3 Storage Device Stocks to Consider Buying

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

As the demand for data grows, there will be continued pressure on storage device producers for innovation. The problem is that, as the market continues to grow, some lines of business have started to be replaced by newer models. While the firm's that are capable of catching up to speed in a turnaround effort are likely to generate the strongest returns, investors are encouraged to also back businesses that have established relationship with top tech firms.

Seagate's (NASDAQ: STX) Do Or Die Moment

While Seagate may trade at 4.4x past earnings, the company is still rated closer to a "sell" than a "buy" and has 138% more volatility than the broader market. Citi recently downgraded the stock based on forecasts that were even weaker than the reduced 150-155 million unit forecast of Q4 hard drive sales set by Seagate. Their analysis goes onto speculating about a 27% q-o-q decline in high-margin enterprise drive sales that will not be offset by strong performance in Windows 8.

The company is exposed to strong secular tailwinds in cloud computing, but supply chain disruptions have overclouded the growth story. Strong past design wins from Dell and HP are being complicated by the transition to Ultrabooks that run on solid state drives (ie. not Seagate's specialty). Accordingly, the pressure has been heating up for Seagate to stage a takeover an SSD producer - this is it's "do or die moment".

If Seagate is successful in acquiring an undervalued target, it could leverage its low cost operations to preferentially gain share in a competitive market. I also believe that the market is overly negative on the decline of PCs. Although tablets and smartphones have grown in popularity, they are more complementary to PCs than substitutes. Indeed, Microsoft's decision to model its Surface tablet off of Windows 8 was a strong idea to reinforce to consumers that it is an extension off of the PC and not ideally a replaceable PC by itself.

Western Digital (NASDAQ: WDC) & EMC Corporation (NYSE: EMC)

Western Digital is similarly selling at a bargain price of 5.6x and 4.2x past and forward earnings, respectively. The stock is forecasted for 6.4% annual EPS growth over the next 5 years, which is incredibly low given the double-digit growth rate that was achieved over the past 5.

Assuming the company only yields this amount, 2016 EPS would come out to $10.38. At just a 9x multiple, this translates to a future stock value of $93.42 - more than triple the current market price! The chances of generating this kind of a return are very lucrative and are supported by excellent performance. Last quarter, management beat expectations by 36.2% with EPS of $3.35. The quarter before that, EPS was 59.5% ahead of consensus. Yet, since mid-August, the stock has been on a precipitous decline from $45 to $36. It should therefore not be surprising that Standpoint Research has at least argued that the stock's price target should be around where it was in mid-August. In its September 18 research not, Standpoint upgraded Western Digital from a "hold" to a "buy".

Compared to Western Digital and Seagate, EMC is relatively expensive at 21.2x past earnings. However, analysts are actually most optimistic on the stock and rate it 1.7 out of 5. Much of the reason has to do with the company's impressive momentum towards around 14.1% annual EPS growth over the next 5 years. 15.4% was achieved over the past 5 years (a period that included the recession), so the bar, if anything, has been set too low.

I am also optimistic about EMC's partnership with Cisco in cloud computing. This should not only secure an attractive stream of free cash flow but also increase brand recognition. In addition, the purchase of nearly four-fifths of VMWare will help the company to better create bundles of services or cross-sell multiple lines.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of EMC and 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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