Looking Beyond Seagate's Earnings
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When the going gets tough, the tough get going. This age old adage perfectly fits hard drive maker Seagate Technology (NASDAQ: STX) after the company beat the Street in the third quarter and saw its shares jump some 5%. The company has done well even though the industry is still feeling the aftershocks of the Thailand floods which disrupted operations and led to a supply chain disruption last year.
Fool analyst Seth Jayson has already given us a brief snapshot of how the numbers were. Now I will put Seagate through the wringer and see what it did right and how it might perform in the long run.
Higher prices and increased shipments pushed up Seagate’s top line by a phenomenal 65% to $4.4 billion in the quarter from the year ago period. The company shipped 61 million drives in the quarter, up 29% sequentially. This is an indication that the industry is getting back on track after the Thailand disaster last year which had significantly damaged production facilities.
Damaged production facilities led to an increase in the cost of making hard drives but increase in average selling prices more than made up for the cost jump. And since the demand-supply balance hasn’t been restored yet, Seagate continues to make merry. As a result, the company’s gross margins almost doubled to 37% in the quarter from the year ago period. In addition, it is expected that the depressed supply conditions will go on well into the next year, effectively meaning that Seagate can enjoy charging more for its hard drives for at least another year.
Seagate expects its growth to continue on the back of improved PC sales and growth of cloud computing. The PC market improved more than what was expected in the first quarter this year and the launch of the much anticipated Windows 8 platform by Microsoft later this year could further help sales. One may say that the days of the PC are over but they are still selling in good numbers in emerging markets in India, China and the EMEA region.
Seagate also supplies drives for building cloud infrastructure. This is another area where the company might see terrific growth going forward since cloud computing is projected to grow at 39% annually over the next four years. The company expects that the market for hard drives will total 160 million units in the current quarter and 185 million units in the quarter ending December. And considering Seagate commands 43% of the market, one would expect the good times to continue moving forward.
Seagate and its rival Western Digital (NASDAQ: WDC) are making the most out of the supply shortage in the industry. Western Digital beat Mr. Market’s expectations the last time it reported its earnings. Further, it seems like Seagate’s positivity has rubbed off on to its rival as Western Digital which had a great day yesterday.
The Foolish takeaway
Seagate has given a market beating return of 77% so far this year and I expect it to get better as the year progresses. The strong pricing environment and opportunities in cloud infrastructure along with probable improvement in PC markets might drive the company’s top line further north. And once you throw in a dividend yield of 3.5%, as compared to none offered by Western Digital, the case for Seagate becomes even stronger.
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