Robert Marcin on Seagate (STX)

| About: Seagate Technology (STX)
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Barron's, this weekend, has an interview with value manager Robert Marcin who likes Seagate (NYSE: STX), writes The Stalwart. His case is simple and compelling:

Seagate the largest disc-drive maker, is down to 15 from 21 earlier this year.

Marcin: And the run rate of earnings is $2.20 a share.

So this is a classic Marcin, Defiance stock?

Marcin: It's a classic stock where the P/E is too good to be true. One of two things has to happen. The stock price has to go up meaningfully, or the earnings have to degrade materially. We believe that the investment community has it wrong this time on Seagate

What's the knock against Seagate?

Marcin: The knock is that the disc-drive cycle is as good as it gets. And Seagate is doing so well from a profitability and competitive perspective that it can't possibly do any better. We think that's silly. What's the reality of the disc-drive business? Seagate is the market leader with a 30% market share. Unit growth is accelerating because of consumer-electronic applications and pricing degradation is slowing.

For the first time in five years, the industry is experiencing double-digit revenue growth. Yet there are only two companies making money, Seagate and Western Digital . The others -- Toshiba, Fujitsu, Samsung and Maxtor -- are losing money or breaking even. There is no incentive for the industry to embark upon a price war when the industry on the whole is only breaking even.

What's going right for the industry?

Marcin: Well, the consumer-electronics market, which was only two million units two years ago, could be 75 million units this year. Disc drives are in MP3 players, set-top cable TV boxes. The home-run application would be cellphones. We don't know whether small disc drives or flash memory takes over the storage function of a cellphone handset. Nokia makes a phone that has a hard disc drive in it. If the industry gets 10% of the cellphone market in three years, that'll be 100 million of hard drives in cellphones. If that story plays out, Seagate, with its 30% share, would be a major beneficiary.

Could Seagate hit $25 in a year?

Marcin: It could be a $30 stock. The stock was at $30 two years ago when it had a run rate of earnings of $1.50 a share. It wouldn't be unreasonable to put a 13 or 14 P/E on $2.20 of earnings for a globally dominant technology company with double-digit growth ahead of it.

Generally, if something seems too good to be true it probably is, but we generally agree with Marcin's assessment. Because the market is sipping Apple-flavored kool-aid, with Steve Jobs anointing flash as the storage technology of the future, Seagate looks like a contrarian opportunity

We've talked about Seagate a few times, so of course all of the standard disclosures (see disclosure on the right) apply. Currently this author owns none, though may take a position at some point in the future.

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