Is There a Reason to Be Bullish on Seagate Technology?
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Seagate Technology (NASDAQ: STX) was one of the technology winners this week, after the shares of the company surged by $2.49 to $28.95 per share from $26.46 per share over the last five days from December 4-10. The stock price of the company already rose by $1.36 per share a week earlier.
Seagate Technology is the world’s leading manufacturer of electronic data storage products including hard disk drives (HDDs), solid-state drives, and solid-state hybrid drives. The company became the first hard drive manufacturer to ship 1 billion units in 2008.
Seagate Technology also developed the first 1TB per disk capacity point, and the thinnest 2.5-inch hard drive. The company sells 70 percent of its products to original product manufacturers (OEMs), 20 percent to distributors, and the remaining 10 percent to retail customers.
Is There a Reason to be Bullish on Seagate Technology? The answer is YES. Charles Brandes, founder and chairman of Brandes Investment Partners is bullish on the company. He increased his stockholdings in Seagate Technology by 912,723 shares, based on his 13F filings with the Securities and Exchange Commission (SEC) for the third quarter of 2012. His entire stake in the company is more than 1.1 million shares with an estimated market value of $35.29 million.
Brandes is one of the most successful hedge fund managers and a follower of Benjamin Graham’s value investing strategy. He invests in companies with high intrinsic values that are trading at discount price after conducting a careful and comprehensive financial analysis. Given the fact that Brandes owns a significant number of shares in Seagate Technology, it means he has a strong confidence in the company’s capacity to deliver long-term growth and value to shareholders.
Another top performing hedge fund manager who owns a large stake in Seagate Technology is David Einhorn of Greenlight Capital. Although Einhorn reduced Greenlight Capital’s stockholdings in the company by more than 6.6 million in the third quarter, the hedge fund still holds over 16.5 million shares of Seagate Technology. The stock is the second largest position of Einhorn in his portfolio with an estimated market value of $513.5 million.
In his letter during the first quarter, Einhorn stated that Seagate Technology is one of Greenlight Capital’s long-term equity investments, which prevailed and benefited from “man-made disasters” particularly the flood in Thailand, but affected the company’s competitors and component suppliers. According to him, “STX hard drive manufacturing facilities were relatively unharmed by the flooding and the company has been able to capitalize on the resulting shortages, which has led to a dramatic improvement in the company’s near-term prospects.
Over the past 10 years, Seagate Technology consistently generated positive net income except in 2009, wherein it suffered $3 billion losses after the company wrote down $2.3 billion goodwill impairment charge.
On September 30 Seagate Technology reported its 1Q 2013 financial results. The company revenue increased to $3.7 billion, higher than its $2.8 billion revenue during the same period a year earlier. Its net income was $582 million or $1.42 diluted earnings per share. The result is better than the $140 million or $0.32 diluted earnings per share during the same quarter in 2011.
Seagate Technology generated $1.1 billion cash from operations, paid $127 million in cash dividends, repurchased 20.5 million ordinary shares, and its gross margin was 28.4 percent during the quarter. The company reported that its cash, cash equivalents, restricted cash, and short-term investments increased by approximately $256 million to $2.5 billion.
According to Seagate Technology chairman and CEO, Steve Luczo, the top priority of the company remained, which is to return value to shareholders of more than 70% of its operating cash flow via shares redemption and dividend payment. During the September quarter, the board of directors of the company approved a quarterly dividend payment of $0.32 per share to shareholders, paid last November 29, 2012. During the same period in 2011, shareholders received a quarterly dividend payment of $0.18 per share.
In terms of stock returns, Seagate Technology delivered 83.74 percent year-to-date (YTD) total returns, higher than its competitors including Western Digital (NASDAQ: WDC) and OCZ Technology (NASDAQ: OCZ) with 25.05 percent and -71.56 percent total returns YTD. Over the past three years, the stock generated 89.02 percent total returns to shareholders compared with the 37.86 percent total returns of the S&P 500.
Seagate Technology (STX) Total Returns Comparison
The stock price of Seagate Technology demonstrated an upward trend over the past 52-week range from its lowest price at $15 per share to its current trading price at around $28.95 per share after hours trading on December 10. The stock reached $35.67 per share in mid-August this year.
Source: Yahoo! Finance
Seagate Technology is trading at discount price with its current P/E ratio at 3.82x compared with its rivals, Western Digital Corporation’s 5.04x P/E ratio and EMC’s 20.51x P/E ratio. The average industry earnings multiple is around 13.8x.
Seagate Technology Price to Earnings (P/E) Ratio
Seagate Technology has $10.91 billion market capitalization with a quarterly revenue growth of 32.80 percent and diluted EPS quarterly growth of 343.8 percent year-over-year. The company’s dividend yield is $5.8 percent. The company recently announced a 19 percent increase in dividend payment from $0.32 per share to $0.38 per share, payable on December 28. The company is confident that it would continue to generate strong and sustainable operating cash flow. Steve Luczo, chairman and CEO of Seagate Technology reiterated that the company is committed in returning capital to shareholders. He was chosen as one of the top Business Persons of the Year (2012) by Fortune magazine.
Last month, Seagate Technology’s newly designed external storage devices known as the Backup Plus family of hard drives were named International CES Innovations 2013 Design and Engineering Awards Honoree. The Backup Plus family of hard drives are compatible with Mac and Windows computers and the world’s first external hard drives with the ability to provide back-up for content on social networks such as Facebook and Flickr.
The company recently announced the expansion of its EVault cloud-connected backup and recovery solutions in the Brazilian market in partnership with Alcateia Group, one of the leading IT solutions providers in the country.
Seagate Technology is a great company with high quality products. The stock price of the company is undervalued with its current P/E ratio at 3.82x. The company’s management team is committed in increasing the value of its investors through dividend payments and shares buyback. Overall, the company has the ability to generate high returns to investors over the long-term.
MarieCabural has no positions in the stocks mentioned above. 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!