10 Reasons Why Seagate Is A Good Buy

| About: Seagate Technology (STX)

Seagate (NASDAQ:STX) is a good buy at around $23 per share and here are 10 compelling reasons why you should buy Seagate's shares:

(1) Seagate's current forward P/E, or price-to-earnings ratio, is a very low 2.4. This means that its entire market capitalization (the amount which the market values the company) is only a bit more than Seagate will earn in the following 2 years, provided earnings stay stable. Yes, it is possible that earnings will decrease because its main competitor Western Digital (NYSE:WDC) will be ramping up production of hard drives after the flooding in Thailand which temporarily decreased WDC's production of hard drives, but even if earnings decrease by 50% Seagate would still be undervalued at under a P/E of 5, and it is unlikely that Seagate's earnings will decrease that much. Seagate's current P/E is already a very low 5.2 and Seagate's P/E will be going even lower in the near future as explained above.

Check out Seagate's chart sourced from CNN Money:

chart of STXClick to enlarge

(2) Seagate's PEG ratio, or price-to-earnings-growth ratio, is a very low .2. Most investors recognize that any stock under a 1 PEG ratio is slightly to substantially undervalued by the current market. Stocks with a PEG ratio of just .2 are quite rare and usually represent a stock that is very undervalued by the current market. The main concern over Seagate has been that the relative newcomer solid-state drives will increasingly eat into the market share of Seagate's magnetic hard drives, particularly in smaller consumer devices such as the iPhone and iPad and similar competitors' mobile computing devices. However, history shows that hard disk drives have consistently been the dominant data storage device since shortly after 1956 when they were invented by IBM. Hard drives are likely to maintain this data storage dominance because they are continually advancing in their recording capacity, cost, reliability and speed, despite innovations from their more costly competitor solid-state drives. It is true that solid-state drives will continue to dominate in the mobile computing devices arena, but it is equally true that hard drives will continue to dominate in the desktop, laptop, servers, external storage and mainframe computers arena. Furthermore, Seagate's CEO Stephen Luczo has publicly stated his conviction that solid-state drives will be complementary to hard drives but will not replace hard drives.

Take a look at Seagate's core numbers (yes these numbers are correct):

Forward P/E 2.39

PEG 0.21

Price/Cash per share 4.69

Price to Sales 0.72

Return on Equity 63.89%

(3) There is a huge trend toward cloud data storage that has been developing in recent years and will continue to expand in upcoming years. This trend has been labeled the "big data" trend. Seagate and its' primary competitor Western Digital are both well-positioned to capitalize on this huge trend as cloud data storage centers will continue to need and demand low cost high capacity hard drives to store these huge amounts of data. Legal compliance also requires that companies store huge amounts of data for purposes of later discovery. Huge industries require huge amounts of data storage, including: encyclopedias such as Wikipedia which seeks to catalog all human knowledge about everything, online databases such as ancestry.com, historical internet traffic which is estimated to be over 10 zettabytes per year, social networking sites such as Facebook and Yahoo groups, and huge amounts of audio and video needing to be stored from all private and public sectors.

(4) The MACD and RSI, among other technical indicators, show Seagate to currently be in substantially oversold territory.

(5) Seagate's growth numbers are outstanding. Seagate has a current return on equity of 64%, a current return on investment of 32.5%, and a current return on assets of 21.5%. Seagate's earnings growth of 477% this year is an outlier due to the flooding of WDC's production facilities in Thailand. I note with a dry sense of humor that if you are long STX like me you wish for more flooding in Thailand (of course I'm just kidding).

(6) Seagate's insider ownership is over 12% of the outstanding stock. I like it when a company has a fairly high percentage of insider ownership because it means that the insiders believe in the company and they are willing to put money where their mouth is and they are incentivized to work hard to grow the company because the have a substantial stake in the company beyond just base salary compensation. Additionally, Seagate has substantial institutional ownership at 75% which I also like because institutional investors are considered smarter money than retail investors so it appears STX is a relatively safe well-heeled bet.

Also outstanding, Seagate's board has authorized company share repurchases of $2.5 billion. This confirms that Seagate believes its own company is substantially undervalued by the current market, it also helps to protect shareholder value by retiring millions of shares and it has a substantial anti-dilutive effect. I hate it when a company I partially own issues tons of more shares and dilutes my percentage of ownership in the company. Seagate is doing the reverse, with each share they repurchase they are increasing my relative ownership percentage in the company.

(7) One of the things I love about Seagate and Western Digital is that they have a virtual duopoly on the hard drive market since Seagate recently purchased Samsung's hard drive business and Western Digital purchased Hitachi's hard drive business. This makes it likely that there will not be large price-cutting between the two, as you might see where there are large numbers of competitors in a single market. Instead, in order to protect its own pricing power, the company will probably be roughly matching each other's pricing at reasonable market levels, as opposed to slashing each other's prices. The only other competitor in the hard drive market is Toshiba but Toshiba has only about a 10% market share.

(8) Seagate's revenues are expected to be about $15 billion this year and were about $11 billion last year. Its revenue streams appear to be fairly solid and stable with pricing power, large barriers to entry and a wide and sustainable economic moat into the foreseeable future, with the exception that Western Digital will be more of a competitor as they are getting fully back on-line in production of hard drives in Thailand, and with the exception that solid-state drives will continue to incrementally eat into Seagate's profits. It is this author's opinion however that the threat from solid-state drives is exaggerated and actually far less than the market is baking into the share price. Seagate's next year's earnings are projected to be about $1 billion per quarter, which is why Seagate is repurchasing shares hand over fist, given the market values the entire company at about $9.6 billion.

(9) Seagate's current dividend yield is about 4.5% per year, which operates as an insurance policy against the possibility of a declining share price, as you will get paid to wait until the share price recovers. It is anticipated that Seagate will not cut its dividend but if anything will increase the dividend given the large piles of cash they are accumulating and the recent quarterly dividend increase from 18 cents per share to 25 cents per share. Note however that Seagate's dividend was suspended during the 2009-2010 Great Recession period.

(10) The last reason why Seagate is a good buy is the fact that investing guru David Einhorn of Greenlight Capital also thinks that Seagate is undervalued and has been accumulating 23.1 million shares, or 5.4% ownership of all outstanding shares in the company, as was just reported in the news today. Why should you care what David Einhorn thinks? David Einhorn started Greenlight Capital in 1996 with just $900,000 but has become close to a billionaire through very astute money management. He has achieved a highly respectable 22% annualized return for investors in a very challenging timeframe which included the huge bursting of the dot com and tech stock bubble and the Great Recession. Quite frankly, sometimes the best way to invest, especially if you don't have much time to research and analyze the thousands of potential investments, is to follow what the big money/smart money is investing in.

Here's the caveat emptor: from a bottom-up analysis of the technicals and fundamentals it would appear that STX is a strong buy, in fact it appears to be at the top of a short list of most compelling buys in the entire market. However, recently there have been unusually high market correlations so a top-down (macroeconomic) analytical paradigm is probably more important to how equities are moving, given the headline making European sovereign debt problems, FED policymaking decisions, unemployment numbers, political and government dysfunction, etc. Also, keep in mind that solid-state drives are incrementally decreasing the demand for hard drives. Also note that Seagate's most recent numbers are better than normal given the disruption to main competitor WDC's production facilities owing to the flooding in Thailand.

Disclosure: I am long STX, WDC.