Gathering New Information about Stocks, Health, and Sports

Introduction

Seagate Technology (STX) is an $11.2 billion company in the computer storage device industry. Market capitalization competitors in this industry include Western Digital, SanDisk, and EMC. The computer storage is down 8.88% over the past year compared to the S&P 500 which is down 5.76% during the same period. Over the past month, the industry has been down 8.50%, while the S&P 500 has been down 2.24%. After a strong sell-off earlier in the past month, there is a strong potential for computer storage companies to grow. Evidence comes from a potential bottom in a sector uncorrelated to recent economic issues. Seagate’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Seagate produces. According to Reuters, Seagate “is engaged in the design, manufacture and marketing of rigid disc drives.” These disk drives are more familiar to consumers as hard drives. Most are produced in raw form which is then sold to OEM and other distributors. These products are used for a variety of products. Some products include notebook computers and mobile computing applications. In addition, these products can be more specified into certain business segments, including: enterprise storage, mobile computing, desktop storage, and consumer electronics storage. These products all have detailed specifications which Seagate realizes and adjusts to fit the consumer preference. Moreover, as the dollar is at an all time low against major currencies, Seagate has the opportunity to surprise investors with higher sales and margin numbers. This will happen because a lot of technology is exported to other countries for a depreciated dollar to benefit U.S. multinationals. Therefore, with a strong business model and positive economic advantages, Seagate has the potential to be a great stock in a diversified portfolio for companies.

Growth

Seagate has illustrated solid growth prospects over the past year. According to Reuters, Seagate reported a $11.36 billion revenue product last year. This number is over 15.74% higher than it was the previous year. Compared to the industry’s average of 25.08%, Seagate illustrates its capability to perform above average throughout most economic conditions. However, Seagate’s earnings growth at 234.41% is significantly above the industry’s average of 31.41%. And this statistic coincides with Seagate’s strong history of earnings. This argument is supported with Seagate’s five year average earnings figure of 34.19%--a number nearly identical of industry average metrics. Moreover, Seagate’s current earnings report beat out competitors (EMC: 41.88%, Western Digital: 55.42%, and SanDisk: -5.91%) as well.

Moreover, Seagate has kept its costs under control. According to Reuters, Seagate has reported gross, operating, and net profit margins of 23.58%, 10.20%, and 12.32% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 22.49%, 8.19%, and 8.89%. The current averages are also better (business model respected) than the industry’s respective operating and net income averages of 8.32% and 8.13%. Therefore, Seagate has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Western Digital reported respective gross, operating, and net income margins last year of 18.72%, 9.80% and 10.48%. SanDisk only reported operating margins of 7.10% and net income margins of 5.74%. Therefore, Seagate is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, Seagate reported an ROE of 31.97%. Therefore, out of all shareholder equity, more than 32% come from earnings instead of debt or stock. This number is great to the industry average of 13.47% and competitor averages of 14.58% (EMC) and 4.49% (SanDisk). Not to mention, Seagate’s current year ROE is also better than the company’s five year average of 26.67%. Therefore, Seagate has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Seagate cannot continue its success. The same logic applies to Seagate’s 15.20% ROA (above average) and 21.77% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that Seagate has a forward P/E ratio of 7.46 and a forward price to sales ratio of 0.88 compared to the industry’s respective 19.17 and 2.02, but there is an even different picture to consider. In comparison, market-cap competitor SanDisk has respective figures of 11.28 and 1.01. EMC also has higher numbers at 18.11 and 2.10. What makes these remarks even more enticing is these firms that aren’t growing so greatly but have higher multiples. That idea shows overvaluation, not the idea Seagate is currently in. Moreover, Seagate has a low PEG ratio (0.51) compared to other competitors’ numbers (EMC: 1.41, SanDisk: 0.80, and Western Digital: 0.97).

Efficiency

Seagate is efficient. Inventory turnover at 11.72 is excellent compared to other industry market-cap rivals (EMC: 7.03) Moreover, asset turnover is also strong at 1.23 compared to competitor figures. Receivables turnover also illustrates a number of 8.63, illustrating cash received every 42 days. In terms of liquidation, Seagate’s current ratio is 1.52. This number is a good mix of both equity and debt. The company’s capital expenditures have increased (10.90%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 91.35% of all Seagate shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Seagate performed poorly in the past year. The company’s share price has decreased 13.57% year-to-year. This type of growth is correlated for a recessionary-type economy, especially considering the fact that other technology companies have performed far worse. There seems to be some support at the 20 dollar share price range dating back to earlier January 2008. The last time Seagate reached this amount the company rebounded and appreciated 15%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Seagate illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 34.75, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Seagate according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Seagate is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
March 21st, 2008