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Seagate Looks Attractive on HDD, Risks Persist

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On Jun 27, 2014, we issued an updated research report on Seagate Technology (STX - Free Report) .

Seagate is the second largest manufacturer of HDDs in the U.S. The company shipped 226 million units in fiscal 2013 compared with 224 million units in 2012 and 199 million units in 2011. IT research firm, Gartner, expects revenues from HDD to grow at a 2.0% compound annual growth rate from 2012 through 2017. We believe that with an expanded product portfolio and higher mix of OEM business, Seagate will be well positioned to capitalize on the opportunity.

Seagate has also expanded its SSD portfolio and has made investments in the fast evolving PCIe (Peripheral Component Interconnect Express) storage market. The company has also introduced thin hybrid drives to cater to the increasing demand of the mobile market. Moreover, Seagate acquired the Accelerated Solutions Division (ASD) and Flash Components Division (FCD) from Avago Technologies. We believe that the acquisition will not only boost Seagate’s enterprise-class PCIe flash offerings but also provide SSD controller capabilities.

Seagate is focusing more on the enterprise side, which is the key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. We believe that this will boost margins and reduce Seagate’s dependence on the PC market.

Its new products focused on the surveillance and video analytics markets and other hybrid drives, are also gaining traction.

Among other factors, Seagate focuses on returning shareholders’ value. The company paid dividends worth $417 million and repurchased shares for $1.89 billion in the first nine months of fiscal 2014. These investor-friendly initiatives not only boost earnings but also instill investors’ confidence and loyalty.

Nonetheless, Seagate faces stiff competition from Western Digital (WDC - Free Report) , Hitachi, Samsung and Intel (INTC - Free Report) in the storage market and from SSD pureplays such as SanDisk and Micron.

Moreover, customer concentration is a major risk for Seagate. During fiscal 2013, Hewlett-Packard and Dell Inc. accounted for 10.0% and 13.0% of its total revenue, respectively. Nonetheless, we believe that there is lesser chance of a shift in preference for the two tech giants as there are not too many options in the HDD market.

It is worth noting that over the last 60 days, Seagate witnessed one downward revision for the current quarter and 3 downward revisions for fiscal 2014. The Zacks Consensus Estimate for the current quarter and fiscal 2014 went down by 2 cents to $1.09 per share and $5.04 per share, respectively over the same period of time.

Currently, Seagate has a Zacks Rank #4 (Sell).

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