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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


October 26th 2014 Seagate
NYSE Symbol: STX
Industry: Disk Drives
Price as of 10/24: $58.36

It's been a whirlwind two weeks with the major averages dropping 8% only to roar back with a 6.7% gain of which 4% came this week, the best week for the S&P 500 in two years. Such a sharp rebound portends to more volatility in the coming weeks. October after all is the most volatile month of the year. And while the markets may pull back in the coming weeks, the selloff should be used as a buying opportunity for a more than likely year-end rally. October has been a crazy month. Weakening global economies and the strong dollar has caused oil and other dollar denominated commodities to take a sharp hit. Interest rates have also plummeted as it looks like many hedge funds got caught on the wrong side of the commodity and bond trade. But the past weeks' earnings reports have shown that our corporations remain in strong footing with great balance sheets and solid growth prospects. The reduced fear of ebola and lower gas prices have sent the airline stocks like American Airlines soaring. Transports in generate continue to perform well which is a good sign for the markets an our economy. Strong cash flow and strong balance sheets have allowed companies to continue to hike their dividends and buy back the stock. This week we'll highlight a tech company that hiked their dividend 26% last week. The stock of the week is Seagate Technology. The disk drive maker was a darling back in the 1990s along with Western Digital and other tech related companies like Micron. Back in the 1990s these company specific products were highly commoditized making for unstable earnings. Fast forward 20 years and the earnings have become much more stable hence the consistent dividend hikes, yet the valuations remain quite compelling trading for less than 10 times earnings. Seagate will report earnings tomorrow so cautious investors may want to see the earnings first, but longer term, Seagate is a great stock for investors looking for income (4% dividend) and growth at a reasonable price.
Seagate Technology and Western Digital, another great stock, own a majority of the disk drive space. Seagate owns 40% share of the hard disk drive market below Western Digital's share, but the company is poised for earnings growth in the coming year. In September Seagate raised guidance expecting to generate $100 million more in the September quarter than it originally estimated based on increasing demand across all of its segments. Besides raising their September-quarter guidance, they also highlighted $2 billion in additional opportunities in upcoming quarters. This past week the company raised their dividend dramatically. Part of the dividend will be paid from a victory in an $800 million lawsuit. But as the CEO mentioned, the increase in the dividend target reflects the continued strength of their business and operations, and their confidence in Seagate's ability to continue to generate sustainable operating cash flow and maintain a strong balance sheet.
Seagate's stock has been stuck in a tight range between $64 and $50 a share for the last year, but some analysts expect the stock to break out of the range in the next year. Jefferies recently upgraded the stock with a $70 price target expecting the company to benefit from robust storage growth in public and private clouds along with growth opportunities in flash-based storage via the company's recent acquisition of LSI's Flash/SSD assets from Avago . Benign industry dynamics should also lead to more constant and stable growth. Besides the growth prospects, the recent dividend hike has made Seagate a much more appealing investment to income oriented investors. A dividend yield 3.7% and a stock that trades for less than 10 times earnings should provide a floor under the stock while providing upside potential with improving fundamentals.