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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

Seagate

November 10th 2015

Seagate
NYSE Symbol: STX
Industry: Disk Drives
Price as of 11/10: $36.54

 

October closed out up 8% and 9% respectively for the S&P 500 and the Dow Jones Industrial Average, the best month in four years. So far November has been just as kind. Money managers were afraid to be in the markets in September. Now they're afraid to be out of the markets. The markets are due for a mild pullback or even a sideways week or two, but the correction may be short lived since most money managers are praying for a pullback to get back in. Earnings season is coming to a close and while the earnings were not spectacular, they were better than feared. The healthcare sector looks to have lost their leadership role, but the techs look ready to take the baton. Income stocks or dividend paying stocks also look good. When corporations pay a dividend, management is working for their shareholders because the one thing CEOs don't want to do is cut their dividend. For example, in the oil patch plenty of oil companies right now are cutting costs and doing whatever it takes to preserve their dividend.  This week we'll highlight a cyclical tech stock in a downturn that just boosted their dividend lifting the yield above 6%. The stock of the week is Seagate. Seagate is a major storage provider in the form of disk and solid state drives along with Western Digital. Seagate's shares have declined over 40 percent since the beginning of the year, while the Standard & Poor's 500 index has risen over 1 percent. The fundamentals in the short term still look tough, but the dividend hike should provide hope to investors that management is doing what's best for company, maximizing shareholder value while waiting for the next business upswing. With a 6% dividend it won't take much in capital appreciation for a great total return.

Back in October, Seagate reported lackluster first quarter earnings. They reported 54 cents in earnings per share on sales of $2.90 billion which compares to consensus estimates from Thomson Reuters of 50 cents and $2.92 billion in revenue. The same period from the previous year Seagate earned $1.34 in earnings per share on revenue of $3.78 billion. During the quarter, Seagate completed its acquisition of Dot Hill Systems in an effort to expand its cloud business. Seagate also secured the Chinese government's approval to integrate Samsung Electronics' (SSNLF) hard disk drive business, which could significantly widen its sales coverage going forward. Looking ahead, management indicated they were focused on delivering storage solutions for a significant range of existing, growing and emerging areas, and believe they have the right strategy and portfolio to deliver value to shareholders.

In this quarter, Seagate paid cash dividends of $163 million and repurchased approximately 20 million ordinary shares for $983 million. As mentioned, the board approved a quarterly cash dividend of $0.63 per share, which will be payable on November 20 to shareholders of record as of the close of business on November 6. During the first quarter, the company generated approximately $824 million in operating cash flow. Cash, cash equivalents and short-term investments totaled approximately $1.9 billion at the end of the quarter.

With the fundamentals languishing, Seagate looks more like a value stock than a growth stock. The stock current trades for 12 times current estimates, 8 times next year's estimates and less than 1 times sales. Besides a cheap valuation, Seagate also sports one of the best dividend yields in the markets. The 6 plus dividend yield should limit any further downside. With over $1.9 billion in free cash flow, the company has enough cash to cover the $664 million in total payouts for the foreseeable future. This cushion should reward patient shareholders awaiting the next business upcycle.