Seagate: Continuing To Provide High Growth In The Future

May.21.12 | About: Seagate Technology (STX)

Company Overview

Seagate (NASDAQ:STX) designs, manufacturers and sells hard drive disks. Its products are used in desktops, notebooks, servers, mainframes, workstations and external storage systems to name but a few. It offers data storage services which include online backup, data protection and recovery solutions. Currently, 70% of its sales are to manufacturers like HP (NYSE:HPQ) (16%) and Dell (NASDAQ:DELL) (11%). Distributors and retailers comprise the other 30% of sales. Furthermore, 75% of its sales are foreign sales, outside of the U.S.

Key Company Changes

The chairman has redesigned the design centers into core teams organized around individual projects to meet the corporate objective of better productivity. Over the last 15 years, Seagate has been rapidly improving on its productivity. Its most rapid period of change came between 1997 and 2004. In this time, it managed to reduce its employee count from 110,000 to just 50,000. It also more than halved the number of factories it owned from 24 to 11 and more than halved the number of design centers from 7 to 3. While this was happening, Seagate improved the number of drives it produced per quarter from 9 million to 20 million. This is a remarkable example of managerial efficiency in increasing productivity.

Flooding in Thailand

The flooding in Thailand possibly benefited Seagate because it allowed Seagate to take significant market share from one of its closest competitors Western Digital (NASDAQ:WDC). Seagate's hard disk drive factory was located on higher ground than Western Digital's and so it was not affected while Western Digital's factory was flooded. The flooding damaged many of the HDD manufacturers because it led to a shortage of available parts so Seagate was hurt due to this. Seagate now has roughly 40% of the market, while Western Digital has between 20 and 25%.

Q3 Earnings

Seagate reported net income of $1.1 billion in its third fiscal quarter. Its earnings were $2.64 per share of revenues of $4.4 billion which surpassed Wall Street expectations by $0.53 per share. It had cash from operations of $938 million, repurchased 43.1 million shares of common stock, and its operating expenses were $3.164 billion due to the continued integration of Samsung's (OTC:SSNLF) hard disk drive business.

Samsung Acquisition

In December of 2011, Seagate acquired Samsung's HDD business for $1.4 billion. As part of the deal, Seagate got Samsung's M8 2.5 inch HDD line. Furthermore, the company got a number of experienced employees from Samsung's South Korean facility in the process. This acquisition will help Seagate to expand its brand into the Asian marketplace fueling growth.

Risks

There is increasingly aggressive competition that is driving down the prices of the products Seagate provides. Furthermore, new firms continue to enter the market and try to grasp some of the market share. Also, the flooding in Thailand shows how volatile the market is and how easily the HDD market can be overhauled.

Nonetheless, Seagate is the established industry leader. It constantly releases new and updated products. Seagate spent heavily on product development which means its products are generally more technologically advanced and have better storage levels than its competitors.

Conclusion

Seagate is currently the market leader and as soon as Samsung's facilities become fully integrated costs should decrease rapidly. Seagate is also launching a new line of hard drives aimed at mobile phones, tablets and notebooks. They have started to capture one of the biggest markets for external storage and will continue to expand in this area. Therefore, Seagate is a great buy at the current price especially off Q3 earnings.

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