drive business last December, for $1.4 billion, also helped fuel profits.
Seagate also faces some long-term challenges. Disk drives for personal computers account for about 75% of its sales. But experts expect the PC business to slowly fade as smart phones and tablets become increasingly sophisticated. Fortunately for Seagate, it has only three remaining competitors, and few want to enter a capital-intensive business that’s already on life support. That may discourage the price-cutting that has hindered profits in the past, says analyst Rajesh Ghai, of ThinkEquity, a San Francisco investment-banking firm.
Seagate also has a toehold in the superhot cloud computing business. The “cloud”—touted as a heavenly way to store data that lets you access it wherever you go—is actually made up of a series of earthly data centers, some of which use Seagate drives. Seagate derives only a small portion of revenues from drives used in cloud computing, but it has been devoting more resources to this area and to developing data-storage products for the fast-growing tablet and smart-phone markets. Analysts aren’t sure whether Seagate will succeed in its cloud ventures, so they are cautious with their long-term profit growth estimates.
Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter. Or email her at practicalinvesting@kiplinger.com.
Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Download the premier issue for free.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Why Tesla Stock Is Soaring After a Q1 Earnings Miss
Tesla came up short of analysts' expectations for its first quarter, yet its stock is roaring higher today. Here's why.
By Joey Solitro Published
-
Eight Easy Ways to Save Money Without Compromising Your Lifestyle
Saving money can be as simple as a quick phone call.
By Kiplinger Advisor Collective Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published
-
Stock Market Today: Stocks Stabilize After Powell's Rate-Cut Warning
The main indexes temporarily tumbled after Fed Chair Powell said interest rates could stay higher for longer.
By Karee Venema Published
-
Stock Market Today: Stocks Reverse Lower as Treasury Yields Spike
A good-news-is-bad-news retail sales report lowered rate-cut expectations and caused government bond yields to surge.
By Karee Venema Last updated
-
Stock Market Today: Nasdaq Leads as Magnificent 7 Stocks Rise
Strength in several mega-cap tech and communication services stocks kept the main indexes higher Thursday.
By Karee Venema Published