One Company with 83% Returns, and the Fireworks will Continue

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

Whenever I went into the store to buy an ultrabook, the high prices always scared me away. This week I purchased an HP ultrabook that cost me around $900, and while some may say that this isn’t cheap, I’d say it’s cheap on a comparative basis. Solid state drives (SSDs) play a major role in making these machines lighter, more energy efficient, and give them nearly 44% faster boot-up times compared to regular laptops. But it is also the SSDs that drive up the prices of ultrabooks.

However, storage drive manufacturers have found a solution to the high costs. Hybrid hard drives, which include both SSDs and hybrid disk drives (HDDs), are rapidly catching on in the ultrabook market. The technology was first developed by Seagate (NASDAQ: STX) in 2007, but it is only now that the world is shifting to hybrid drives as an alternative to the expensive SSDs.

Let’s compare the price and performance of the two main storage technologies.

Storage Type

Performance

Capacity

Price

Cost/GB

HDD

100%

250GB

$23

$0.09

SSD

144%

256GB

$180

$0.7

We can see that the SSDs cost nearly 800% more than HDDs, while giving only a 44% performance boost. The pricing of hybrid drives starts at $23, and provides a 41% increase in boot up times and a more than 300% increase in access times compared to the traditional hard drives. The performance is similar to the SSDs but costs 87% less than SSDs.

Most of the ultrabook manufacturers are now rolling out models with hybrid drives for cost conscious consumers like me. However, to cater to the premium segment who don’t want to give up on the drive’s access times, ultrabooks with SSDs are still being sold. Currently Seagate is one of the leading manufacturers of the hybrid technology, and the phasing in of hybrid drives for both desktops and ultrabooks makes the company an appealing investment option.

The highlight of Seagate’s recent quarterly results was the 55% surge in revenues, bringing the total to $4.5 billion compared to $2.9 billion in the same quarter a year ago. Gross margins shrank by 4% due to the floods in Thailand, which was an issue faced by the entire industry. However, the gross margin is still above the pre-flood levels, and the quick recovery in Thailand is expected to inflate the margins back up.

The company shares its market space with Western Digital (NASDAQ: WDC) and OCZ Technologies (NASDAQ: OCZ). From the chart we can see that Seagate has given returns in excess of 80% YTD, while OCZ has negative returns. The company has significantly outperformed its peers in terms of stock returns.

STX data by YCharts

Let’s take a look at the financial metrics of the three companies.

Company

Gross  Margin

Trailing annual Dividend Yield

ROE

Seagate

33.7%

4.25%

96%

Western Digital

29.16%

0.66%

24.5%

OCZ Technologies

23.7%

0%

-7.7%

Seagate looks to have the best mix of numbers, with the highest returns of equity and the highest gross profit margins. The annual yield of 2011 stood at 4.25% with a moderate payout of 12.5%. I believe that Seagate could make its way into any dividend growth portfolio.

Seagate is currently the leading manufacturer of hybrid hard drives and, and the company’s fundamentals and financials look great. Seagate has outperformed its peers in terms of stock returns, and I believe that the stock could further head north.


PiyushArora 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.If you have questions about this post or the Fool’s blog network, click here for information.

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