Do These Solid Disk Drive Stocks Present Good Values?

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

Despite the theory that hard disk drive technology is aging, Seagate Technology (NASDAQ: STX) and Western Digital (NASDAQ: WDC) have enjoyed dramatic run-ups over the last couple years.  As the 2008 financial crisis unfolded, the stocks of these two companies collapsed.  It was widely believed that solid disk drives were a dead technology, exacerbated by the economic downturn, and that non-physical forms of storage would soon make hard disk drives obsolete.  Companies like SanDisk (NASDAQ: SNDK) were supposed to take over the industry. As a result, the share prices of Seagate and Western Digital cratered.  Seagate traded as low as $4 per share in March 2009, and Western Digital hit a low of $10 per share in late 2008.  After huge recoveries for the two companies, is there still room for these stocks to run?

Back From the Brink

Western Digital has enjoyed a near-uninterrupted run to its current level of $47 per share.  Seagate’s run has been even more impressive, becoming a near 10-bagger for investors fortunate enough to have bought at the 2009 lows.  Of course, buying at the 2008-2009 lows was easier said than done.  Operating performance for both Seagate and Western Digital suffered mightily.   Seagate reported a loss of $6.40 per share in fiscal year 2009, and the company suspended its dividend as its business suffered.  Western Digital endured equally shaky financial performance during the recession.  In fiscal year 2009, sales declined almost 8% and the company’s diluted earnings fell to $2.08 per share.

For its part, SanDisk fell to a low of under $6 per share in late 2008 and has impressively recovered all the way to its current level of $48 per share.  Its flash memory storage solutions didn’t eradicate solid disk drive technology.  In fact, the company’s total revenues declined 14% through the first nine months of 2012 versus the prior year.  Unlike both Western Digital and Seagate, SanDisk doesn’t pay a dividend, and also doesn't appear to be as attractively valued at almost 25 times trailing twelve month earnings. 

Is There Value Left?

Both Western Digital and Seagate appear to still be modestly valued, despite their huge run-ups over the last few years.  In its 2012 annual report, Seagate reported a 36% increase in revenues versus 2011.  Amazingly, diluted earnings per share jumped from $1.09 in fiscal year 2011 to $6.49 in fiscal 2012.  At its current price of $36, Seagate is trading at a price-to-earnings ratio of less than 6 times its fiscal 2012 profits.  The company pays a hefty dividend that currently yields 4%. 

Western Digital’s results were equally as impressive in fiscal year 2012.  Western Digital’s 2012 revenues increased 31% year over year.  Diluted net income per share more than doubled over the same period, to $6.58 in fiscal year 2012.  At current prices, investors are paying slightly more than 7 times the company’s 2012 earnings.  Western Digital announced a new dividend policy in 2012, and currently yields roughly 2%.  Another catalyst for Western Digital’s shares has been recent rumors of a buyout.  Shares bounced more than 5% on January 22 as an analyst speculated the company could go private to maximize its operations.

The Bottom Line

Recent operating and share price performance for both Western Digital and Seagate has been truly impressive.  However, investors can suffer from short memories—these companies suffered heavily from the effects of the 2008-2009 financial crisis.  Times are good now, and both stocks may experience both increased earnings and multiple expansions going forward.  However, it would be prudent for investors to remember that another economic downturn would likely have a pronounced negative impact on both stocks, as happened during the last recession.  Long-term investors may want to wait for a better entry point before jumping in to shares of these two stocks.

Robert Ciura 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!

blog comments powered by Disqus