Is Seagate Actually A Better Investment Than Apple?

Jul.30.12 | About: Seagate Technology (STX)

The premise of this article was originally supposed to compare the very attractive Returns on Equity (ROE) by both Apple, Inc. (AAPL) and Seagate Technology PLC (STX); however I actually found that STX is a much more attractive stock than AAPL based on several comparable variables. The initial requirements for my screen were as follows:

-Minimum Return On Equity Must Be 44.00%

-Minimum P/E Ratio Must Be Under 14.00

-Minimum Yield Must Be 1.00%

After what many analysts are calling a dismal second quarter for some of the major companies within the sector, I wanted to focus on two companies that either met or surpassed the minimum requirements I had established, with the focal point being Return on Equity (ROE). The term 'Return on Equity' is defined as "the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested". In my opinion, the screen of companies based on ROE acts a stepping stone for beginning investor.

Apple, Inc. trades in a 52-week range of $353.02 (52-week low) and $644.00 (52-week high), closed trading at $585.16/share on Friday. For the June quarter analysts were expecting AAPL to earn $10.37/share, but when the company announced earnings of $9.32/share on Tuesday, the stock took an after-hours beating. That said there are several reasons I'm attracted to AAPL, especially at the $585.00/share level. First, the company has demonstrated a 44.32% return on equity over the last 12 months, which to me is exceptional considering the slowdown in Europe due to the ongoing economic crisis. Second, and from an income standpoint, the company recently announced it would be distributing its first dividend in almost 17 years. Even though the yield is only 1.8% ($10.60), I think investors could see a continued increase in the dividend based on the company's ability to accumulate and stockpile cash over the next several years.

Potential investors looking to establish a position in AAPL should consider the company's recent acquisition, which in my opinion, will help fuel the performance of the company's stock during the second half 2012 and first half of 2013. The company recently announced the acquisition of AuthenTec for $356 million dollars in an effort to boost its presence in the mobile and user initiated computer security segments. The company currently owns over 200 patents with regard to fingerprint sensors and various other end user sensor technologies, which would certainly enhance not only Apple's presence with the sector, but enhance their bottom line with various new revenue streams.

Seagate Technology PLC trades in a 52-week range of $9.05 (52-week low) and $32.55 (52-week high), closed trading at $30.01/share on Friday. Based on the company's recent performance over the last month, up nearly 21.35%, there are three reasons why I like STX. First and foremost, the company has demonstrated a return on equity of 63.89% over the last twelve months and when compared to some of its competitors, STX's ROE is nearly 2.60 times that of Western Digital's (WDC) ROE which is 24.50%, and nearly 4.65 times that of EMC Corp. (EMC) which has demonstrated an ROE of 13.76%. The second variable to consider ahead of July 30th earnings, is the company's recent EPS trends. In all four of the last quarters STX has surpassed analysts' estimates by an average of 17.25%. If we compare that to the EPS trends of EMC we'll notice that estimates were surpassed in two of the last four quarters by an average of just 4.65%.

Potential investors should try and establish a position ahead of the company's earnings which are set to be announced after the bell on Monday July 30th. When it comes to STX, the company's EPS performance over the last four quarters clearly speaks for itself, but there are two things investors should pay close attention to. STX is headquartered in Dublin, Ireland and given the current economic state of the Eurozone, it will be interesting to see how the company will fare in terms of sales and revenue growth. If something compelling comes out of the report, such as higher than expected sales growth or an improved outlook for the second half of 2012, we could see the stock pop by at least 4%. If earnings come in-line or fall short based on secondary catalysts such a slowdown in the US PC market we could see the stock sell-off as much as 3%-5%, although the chances of that happening are pretty slim.

Final Analysis

Not only do AAPL and STX meet the minimum requirements set forth in the screen, but when compared from both an income and growth standpoint, STX comes out the surprising winner. AAPL's dividend yield of 1.8% ($10.60) and STX's dividend yield of 3.3% ($1.00) may be considered a bit conservative; however I believe they open the door for income investors who may be interested in establishing a position in the tech sector from an income angle. On the other hand, and from a growth standpoint, STX is the clear leader, considering the company is expected to grow 796.40% during the June quarter and 608.80% during the September quarter, which is 28.18 times that of Apple. If we combine the growth potential of STX with the current yield of 3.3% and a P/E ratio of 6.78 not only do we have a very inexpensive stock, but one that is certainly demonstrating excellent long-term potential. Do I think STX is outshining AAPL from a fundamental standpoint? Based on my calculations and research, I certainly do.

Disclosure: I am long STX, AAPL.