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Seagate, Western Digital: Expecting Seasonal Updrafts in Volume and Earnings

Update: Following comments from Avian Research today:
"We expect STX to report upside to estimates this quarter, with margins in particular likely to benefit from the more rational pricing environment. Since ’02, during strong back half drive environments, margins at STX have advanced by between 240 bps to 400+ bps from CQ2 to CQ4. Assuming we see similar margin trends this time around, STX would report upside of $0.14 to $0.25 to consensus quarterly earnings by CQ4.
We see STX and WD sellside conference presentations early in September as the next potential positive catalysts for the stock as we expect both companies will provide very positive commentary about the current environment.

Gold's Value In the 21st Century: About As Real As the Myth of El Dorado

No simplke answer here. However, I think your gold=currency=value is, as you probably intended, false. At one time we could say currency=gold=value but again, you are correct, that is gone.

The answer comes at least partially from Robert Bohrer's comments as to the vaue of Gold in jewelry, especially in Asia. (Gold sees little use as a manufacturing material other than in jewelry). It is a defactor currency, or wealth asset to millions here.

The lustre of gold is not going to go away, perhaps because of it;s illogic rather than in spite of it's illogic.. I would add gold to the wisdom of Robert Lichello's observation that in nuclear winters only cigarettes, soap, booze, and chocolate have investment value. (as reiterated above by Malkiel). There will always be those that will sell you these things if you have gold in my opinion. Incidentally, I also would have added condoms to Lichello's list.

Time to Buy Gold Stocks: A Vicious Circle Turns Virtuous

Justice, I am compelled to write that of all the insightful, literate comment that Seeking Alpha is awash in, I enjoyed this single piece more than any in a long time. I find myself in that position of being an "early one", and haven't wavered. Your piece articualtes the "why" of this better than I might have ever penned for myself, though the basic thrust of my reasoning is there. I suspect everyone has a natural desire to hear echoes of out thoughts from our peers. In fact, so much so that we sometimes alter those echoes so that they fit what we think we thought. It is a basic emotion. As such, it is one best suppressed when it comes to things financial. However, I cannot resist that "sated" feeling. Many thanks for a superb post.

Continued Pricing Power in Store For Data Storage?

Unit pricing and shipment volumes in the HDD industry is largely cyclical. that of course is no secret. That cyclicity, simply stated, is that unit growth rates Q over Q (and ASPs as well) decline in the first half of the calendar year and increase in the second half. This has led to more intense competitive price inititiatives during the softer first half, sometimes excessively so. Those initiatives lose their attraction as the second half buying winds up and more market is available. Trend Focus (trendfocus.com) recently provided a study to it's clients, based on reviewing quarterly unit shipments (across all models) since 1998, by quarter. The swings can be quite pronounced. For example, shipments rose 22% in CQ3 of 2003, and fell 8.2% (QoQ) in CQ1,04. In CQ1-2007 shipments declined %5.11 from the previous quarter. In CQ2-2007 the decline softened to -%1.26. The mean forecast for CQ3 (from several forecasters) is that unit demand will grow 17%. Mobile units are expected to outpace that at 23% Q over Q. We would have expected to see some aggressive pricing in 2.5 ich drives, expecially those at the higher capacity points (250GB). That hasn't happened norappeared to have happened, at least yet. We would also have expected to see continued aggressive pricing in 3.5 inch desktop and CE (DVR) Models. That also does not appear to have happened. In fact certain capacity points in the 3.5 inch sector are getting hard to find and in at least one mfr's case they are currently on allocaton. In the excerpts from conference calls you used above, we would note that WD seems to be saying that they expect the heat on pricing to cool off somewhat in CQ3 as buyers opt for assured and steady supply so as not to threaten their time critical build plans. Seagates comments are, while admittedly more circumspect, suggest that they are planning for continued price pressure from the competition as a matter being conservative, as they have no control over competitor';''s behavior in pricing. Since both those statements were made however, it has been pretty clear in the channels that pricing has not been as aggressive in CQ2. In their most recent pricing survey, Avian Research notes that pricing for 100GB 7200 RPM mobile drives has risen .4% week over week. TYhe 160GB 5400 RPM SATA 2.5 inch has risen 1.2% in the same period. I agree that in general, pricing in the hard drive market is always competitive. However, recent consolidation, coupled with the commencement of seasonal higher demand, suggests that, contrary to any imminent decline in pricing power, the industry should be poised for near term strengthening in pricing power, at least through the next two quarters. To draw any real conclusions from this one would have to review and understand operating efficiencies especially opex, time-to-volume on new products, and product mix shipped. Two brands of HDD targeting the same performace and capacity, have little in the way of differentiation. Yields in the factory, COGS, time-to-volume, and ROI on Capex is what will set apart a particular vendor.

