Seagate Earnings Strong, Stock Has 80% Upside

| About: Seagate Technology (STX)

Investors in Seagate Technology (STX) largely brushed off a pre-earnings warning in early July, and the stock experienced a huge spike after competitor Western Digital (WDC) reported better-than-expected results.

STX Chart

STX data by YCharts

The stock has dipped about 8% in after-hours trading following earnings results. Notable information: the quarterly dividend payout was raised 28% from $0.25 to $0.32, revenue expectations for the September quarter are $4.0B, and gross margin expectation for the September quarter is ~30%. The yearly dividend of $1.28 represents a 4.57% payout on the current trading price of ~$28.

I view the dip as a buying opportunity. Why? According to a July 27 report by Thomson Reuters, analyst estimates for 2013 full year profits range from a low of $6.05 to a high of $9.48 with a mean of $7.92. These estimates all still seem very reasonable after earnings, with CEO Steve Luczo guiding for non-GAAP EPS of $8.44 for FY13 in the earnings conference call. The following table presents end-of-FY-2013 stock price depending on the TTM P/E ratio at that time.

  P/E 5 P/E 6 P/E 7
Low EPS ($6.05) $30.25 $36.30 $42.35
Mean EPS ($7.92) $39.60 $47.52 $55.44
High EPS ($9.48) $47.40 $56.88 $66.36

Presented in the table below are the same price targets converted into percentage return format, assuming a cost basis of $30/share.

  P/E 5 P/E 6 P/E 7
Low EPS 0.83% 21% 41.17%
Mean EPS 32% 58.4% 84.80%
High EPS 58% 89.6% 121.2%

Given STX's current and historical TTM P/E (see chart below), all of these ratios are reasonable. Even assuming the most conservative TTM multiple (5) and the mean analyst consensus, the stock could return 32% excluding the dividend. With a higher multiple and earnings ahead of analyst consensus, the return could vault into the triple digits. It's worth noting that according to Thomson Reuters, the current mean analyst consensus of $7.92 EPS for FY 2013 has fallen from $9.43 as of 90 days ago. Based on Luczo's guidance of $8.44 and a TTM P/E of 6, I believe $50.64 is a reasonable 1-year price target, representing 80% upside to the current after-hours share price of $28.00. Even if Seagate falls short of this guidance, the stock should continue to display strength as problems related to Thai flooding continue to recede.

Watch for Seagate to devote more attention to the SSD sector, where it's been pretty busy lately. After investing in Israel-based DensBits, the company has stolen Gary Gentry from Micron Technology (MU) to lead Seagate's SSD efforts.

STX PE Ratio Chart

Disclosure: I am long STX.