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Summary

  • Although STX's stock price has gained an astounding 262.8% since the beginning of 2012, it still has plenty of room to move up.
  • STX's stock is ranked second among all S&P 500 stocks, according to Portfolio123's "ValueSheet" powerful ranking system.
  • Seagate returned $2.5 billion to shareholders in the form of dividends and share redemptions in fiscal year 2014.

Although Seagate Technology (NASDAQ:STX) reported on July 17 results that were in line with expectations, its stock dropped 2.97% in the next trading day. The decline in the stock price came out even though on a conference call following the report Seagate management projected revenue for this quarter of $3.55 billion, above the consensus of $3.53 billion. However, since late 2011, STX's stock has been in a continuous strong uptrend. Since the start of 2012, STX's stock has gained an astounding 262.8% while the S&P 500 index has increased 57.3% and the Nasdaq Composite Index has risen 70.8%. Nevertheless, Seagate still has plenty of room to move up. Seagate has built new promising product lines including cloud systems and solutions and flash technology for connected storage. STX has compelling valuation metrics and strong earnings growth prospects. Furthermore, the company is generating strong free cash flows and returns value to its shareholders by stock buyback and by increasing dividend payments.

The Company

Seagate Technology designs, manufactures, and sells electronic data storage products. The company offers hard disk drives, solid state hybrid drives, and solid state drives, which are designed for enterprise servers, mainframes, and workstations; for desktop and notebook computers; and for various end user devices, such as digital video recorders, gaming consoles, personal data backup systems, portable external storage systems, and digital media systems. The company was founded in 1979 and is headquartered in Dublin, Ireland.

Valuation Metrics

The table below presents the valuation metrics of STX, the data were taken from Yahoo Finance and finviz.com.

STX's valuation metrics are very good; the trailing P/E is low at 13.21, and the Enterprise Value/EBITDA ratio is very low at 7.73. According to finviz.com, STX's next financial year forward P/E is very low at 9.69 and the average annual earnings growth estimates for the next 5 years is high at 11.95%; these give a very low PEG ratio of 0.81. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On July 17, Seagate reported its fourth-quarter and full fiscal year 2014 financial results, which were in line with expectations.

For the fourth quarter, the company reported revenue of $3.301 billion compared with $3.425 billion in the same quarter last year, representing a decrease of 3.6%. Adjusted earnings per share of $1.10 were 8.3% below the same quarter last year's non-GAAP EPS of $1.20. For the fiscal year ended June 27, 2014, the company reported revenue of $13.724 billion compared with $14.351 billion last fiscal year, representing a decrease of 4.4%. Adjusted earnings per share of $5.04 were 4.5% below last year non-GAAP EPS of $5.29.

In the report, Steve Luczo, Seagate's chairman and chief executive officer said:

Throughout fiscal year 2014, Seagate delivered strong financial and operational performance and returned significant value to shareholders. We made strategic investments in our technology portfolio, which enabled us to continue to innovate into higher capacity and power efficient storage solutions, and expanding our capabilities to serve a broader storage customer base in the future through new cloud systems and solutions and flash technology for connected storage.

Dividend and Share Repurchase

Seagate has been paying dividends since 2003, but had stopped its payments in 2009 and 2010. The forward annual dividend yield is fairly high at 2.89% and the payout ratio is only 26.6%. The annual rate of dividend growth over the past three years was extremely high at 110%.

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Source: Charles Schwab

Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.

During the fourth quarter, the company generated approximately $577 million in operating cash flow and returned $166 million to shareholders in the form of dividends and share redemptions. In fiscal year 2014, the company returned $2.5 billion to shareholders in the form of dividends and share redemptions.

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Source: Seagate

Competitors

A comparison of key fundamental data between Seagate and its main competitors is shown in the table below.

Seagate has lower trailing and forward P/E, and much higher dividend yield than its competitors, but it has also a higher debt-to-equity ratio.

Seagate's Efficiency and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.

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Source: Portfolio123

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The STX stock price is 0.92% above its 20-day simple moving average, 6.22% above its 50-day simple moving average and 12.52% above its 200-day simple moving average. That indicates a short-term, mid-term, and a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.48 and flat, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 63.98 which does not indicate oversold or overbought conditions.

Ranking

According to Portfolio123's "ValueSheet" powerful ranking system, STX's stock is ranked second among all S&P 500 stocks; only Akamai Technologies (NASDAQ:AKAM) is ranked higher. The "ValueSheet" ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, asset utilization, technical rank, industry rank, and industry leadership, as shown in Portfolio123's chart below.

Back-testing over fifteen years has proved that this ranking system is very useful.

Analyst Opinion

Analysts' opinion is divided; among the twenty-eight analysts covering the stock, three rate it as a Strong Buy, nine rate it as a Buy, fifteen rate it as a Hold, and one analyst rates it as an Underperform.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering STX stock there are eleven analysts who have the four or five star rating, eight of them recommend the stock, and three analysts have a Hold rating on the stock.

Major Developments

On May 29, 2014, Seagate and Avago Technologies Limited (NASDAQ:AVGO), a leading semiconductor device supplier to the enterprise storage, wired, wireless and industrial end markets, announced that they have entered into a definitive asset purchase agreement under which Seagate will acquire the assets of LSI's Accelerated Solutions Division ("ASD") and Flash Components Division ("FCD") from Avago for $450 million in cash. According to Seagate, it is committed to providing its customers with a complete range of storage solutions, and this acquisition will significantly enhance its flash storage offerings to supplement its existing portfolio.

I consider the acquisition of LSI's flash-based assets very positive to Seagate, since it expands the company's capabilities to deliver solutions for the growing flash storage market. Trendfocus, the storage analyst firm, predicted about 53% growth rate in 2013 for the client SSDs market and 14% in the enterprise market.

Conclusion

In my opinion, Seagate will benefit from its investments in developing new promising product lines including cloud systems and solutions and flash technology for connected storage. Furthermore, the new acquisition of LSI's flash-based assets will expand Seagate's capabilities to deliver solutions for the growing flash storage market. Seagate has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is extremely low at 0.81, and its EV/EBITDA ratio is also very low at 7.73. Moreover, STX's stock is ranked second among all S&P 500 stocks, according to Portfolio123's "ValueSheet" powerful ranking system. Seagate is generating strong free cash flows and returns value to its shareholders by stock buyback and by increasing dividend payments. All these factors lead me to the conclusion that STX stock is a smart investment right now.

Source: Why Seagate Is A Buying Opportunity