Many ETFs, Few Investment Opportunities: 127 Investable Funds

Richard,
Your post is a nifty piece of work, and very helpful as I am currently reconstructing our portfolio (who isn't?). Many thanks, it is much appreciated. Incidentally, I had no problems saving the jpg files in the enlarged format as of 10:00 am asia pac time (10 pm EST). Best Regards,
Gary Davis

Seagate Technology Adopts Baffling Policy on Financial Guidance

I think Seagate's rationale is pretty straight forward. They have correctly concluded that attempts to guide on a longer term basis is meaningless given market conditions. I haven't seen anything, nor did I hear anything during the conference, that suggested they won't discuss long term strategies. They have correctly concluded that revenue and earnings guidance beyond one quarter can be misleading. I believe this is a big issue for any internationally focused company with a sizeable dependence on the consumer space. As to dropping guidance altogether, that simply doesn't make sense to me as it doesn't serve shareholders at all. I agree in general with you that financial guidance is overrated, but would stop at saying "very" overrated. I want to know what management thinks. You might recall that, during the conference, Brian Dexheimer pointed out that OEM volumes are usually negotiated and done before the quarter starts. That, at least, gives management knowledge that, in this case, Seagate is willing to use to shape their guidance. Surprises come primarily from the channel, which is more problematic in forecasting volumes and pricing for. I want whatever info management is willing to share. I have already voted my confidence in the people the moment I took a long position on the company. Once I have made that decision, I want to hear what is on their minds at any opportunity.

What Does The iPhone Teach Us About Technology?

It seems almost obvious that the iPhone, as is in the current offering, is network bound and that will limit available market. While design is important as you note and as Apple has proven, the question that keeps coming to me when I think iPhone is whether Apple has the juice to enter the rapidly maturing market of hand held computing/communicatin... devices (smart phones) and compete favorably with RIM, Nokia, Palm, Sony Ericson, et al. When Apple introduced iPod they hit a winner whereby a large part of the consumer base knew little about MP3s or what they were. Now, however, iPhone comes in to compete in a technically saavy space, as Smart phone users have had almost a decade of using these devices. Furthermore, almost everyone else has at least a mobilephone. Can Apple pull the simple mobile phone user to their side with a package that weighs in at around $2,000? That $2K commitment is to a stodgy AT&T and the more sleek and hip Apple. Where is the synergy in that? Perhaps Apple is thinking launching pad only? A way to gain initial ground? Apple needs to be thinking VOIP to give this one legs. This isn't your father's iPod proposition.

How to Win the China Piracy Battle

I could not agree more, the key to fighting piracy in China ultimately is economic and not moralistic. However, the WTO and their respective trading nations should continue relentless pressure on China (and other trade nations) for better and more vigorous enforcement. Use of witholding trade incentives must continue. Furthermore, they must be less idealogically applied. Whether it is the press we see or actualy policy, China is subjected to considerably more censure than say, Thailand or Malaysia, though the pirating of products in both of those countrys is still broadly practiced.

China in particular, has a long and rich history of replication. This includes emporor's from various dynastys commissioning the manufacture of exacting replicas of antiquities. It had been a time honored practice, with the most accomplished artisans receiving praise and rewarded for their skills.

China today is quite a bit different than the former inward Confucian, and then communist, driven closeting of the past. But it is difficult for the West to stand on moral ground when considering history and events such as the opium wars and the smuggling of tea plants out of China for culturing in the British Raj.

Though several encouraging headlines recently point to increased enforcement in China, open sales of faked brand names is still grossly obvious to the most casual observer. As I live in, and travel Asia extensively I see this in almost every country I visit. One only needs to walk the shops and open-air markets in Shenzhen, Bangkok, Kuala Lumpur, name a city...to guage how prevalent this is. (For example: at the moment, directly across the street from my hotel in Bangkok, there are fake Rolex's galore, along with numerous "branded" clothing items. I think that it is erroneous to believe that somehow, as personal wealth grows, the transition to purchasing genuine Gucci will somehow follow. From my own ad hoc observations, there is no shortage of my fellow Westerners lining up to buy these items. And what is a $400.00 per month secretary opining for a fake Louis Vuitton bag doing, other than succumbing to the mind-numbing scramble for prestige that world commerece has churned up since time immemorial. However, I am much less concerned about fake Rolex's and Gucci bags. (They fall apart, or the logos tarnish, and the greedy buyer gets what he/she deserves.) I.T. products, heavy machinery, pumps, medicines, household items,process technologies, all have been subjected to copying that shows dismaying ingenuity in reverse engineering.
Official encouragement and assistance for effective enforcement will go a lot farther than assuming increased personal wealth will obviate against pirated products. I also think that while U.S. customs practices profiling visitors for security inspections, they might add to their list of profiles the returning American with the fresh tan. Chances are his luggage will contain more than one dubious product.