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Hard Drives, A Stable Investment In An Unstable Market

In this technology driven world, everything’s about data. Either on the cloud, personal devices or other storage devices, everything is stored somewhere. This somewhere in most cases is a hard drive, which are most likely made by Western Digital (NASDAQ: WDC) or Seagate Technology (NASDAQ: STX). For a few years now the two companies have competed for the reign of the electronic storage products, and in the process, they haven’t really “taken each other out”, but rather both saw very healthy profits and growth. In terms of an investment however, STX has the upper hand.

A bit of background

Seagate Technology (NASDAQ: STX) designs manufactures and sells electronic data storage products. It has a wide variety of products in the sector including hard disk drives, solid state hybrid drives and solid state drives. These products are designed for enterprise servers, mainframes, workstations (Both desktops and laptops) as well as many other end user devices like cameras, gaming consoles, portable external storage devices, personal back up drives, etc. The company also provides data protection and recovery solutions for small and medium-sized businesses as well as a new product named “Rescue + Replace Data Protection Plan” which is a recovery service for data loss that was caused by physical damage, accidental deletion or corruption, and with the data recovery comes a drive replacement (if needed.).

STX has deals across multiple business lines with multiple big name companies such as backup drives through Samsung, among others. The company was founded in 1979 and is headquartered in Dublin, Ireland and has a market cap of $17.28B with shares trading just shy of $48.50 as of the time of writing.

The numbers

As mentioned above, with a market cap of $17.28B, STX is well placed in its industry, with an enterprise value of $18.44B and revenue(ttm) of about $14.35B. The company has also a very modest amount of debt, even though it’s debt to equity ratio is a bit high at 0.79, it’s not uncontrollably high.

In the past few years, STX has been over-performing both the industry average and S&P 500 as well as being undervalued in comparison to both (shown below.).

Return on equity(%)
Year STX Industry avg. S&P 500
Q4 2013 52.58 29.86 13.75
Q4 2012 81.84 35.48 13.93
Q4 2011 20.74 33.42 14.22
P/E Comparison
STX Industry avg. S&P 500
10.10 17.17 19.06

With a high return on equity, STX have been able to give back quite a lot to its shareholders with a 3.13% yield and a dividend history that’s consistently increasing for the past few years.

Comparison to the competition

The biggest competitor with STX is WDC, who just like STX are very well established, and are viewed positively by investors and institutions across the market. However, the reason STX is a better investment than WDC (in my opinion) is in the numbers.

Metric STX WDC
P/E 10.10 17.72
Market Cap(million) 17,302 16,617
Net Sales (million) 14,351 15,351
Net Income 1,838 980
Div. Yield(%) 3.00 1.40

Interestingly enough, WDC sells more than STX, with about a million more in net sales, however their net income is half of STX. On top of that, in terms of valuation, STX is more than fairly valued and can even use a bump, considering companies in the industry are trading at much higher P/E ratios, like SanDisk (NASDAQ: SNDK) at 18.36, WDC at 17.72, EMC Corporation (NASDAQ: EMC) at 18.77, Datalink Corporation (NASDAQ: DTLK) at 20.81, etc. On top of all that, STXs yield is more than two times higher than WDC and all that while WDC is 45% more expensive than STX.

The Street have a target price of $63.60 on STX, which is about 30% above current level and estimate EPS of 5.43 for 2014 and 5.98 for 2015. Even with these great estimates and pretty good numbers lately, EPS has been going down since Q3 2012 and the latest quarter shows an EPS if $1.20 which is about half the EPS from a year earlier(Q4 2012 – $2.41). With Q1 2014 earnings coming up on Monday (10/28) and the expectation is of about $1.30, STX has a chance to assure investors that the company is in a good earnings position.

In every store there are two sides.

While The Street have a relatively generous target price S&P Capital IQ have a more conservative target price of $52, which doesn’t leave much growth space. On top of that, Luczo Stephen J who is the Chairman, President and CEO of STX sold 214k shares at $50.01, which raised a red flag in the market since after all, what kind of CEO sells such big stake if they believe (and usually know) they can get more buck for their stock. With shares trading about 10% above the 50 day moving average and a bit more than 10% above the 200 day moving average, there are some red flags in terms of the technicals.

With the desktop market slowly dying, the companies that want to survive need to be able to adapt to new markets. Hard drives are still required in data centers, “cloud” services, enterprise systems, etc. and as long as STX are able to adapt and stay ahead, they’ll be successful.

The bottom line

Year-to-Date Chart of STX

Year-to-Date Chart of STX

While STX is a great investment, it’s moved about 20% upward in the past two months, and is about 50% higher since January, so the question is how much longer is this run going to last? there are a lot of analysts out there saying it’s still a great buy, others say it’s a hold more than a buy. If you’re on the fence, you can wait for after earnings, but you might miss its gains… However just like you can miss those gains, you can also avoid potential losses and have a better price to get into.

Unfortunately with the weekend coming up, if you’re interested in getting in, time to spend some late night hours researching and making up your mind.

For the Record

Believe it or not, as much as I’ve said STX is a better investment than WDC, WDC has more analysts favoring it than STX. So I would recommend looking into WDC just as much as STX, however in my opinion STX is the better choice.

Disclosure: I have no position on any stock mentioned in the article above, nor intend to start a position anytime soon (no funds). If I had the capital, I would have started a position in STX within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with the company whose stock is mentioned in this article.

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