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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


January 8th 2010 Seagate
NYSE Symbol: STX
Industry: disk drives
Price as of 1/8: $17.89

It's the start of a New Year and so far so good. Next week is the start of the fourth quarter earnings season. The financials have started the new year with renewed vigor. The retail sector is also acting better thanks to solid December sales numbers reported this past week. The commodities are running once again. The techs are going to have a banner year in terms of sales and earnings, but so far the new year has brought selling pressure. This week we'll feature the largest disk drive maker, Seagate. Back in the 1990s the disk drive makers were the momentum stocks, but then went through a rough pact following the tech bubble. Now the industry seems to be much more stable with solid prospects for 2010 thanks to Windows 7 and the much anticipated PC update cycle that should accelerate through 2010.
Seagate will report earnings in two weeks so many investors may want to wait until the numbers are out, but last quarter Seagate reported earnings of $179 million, or 35 cents per share, compared with $57 million, or 12 cents per share, in the same quarter a year earlier. Earnings included a $120 million in restructuring charges, asset write-downs and amortization of intangible assets. In the third quarter, Seagate shipped 46.3 million disk drive units and the gross margins improved to 24.5%. During the quarter, Seagate took advantage of the low interest rates and reduced their short-term borrowing and long-term debt by approximately $465 million.
Heading into the new year, analysts have been nudging up earnings estimates for Seagate. The analyst at Brean Murray upped his numbers twice in as many weeks for Seagate and Western Digital. Their new price target for Seagate is $25. In last week of December, the analyst at Broadpoint AmTech upgraded Seagate to $22 from $20. AmTech believes the firmness in pricing is being driven by historically low inventory levels in the supply chain and strong bargaining power by the manufacturers as customers try to rebuild inventory. On December 21st, Baird upgraded Seagate Tech to outperform from Neutral and raises their target to $25. Baird expects IT hardware spend to accelerate throughout 2010 with enterprise storage a key category of strength. Inventory also remains low.
Seagate is not a conservative investment due to the volatile nature of their earnings, but the good news is the stock is trading for a low valuation. Currently, Seagate is trading for 8 times earnings and 7 times next years earnings. The stock also trades for less than one times sales. Seagate is not a conservative investment or a dividend play, but the stock does have good growth potential due to the coming tech boom.