Seagate A Compelling Buy On Impacts From Thailand Flooding

| About: Seagate Technology (STX)
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Seagate Technology (NASDAQ:STX) raised revenue and gross margin guidance for the December 2011 and March 2012 quarters after the market closed yesterday. This confirms analyst speculation last month after the company announced its Q3 report that while being a horrible tragedy in terms of the loss of life and economic impacts, the Thailand flooding may actually benefit STX. This is because STX's factories have emerged relatively unscathed, in contrast to rivals Western Digital (NYSE:WDC) and Toshiba.

WDC, for example, announced earlier that revenues would fall more than 50% Q/Q in Q4. In contrast, STX's guidance yesterday indicates that revenues will be flat Q/Q for Q4, and they will rise by a third Q/Q for the March 2012 quarter. Furthermore, pricing is expected to firm up due to the expected shortage of hard disk drives (HDD), with market research firm iSuppli projecting that HDD prices could go higher by 10% in Q4. Thus, overall, the Thailand flooding may help STX gain market share, increase revenues, gross margins and operating profit going forward at least in the short-term.

While much of this was known qualitatively prior to yesterday's announcement, as reflected in the strong rally in STX shares since the Q3 announcement on October 19th, there was still nervousness that component supply constraints would hinder revenue and profit growth. The company's announcement yesterday lays most of those doubts to rest. The company raised guidance for the December quarter to $2.8 billion (versus $2.65 billion estimate), with gross margins higher by 150-300 basis points above the high end of the company's long-term, targeted gross margin range of 22%-26%. For the March 2012 quarter, the company guided revenues to $3.75 billion (versus $3.24 billion estimate), including revenues from the recent acquisition of Samsung's HDD business, and gross margins at least 300 basis points higher than the high-end of the 22%-26% earlier target range. Applying this to the company's income statement model, we estimate that the company would earn between 60c-70c in Q3 (versus 47c estimate) and $1.00-$1.10 in Q4 (versus 78c estimate).

At its $16 closing price yesterday, STX is trading at less than 5 forward P/E while earnings at least in the short-term are projected to rocket up from $1.24 in 2011 to well over $3 in 2013, as the company also gains market share. In contrast, its chief rival in the hard-disk drive industry, WDC, trades at 6-7 forward P/E while in the short-term while earnings are projected flat to down in the short-term. Also, Sandisk Corp. (SNDK), manufacturer of non-volatile removable memory cards, trades at 9-10 forward P/E while earnings are projected to rise by 5% a year; LSI Corp. (NASDAQ:LSI-OLD), a designer of ICs used in hard disk and solid state drives (SSD), trades at 10-11 forward P/E while earnings are projected to rise by 5% a year; Netapp Inc. (NASDAQ:NTAP), a manufacturer of integrated network storage and data management hardware, trades at 13-14 forward P/E, while earnings are projected to rise by 12% a year; EMC Corp. (EMC), provider of enterprise storage systems and software, trades at 13 forward P/E, while earnings are projected to rise by 16% a year; SSD manufacturer STEC Inc. (NASDAQ:STEC) trades at over 75 forward P/E, while earnings are projected to plummet from 69c in 2010 to 11c in 2012; and SSD manufacturer OCZ Technology Group (NASDAQ:OCZ) trades at 11-12 P/E, while earnings are projected to rocket from 24c loss in 2011 to 53c earnings in 2013. (We also recommended buying OCZ earlier last month, prior to a 60% rally in the stock in less than six weeks).

We believe that STX is a buy at these levels, and would recommend scaling into it, buying it on dips, given that it is already up more than 70% from the lows in October. Thailand, based on estimates by iSuppli, accounts for 25% of the world's overall HDD output, and 45% of the mobile PC HDD market. As such, the impact from the Thailand flooding is expected to last at least until 2013, when supply is expected to finally catch up with rising demand, and we believe that STX may see rising earnings and share prices for quite some time as it benefits from the supply disruption and rising prices.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STX over the next 72 hours.

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