Why I Bought Seagate
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Seagate Technology (NASDAQ: STX) might be the cheapest stock in the market today. I honestly don't remember the last time that I saw a leading technology company, trading at a forward earnings multiple of just 3.57. Considering that there are 24 analysts projecting earnings for 2012 and 2013, either all 24 of these people are crazy, or the stock is a huge bargain. If the company were expecting slow growth, the forward multiple might not matter. However, the average analyst expects earnings growth in the next few years of over 30%. A stock expected to grow at 30%, selling for less than 4 times forward earnings? Sign me up!
Knowing the stock is trading for a cheap multiple is one thing, but what convinced me to buy Seagate shares were other positive factors working for the company. The first thing I notice about any company I'm looking at is, expected revenue growth. After all, companies expected to grow their revenue at a decent rate, have an easier time turning this revenue growth into earnings growth. Considering that analysts are calling for an over 37% increase in revenues this year and another 18% increase next year, you can see that Seagate should have no trouble moving their earnings ahead at a fast rate. Another positive factor is, in the last year, the company has beaten estimates every single quarter by no less than 9.7%. When a company is expected to see huge revenue growth, huge EPS growth, and is already beating estimates, it sounds like a good deal to me.
If that were all there was to the Seagate story, I would consider it a good deal, buy the shares, and keep on going. However, that's not all there is to the story. In fact, one of the more important reasons I bought the shares is the company's dividend. At today's price of $24.84 per-share, the dividend payment of $1 annually, equates to a 4% dividend yield. If you combine this 4% dividend yield with the over 30% growth in earnings that analysts expect, investors are literally paying four times earnings for a company that could return 34% or better overall. Keep in mind, this 34% estimate of mine, only requires that the company stock move up in tandem with earnings, with no multiple expansion at all. Knowing all of this information about Seagate, makes the choice between this company and their major competitor Western Digital (NASDAQ: WDC) a very simple choice.
While Western Digital sells for a very cheap multiple of just 4.07 times forward earnings, the big differences are the expected growth in the company's earnings, and the fact that Western Digital pays no dividend. The company is expected to show earnings growth of just less than 17% in the next few years. While they have beaten earnings in the last four quarters, the lower growth rate, and zero dividend makes all the difference. So the only question left is why are more people not snapping up these cheap shares?
I'm sure the focus is the change in the computer industry, being brought on by the adoption of tablets and smartphones. As more people use tablets and smartphones as their primary computing device, the theory is that traditional hard drives will go the way of the dinosaur. Since both Seagate and Western Digital produce traditional hard drives, I'm sure investors of waiting the shares are assuming that they will suffer. However, this ignores the fact that both companies produce their own solid-state drives. Though tablets and smart phones are a piece of the computing puzzle, it's doubtful they will fully replace traditional desktop and laptop computers for quite a while, if ever. In my eyes, even if Seagate growth came in at less than half of what analysts are expecting, the stock could potentially double. The company's 4% dividend is higher than most technology companies, and it's ridiculously cheap share price versus earnings that leaves plenty of room for expansion. Once investors realize that this company will be around for a while, the shares should do very well.
MHenage owns shares of Seagate Technology. 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.If you have questions about this post or the Fool’s blog network, click here for information.
