Be Bullish About David Einhorn's Second Biggest Position

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

Note: This article previously contained an error in regards to Western Digital's dividend yield. The comparison table has been corrected.

What do you think when you find a business which has a 20% net margin, more than 50% return on capital, a 3.6% dividend yield, but it is valued at only 3.7x P/E? It sounds so intriguing to any value investor. However, before jumping right into that business, investors need to dig deeper into its fundamentals to determine its attractiveness. The stock I am referring to is Seagate Technology (NASDAQ: STX), a hard disk drive data storage manufacturer. 

The majority of Seagate’s products are sold to major OEMs, which accounted for 72% of total revenue in fiscal 2012. The second customer group was distributors, which accounted for 20-21% of total revenue. The last customer group was retail, accounting for only 7-9%. The major contributing region to Seagate’s revenue was Asia Pacific, with 51-55% of total sales. Because significant sales were generated from OEMs, it was a good thing that Seagate normally had master purchase agreements with them, normally in 12-24 months. The two biggest customers were Dell and Hewlett-Packard, which accounted for nearly equal share (14-15%) of the total sales. 

Existing shareholders must be extremely satisfied with the performance of its stock in around 10-month period. Year-to-date, it has returned 70.51% for investors. 

<img src="/media/images/user_14219/screen-shot-2012-11-04-at-110714-am_large.png" />

However, along the way, Seagate shareholders have been through a roller coaster. Indeed, over the past 3 months, its stock has lost more than 12% of its value. Seagate has many funds and institutions among its shareholders. Currently, the top four shareholders of Seagate are Fidelity Management and Research (nearly 32.4 million shares), Samsung Electronics (45.2 million shares), Greenlight Capital (23.2 million shares) and Vanguard Group (23 million shares). Especially Greenlight Capital, which was founded and run by David Einhorn, has put more than 9% of the total assets he manages into Seagate. He commented on Seagate in his 2012 first quarter letter: “Though the shares advanced from $16.40 to $26.96 during the quarter, the share price remains at a very low multiple of both near-term and longer term earnings. Based on our somewhat more conservative revenue outlook in 2012, we expect earnings to reach $10-$15 per share this calendar year, before settling at an average of about $5 per share in future years when the industry shortage will have ended.”

Recently, the company just released its Q1 2013 earnings results. It delivered $3.73 billion in revenue, a 33% growth from $2.8 billion the same period last year. Its net income was $582 million, a significant increase compared to only $140 million in Q1 last year. Its EPS was $1.42 per share, four times higher than EPS last year of $0.32. Out of $1.1 billion in cash generated from operations, $127 million was used to paid dividends and $669 million was used to redeem 20.5 million shares. During this quarter, the company has returned more than 70% of operating cash flow to shareholders in terms of both share buybacks and dividends.

Compared to its peers, Western Digital (NASDAQ: WDC) and SanDisk Corporation (NASDAQ: SNDK), Seagate appears to be the best value.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>STX</strong></p> </td> <td> <p><strong>WDC</strong></p> </td> <td> <p><strong>SNDK</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>20.8</p> </td> <td> <p>12.9</p> </td> <td> <p>12.3</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>53.9</p> </td> <td> <p>20.6</p> </td> <td> <p>7.3</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.8</p> </td> <td> <p>0.3</p> </td> <td> <p>0.1</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>3.7</p> </td> <td> <p>5.4</p> </td> <td> <p>16.6</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>3.6</p> </td> <td>2.8</td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

It is the best in terms of operating figures and dividend yields. Its net margin is nearly double than that of both Western Digital’s and SanDisk’s. Its return on capital is superb, of nearly 54% whereas Western Digital’s is only 20.6% and SanDisk is only 7.3%. Seagate is the most leveraged company among the three. Nevertheless, it has a quite comfortable interest coverage ratio, of 13x. What triggers me the most is the lowest valuation it receives, with only 3.7x P/E, whereas Western Digital is valued at 5.4x P/E and SanDisk is valued at as high as 16.6x.

My Foolish Take

With a top-notch net margin and return on capital, ample leverage, decent dividend yield, and low multiple valuation, I am bullish about Seagate. In addition, a huge stake of investment guru David Einhorn would give investors more confident on the future potential gains of the stock. Personally I think Seagate could fit well into long-term income portfolios of patient investors. 

Dig Deeper

To stay on top of moving stocks like Seagate Technology, check out company highlights in The Motley Fool’s premium report, which contains valuable information that every investor should have in their portfolio.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Digital. Motley Fool newsletter services recommend Dell. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus