Seagate Earnings: A Classic Case of "Adapt or Die"

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Seagate Technology (NASDAQ: STX), one of the world’s largest manufacturers of hard disk drives, has made its shareholders very happy over the past few years.  In early 2009, as a result of the financial crisis, any company with any perceived weakness was trading at unreal discounts, and Seagate was no exception.  Seagate hit a January 2009 low of $2.98, less than the value of just their assets at the time.  To put this in perspective, the lowest price the stock ever traded at previously was $7.78 in February 2003. 

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Fast forward to the present time, and Seagate has had one of the best post-crisis rebounds in the market, currently trading for $35.38, or a 1,087% gain over the lows hit just four years ago.  Kudos to whoever bought anywhere near that level!  However, analysts generally think that Seagate is overvalued at current levels, due to deteriorating demand for hard drives and the trend toward tablet computers and smartphones.  When the company reports earnings next Monday, investors will want to hear the company’s plans to adapt to the changing computing environment and create even more growth for their shareholders.

First a little bit about the company: Seagate manufactures hard disc drives, the primary medium for storing data in PC’s, laptops, and larger-scale systems.  Hard disk drives have traditionally been the primary means for storing data in computers due to their low cost and high capacity,  however the biggest concern is the emergence of solid-state drives which power mobile devices such as tablets due to their much lower power usage and size.  This is indeed a major concern for Seagate as 83% of its business comes from traditional hard disc drives made for PC’s, notebook computers, and enterprise data systems.  There is an old saying,  “Adapt or die,” and Seagate’s shareholders are going to want plans for adaptation to the new trends.

Seagate’s largest competitors are Western Digital (NASDAQ: WDC), SanDisk (NASDAQ: SNDK), Fujitsu, Hitachi, and Micron Technologies (NASDAQ: MU), with several other smaller players in the space.  All of the competitors share similar concerns about the changing of the computing market, however some of the others have already begun to adapt.  For example, Western Digital recently entered the solid state market by acquiring SiliconSystems in 2009, although the company has yet to derive a significant percentage of its business from solid state.  On the other hand, SanDisk has become a leading supplier of flash storage products and the microSD line of removable storage cards used in mobile phones, and Micron has gone down a similar path. 

With uncertainty about the future generally comes depressed valuation, and that’s exactly what can be seen here.  Seagate is expected to earn $5.27 per share for fiscal year 2013, which ends in June, and the consensus calls for them to grow their earnings to $5.61 and $6.04 in FY 2014 and 2015, respectively.  So, Seagate trades at just 6.7 times current fiscal year earnings, which are expected to grow by 7.1% annually going forward.  Anytime you see a valuation like this, you know something isn’t quite right.  In our case, the market is worried that Seagate’s products will fall out of demand over the coming years, and until shareholders are satisfied that this will not be the case, the stock will not trade at a typical valuation. While I do believe that the trend toward tablet computing is indeed real, the market for traditional hard drives is not going anywhere, especially in terms of large enterprises who seek the most cost effective way to store the ever-expanding volume of data their businesses require.  If the company can reassure the market of this, while at the same time providing a concrete plan to adapt to the changing environment, it would certainly be looked upon very positively by all.

KWMatt82 has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. 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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