Why Seagate Is a Buy on This Pullback

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is hard to find a company let a alone an industry that presents opportunities to all sorts of investors. From growth, to income or value, the Hard Disk Drive (HDD) industry is one that I feel may fit this mold. With two huge players that essentially 'dominate' the market, I think this is an industry that warrants a quick spotlight. One of these two significant players that I like in particular is Seagate Technology (NASDAQ: STX).

Seagate hit a 52-week high of $37.94 back on Jan. 1 and has since pulled back approximately 16%. Seagate presents tremendous value and upside potential at this price point.

Industry

Seagate Technology is in the 'storage' business. From storage in your personal computer to massive enterprise data storage, Seagate dominates a huge percentage of this market. Its primary competitor in the hard disk drive (HDD) business is Western Digital (NASDAQ: WDC). The general market perception is that the days of the HDD are over and done. Given the transition to solid state drives (SSD) and the huge emphasis on cloud computing there cannot possibly be a way for Seagate or Western Digital to continue their earnings growth. However, the most affordable (SSD) drive produced by Micron Technology (NASDAQ: MU) is set to retail at approximately $600, which is way out of the price range of your everyday individual simply looking for some basic backup.

If you do feel that SSD is the way of future, I would hold out for a while. Micron currently trades at about 1.12x book value, which seems reasonable, however a recent net loss of $1.2 billion, a -1.14 PEG ratio, and forward PE of 15.54 casts some doubt on the stock's long term viability. The growth in cloud computing also presents a fantastic opportunity for the HDD business as everything we store on the ‘cloud’ has to physically be stored somewhere (this presents great revenue growth in the enterprise data storage facets of the hard disk drive companies). Why invest in a unproven, up-and-coming cloud storage and computing company when it’s much safer to have your hard earned money in the basic piece of technology all those companies need.

Western Digital vs. Seagate

So now that I have convinced you to get into the HDD industry, it is time to choose what company you want to own. (I say company instead of stock as the great Fidelity Magellan Fund manager Peter Lynch always teaches to view yourself as an owner of the company and not just the ‘stock.’ Definitely great advice as you are more likely to stay on top of your positions, purchase shares of great companies, and never hesitate to add to your holdings on a pullback if you have this mindset). Let us now examine Western Digital and Seagate Technology fundamentals side by side to figure out which company is better for you as an investor:

<table> <tbody> <tr> <td> <p><strong>Fundamentals:</strong></p> </td> <td> <p><strong>Seagate</strong></p> </td> <td> <p><strong>Western Digital</strong></p> </td> </tr> <tr> <td> <p>Market Cap:</p> </td> <td> <p>11.43B</p> </td> <td> <p>11.05B</p> </td> </tr> <tr> <td> <p>Market Price:</p> </td> <td> <p> 31.84</p> </td> <td> <p> 45.90</p> </td> </tr> <tr> <td> <p>Qtrly Rev Growth (yoy):</p> </td> <td> <p>15%</p> </td> <td> <p>92%</p> </td> </tr> <tr> <td> <p>Total Debt/Equity (mrq):</p> </td> <td> <p> 96.34</p> </td> <td> <p>25.80</p> </td> </tr> <tr> <td> <p>Book Value Per Share (mrq)</p> </td> <td> <p>8.14</p> </td> <td> <p>34.22</p> </td> </tr> <tr> <td> <p>EPS (ttm):</p> </td> <td> <p>7.7</p> </td> <td> <p>8.3</p> </td> </tr> <tr> <td> <p>P/E (ttm):</p> </td> <td> <p>4.13</p> </td> <td> <p>5.53</p> </td> </tr> <tr> <td> <p>PEG (5 yr expected):</p> </td> <td> <p>-0.78</p> </td> <td> <p>3.88</p> </td> </tr> <tr> <td> <p>P/S (ttm):</p> </td> <td> <p>0.7</p> </td> <td> <p>0.7</p> </td> </tr> <tr> <td> <p>Dividend (Yield)</p> </td> <td> <p>1.52 (4.70%)</p> </td> <td> <p>1.00 (2.10%)</p> </td> </tr> </tbody> </table>

As you can see, Western Digital and Seagate are fairly similar in many fundamental areas such as P/E and EPS. Areas where these two seem to separate are revenue/earnings growth and the dividend yield. Western Digital’s 5 year PEG of 3.88 is much greater than Seagate’s  –.78, indicating that maybe Seagate does not have any room to grow. However, Seagate’s annual dividend yield is more than double that of Western Digital creating an interesting income option.

Wrap Up

I believe the hard drive disk industry has great growth potential even as the solid state drive (SSD) and the cloud computing industries ramp up. (Wall Street does too as both companies have seen their number of shares short  decrease 23% month over month). Both companies produce a great amount of cash from operations and surprising revenue growth for an industry that apparently was irrelevant. The decision is now yours whether you prefer the great growth potential of Western Digital or the value play in Seagate Technology.

 


Fool blogger Daniel Paterson owns a long position in Seagate Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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