Seagate Technology: A Sell As Hard Drive Shortage Easing And Valuations Dangerously High

| About: Seagate Technology (STX)

Seagate Technology (NASDAQ:STX) has been on a tear ever since the credit crises sent the stock to $4 a share and is up nearly 600% from early 2009. The recent stock surge has been buoyed by a hard drive shortage due to the Thailand floods last year and demand for solid state drives. However, now the valuations for STX look high and there are also reports that the hard drive shortage is easing.

According to a recent Forbes article, BlueFin Research analyst Paul Peterson said in a note that

the supply imbalance in hard drives that was triggered by last year's flooding in Thailand is not as dire as originally feared, which is good news for PC manufacturers that had been struggling to buy enough drives at reasonable cost.

That in turn is bad news for hard drive manufacturers such as STX as the prices for hard drives will fall. Below is an in depth look at the valuation metrics and stock chart.

Valuation: Seagate Technology's trailing 5 year valuation metrics suggest that the stock is overvalued as all of the metrics are above their respective 5 year averages. Seagate Technology's current P/B ratio is 3.6 and it has averaged 2.5 over the past 5 years with a high of 4.2 and low of 1.2. Seagate Technology's current P/S ratio is 1 and it has averaged 0.7 over the past 5 years with a high of 1.1 and low of 0.2.

Price Target: The consensus price target for the analysts who follow Seagate Technology is $32. That is upside of 21% from today's stock price of $26.57 and suggests that the stock is fairly valued at these levels.

Forward Valuation: Seagate Technology is currently trading at about $27 a share with analysts expecting EPS of $8.85 next year, an earnings increase of 42% y/y, for a forward P/E ratio of 3. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. Western Digital (NYSE:WDC) is basically the only hard drive company and is currently trading at about $39 a share with analysts expecting EPS of $8.66 next year, an earnings increase of 33% y/y, for a forward P/E ratio of 4.5. This suggests that Seagate Technology is undervalued relative to WDC.

EV/EBITDA: STX is trading at a 6.3 EV/EBITDA multiple while WDC is trading at a 3.3 EV/EBITDA multiple.

Earnings Estimates: Seagate Technology has beaten EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between -2 cents and 24 cents from consensus estimates or about -7.4% to 22.2% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.

Price Action: Seagate Technology is up 100.5% over the past year, outperforming the S&P 500, which is up 10.5%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $24.59 and above its 200 day moving average, which sits at $16.82.

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