Seeking Alpha
Profile| Send Message|
( followers)  

On June 22, 2012, I had recommended buying shares of Seagate Technologies (NASDAQ:STX) at $23.34, and later followed up with a call to take profits on August 6, 2012 when the stock was trading at $31.90 (more than 36% profits), after their earnings call projected lower sales and demand. Seagate remains a huge player in the market, but the company is not a hand-over-fist buy at its current price compared to Western Digital (NASDAQ:WDC).

In this article, I am comparing these two companies fundamentally as well as technically, and discussing risks and market trends in the Computer Storage industry.

Seagate vs. Western Digital: Fundamentals

Seagate has enjoyed very healthy operating margins and EPS growth this year, compared to Western Digital. However, over a longer term, Western Digital wins the EPS growth as well as revenue growth race, as shown in the comparison table below:

Key Indicators

STX

WDC

52 week Price Performance

169%

48.45%

Institutional Ownership

73%

77%

EPS Growth (Previous 3 years)1

0.89%

46.80%

Rev Growth (Last Qtr vs. Same Qtr Prior Yr)

56.77%

97.84%

Rev Growth (3 Years)

15.07%

18.74%

Cash Flow Growth Rate (3 Years)

18.47%

36.94%

Debt to Capital Ratio (MRQ2)

45.02%

22.17%

Debt/Equity Ratio (MRQ2)

81.87%

28.49%

EPS (TTM3)

$6.49

$6.58

Target Price4

$35.00

$56.00

Beta

2.39

1.42

1: As of 6/30/2012
2: Most Recent Quarter
3: Trailing Twelve Months
4: 12 Months Target provided by Standard & Poors Capital Equities group

  • Seagate's net as well as operating margin are much stronger than Western Digital's, and it gives a healthy 4% dividend, while Western Digital does not offer any dividend at all. These factors probably explain a much higher 52-week performance from Seagate.
  • Seagate has a Debt to Total Capital ratio of 45.02% and is among the most highly leveraged companies in its industry. Western Digital's ratio is only 22.17%, which is decent compared to the industry's benchmark of 16.40%. Western Digital has a much better financial strength, and its higher cash reserves gives better flexibility for shareholder-friendly actions such as stock buybacks and dividend announcements, or analyst-friendly actions such as debt payment and strategic acquisitions.
  • Seagate reported that the demand for PCs and specifically, hard disk drives, is softening. According to its most recent earnings call, the industry is recovering overall faster than expected, which also means more than expected competition for the company.

    Western Digital, on the other hand, had good news to share. Its two main factories in Thailand commenced production recently, recovering completely from the damage caused by floods. The company's revenues should increase by more than 40% in the next fiscal year, thanks to the acquisition of Hitachi Systems.

  • Western Digital has a 35% upside, considering a target price of $56, compared to 17% upside for Seagate (twelve month target price is $35).
  • Both companies are entering into the high potential markets of Solid State Drives (or SDDs) and Hybrid Drives. Western Digital is a little bit ahead of Seagate in this aspect, with SDDs and Hybrid drives already contributing to its total sales. In fact, just recently, Western Digital announced the world's thinnest hybrid drive.

Seagate vs. Western Digital: Technicals

  • Seagate has recently shown some bearish technicals as compared to Western Digital, which in fact, has two very recent bullish patterns to push its price upwards.

    The following figure indicates Seagate's bearish pattern that was formed on 9/10/2012.

(click images to enlarge)
STX

  • On the contrary, two bullish patterns have formed for Western Digital very recently. Take a look at the chart below.

    WDC

  • The table below compares various technical trends for the two stocks:

Technical Indicators

Seagate

Western Digital

MACD

Bearish

Bullish

Up/Down Volume Pattern

Distribution

Accumulation

Up/Down Volume Direction

Down

Up

Support/Resistance

$26.45/$30.60

$39.24/$43.70

Major Bearish Technical Events

On 9/10/2012, Price crossed 50-Day MA, which is Bearish.

N/A

Major Bullish Technical Events

N/A

On 9/6/2012, Engulfing Line indicates buying pressure is overwhelming recent selling pressure.

On 8/24/2012, Double MA (50 day, 200 day) crossover occurred, indicating an intermediate term bullish trend.

Risks For Both Companies

An obvious risk for both Western Digital and Seagate is IT spending globally. However, there is one emerging industry trend that poses a risk to these companies' major source of revenue, which is sales of Hard Disk Drives (or HDDs).

Companies like Western Digital and Seagate that are entirely or greatly dedicated to selling HDDs should eventually see a bigger threat in the increasing acceptance of SSDs. SSDs are developing a solid footing in the portable device industry, which includes digital cameras, smartphones, tablets and even notebook computers (ultrabooks). The threat is not that big today because of certain technological constraints in SSDs and low cost and high capacity advantages of HDDs, but eventually it could snowball into a huge headache for both companies if they fail to derive revenues from SSDs.

Conclusion

From a 50,000 foot view, the computer storage industry will remain a thriving market for the next few years because of increased use of digitization, e-recordkeeping, cloud computing and Big Data analytics that is used for business intelligence. The market for HDDs will continue to thrive and cannot vanish suddenly, as SSDs need some major technological advances to match HDDs' low cost and high capacity parameters. Until that happens, demand for HDDs, especially in the personal computers and enterprise servers space, will continue to thrive.

Seagate's stock is neither a great short sale candidate nor a great buy at its current price, and in my opinion, it is not a bad idea to take profits (especially if it moves a bit higher from here). Comparing both companies, Western Digital appears to be a much better investment with a higher upside in the next 12 months, in spite of the fact that it does not pay a dividend.

Source: Western Digital Is A Better Buy Than Seagate