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Hutchinson Technologies (NASD:HTCH) stock dropped near its 52-week low as news of its fiscal Q2 was released covering that quarter ending March 26, 2006. It's a bit surprising that it did not happen earlier. Hutchinson makes suspension assemblies for disk drives. Revenue growth has been a little choppy at the company, but it rose from $470 million in the 2004 fiscal (September 26, 2004) to $632 million in fiscal 2005. Operating income also rose from $38.9 million to $57.4 million.

The first quarter of the new fiscal (ending December 25, 2005) revenue rose to $185 million from $158 million in the immediately previous quarter. Operating income had already been dropping due to increased costs or R&D and a sharp spike up in cost of revenue. After hitting $20.7 million in the June 26, 2005 quarter, operating income dropped to $4.4 million in the December 2005 quarter despite a revenue increase of $15 million.

All of this pressure on margins took the stock down from $43 last summer to $24 in November 2005. Over the last several months, the stock has inched back above $30.

But then, the company announced its fiscal second quarter which ended March 26, 2006. Revenue jumped smartly to $186 million from $158 million a year earlier. However, the gain from the immediately previous quarter was only about $1 million. And, operating income was only $6.8 million.

Guidance for the current quarter is for revenue to run between $175 and $185 million, and margins to be between 19% and 21%. In other words, more of the same. Hutchinson has said that disk drive sales for 2006 are expected to grow between 12% and 17%, and that suspension assembly demand tends to track these numbers. What the company is less forthcoming about is why its gross margins, which were 30% a year ago, have fallen so far without near-term prospect for recovery. Hutchinson's statement says that its business mix has moved to advanced products that are currently more expensive to produce, but it is too large a change to explain away in a couple of sentences.

Until that issue is resolved, the Hutchinson stock is unlikely to go anywhere.

HTCH 1-yr Chart



Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Source: Hutchinson Technologies Does The Limbo (HTCH)