Minimum 30% Upside For Seagate, EMC Corp.

| About: Seagate Technology (STX)

The Street once again made substantial revisions to EPS estimates for Seagate Technology (NASDAQ:STX). Of the last 23 revisions to estimates, 21 have gone up for a net change of 50.4%. While I am bullish on the company, lack of near-term visibility is not for the risk-averse. The firm continues to benefit from Western Digital's (NYSE:WDC) flood disruptions that have constrained hard drive supply. A less volatile peer that also has meaningful upside is EMC Corporation (EMC). Based on my multiples analysis and DCF model, I find myself in agreement with the bullish sentiments on the Street for these storage companies.

From a multiples perspective, Seagate is the cheaper of the two. It trades at a respective 17.6x and 4.4x past and forward earnings while EMC trades at a respective 22x and 13x past and forward earnings. Western Digital trades at a respective 10.2x and 6x past earnings. And although Seagate stands out with its dividend yield of 3.7%, its beta is roughly double that of its competitors. Currently, the company is rated a weak "buy" while EMC is rated near a "strong buy".

There are several reasons why EMC merits this favorable rating. At the third quarter earnings call, the firm's CEO, Joe Tucci, noted favorable progress:

"Overall, I am very pleased with our Q3 results. They were hallmarked by impressive top line growth, which undoubtedly produced share gains for us, and leveraged on both the bottom line and in free cash flow.

The key ingredient to our success was balanced growth, double-digit year-on-year growth across the vast majority of our product and business units; namely, in VMware with its leading virtualization and cloud-aware software; in our Information Storage business; in our Information Protection business; in our Information Security business; and in our information analytics business.

Additionally, we exhibited this balanced double-digit, year-on-year growth in our global services business and across our major geographies, in the Americas, in EMEA and in APJ".

With its penetration into Big Data and hybrid cloud computing, the company has well positioned itself in high-growth opportunities. The company is experiencing the fastest growth in, conveniently, the highest-margin segments, such as in Data Domain. In addition, almost half of the company's VNX platform wins are coming outside of the EMC universe. The top supplier of enterprise storage systems further is expected to have 12% growth in top-line and, according to Credit Suisse, will benefit from a 300 bps expansion in storage share to 30%.

Consensus estimates for EMC's EPS are that it will grow by 18.3% to $1.49 in 2011 and then by 14.8% and 15.8% in the following two years. Assuming a multiple of 18x and a conservative 2012 EPS of $1.64, the rough intrinsic value of the stock is $29.52, implying 32.7% upside. Modeling a CAGR of 16.3% and then discounting backwards at a WACC of 9% yields a fair value of $25. Despite significant risks, this indicates a clear buying opportunity.

The main problem that Seagate stems from competitive disruptions. Performance-superior NAND memory and solid-state drive have stated dropping in price, putting the pressure on HDDs. I am not saying that they going to dominate HDDs in the next three years, but as a recovery nears investors will start to focus on this longer-term horizon, as opposed to more of the here-and-now. And with the purchase of Hitachi's HDD business by Western Digital the pressure is mounting on the mission-critical business of Seagate. Furthermore, PCs continue to experience pressure from the tablet revolution.

Consensus estimates for Seagate's EPS are that it will grow by 275.8% to $4.66 in 2012 and then decline by 0.6% and 33.9% in the following two years. Even if the multiple is only 6x and 2013 EPS turns out to be 10.3% below consensus, the stock will still soar by 28.4%. Accordingly, while the Street rates the stock only a weak "buy", I am considerably more optimistic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.