Seagate Turnaround Plan Is Already Succeeding

Seagate (STX) CEO Steve Luco's 2 million turnaround plan is already bearing fruit. Higher volume sales and cost controls has helped the disk drive maker earn at least 7% gross margins for the quarter, better than earlier estimates, according to the company's management. Cash increased $200 million to about $1.5 billion. Product development and marketing and administrative costs are expected to be $380 million, below the originally projected $395 million.

As a result, the company expects unit shipments in the quarter of 39 million, with a total market of 110 million to 112 million units. STX's unit demand for 2.5-inch and 3.5-inch ATA drives was better than planned; the company also said it gained significant share in those areas. That said, the company now expects to post revenue for its 3rd fiscal quarter ended April 3 of 2.1 billion-- which is ahead of its previous forecast of 1.6 billion to 2 billion.

On the other hand, the company said the market for enterprise class products fell about 20% sequentially. However, skeptics should realize that all major enterprise companies (EMC, NTAP, etc.) have all been hit by the economy. They all have announced bad numbers, layoffs, etc,. The only thing they did the last quarter was burn off inventory. Customers are not canceling orders, they are simply deferring their orders. Otherwise, there is a huge pent up demand for storage that will soon explode, and when it does, STX will be rewarded significantly. The scenario occurring right now is a pent up demand for capacity, not speed. Hence, customers are not clamoring for SSDs, they want capacity (hard drives).

Aside from improved fundamentals, the technical view is also bullish for STX. See the chart below. Short-term, intermediate-term, and long-term views all indicate a "buy". The 5.80 is a solid support level for STX. The shares have closed above the pivotal point of 6.85-- a very healthy sign. If we can breach through the resistance of 7.80 on heavy volume, more capital will flow into the stock.

Other bullish indicators are the following:

1. 20, 50, and 100 Moving Day Average versus Price.
2. 20-50 Oscillator Band, 20-100 Oscillator Band, 50-100 Oscillator Band
3. 20, 50, and 100 MACD Oscillator

Based on the above technical and quantitative indicators, I recommend the following strategy for new entries.

Assuming the shares open at 6.88 on Monday, the May strike 6 at 1.10/contract look attractive. If you write these calls against the underlying shares, you will be granted .43/contract. That is 430 dollars per 1000 underlying shares. The May strike 7 are also offering .50/contract, but only write those calls if you feel the overall market will continue to hold its rally. Otherwise, the strike 6 might be a better hedge.

Disclosure: The author owns STX in his portfolio.

Comments

[Tom Armistead:]

Agree selling calls is good here, I am long Jan 2.50 calls and short June 7.50 calls.

The prolieration of digital content will drive strong demand for storage capacity, bennefitting STX.

However, the company is coming off an extended period of mis-management which will act to limit profit potential.

Apr 20 09:10 AM

[Jack Haddad:]

Tom, if the shares dip below 6.00, I will accumulate more shares and wrote strike 5 calls. At current levels the strike does not contain much intrinsic value to make my holding worthwhile. Strike 6 is pretty attractive. I may even write that strike against shares at 6. "at the money" calls are pretty juicy in premium but of course offer less of a hedge.

On a side note, glad to have on board. I will be examining closely your holdings in th enext few days and come up with quantitative hedging techniques.


On Apr 20 09:10 AM Tom Armistead wrote:

> Agree selling calls is good here, I am long Jan 2.50 calls and short
> June 7.50 calls.
>
> The prolieration of digital content will drive strong demand for
> storage capacity, bennefitting STX.
>
> However, the company is coming off an extended period of mis-management
> which will act to limit profit potential.

Apr 20 05:24 PM