With shares of Seagate Technology Public Limited Company (NASDAQ:STX) trading at around $36.84, is STX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
There's a lot of bullishness sentiment ahead of earnings. While it's definitely possible that all these optimists are correct, it's a bit frightening. However, it doesn't matter. The reason it doesn't matter will be explained in the Trends section. For now, here's a quick look at positives and negatives for the company.
Positives:
4.20 percent yield (higher than peers) Beat expectations last quarter Strong cash flow Margins still strong despite recent contractions Dominant HDD position Strong storage demand from enterprisesNegatives:
Analysts don't favor the stock: 3 Buy, 18 Hold, 4 Sell Average selling price declines Subpar debt management Slowdown in desktop and notebook computersThe chart below compares fundamentals for Seagate, SanDisk (NASDAQ:SNDK), and Western Digital Corporation (NYSE:WDC). Seagate has a market cap of $13.17 billion, SanDisk has a market cap of $12.72 billion, and Western Digital has a market cap of $13.21 billion.
| STX | SNDK | WDC | |
| Trailing P/E | 4.76 | 27.31 | 6.97 |
| Forward P/E | 6.70 | 11.13 | 6.98 |
| Profit Margin | 19.80% | 9.05% | 12.15% |
| ROE | 101.19% | 6.54% | 25.13% |
| Operating Cash Flow | $4.36 Billion | $936.33 Million | $3.56 Billion |
| Dividend Yield | 4.20% | N/A | 1.90% |
| Short Position | 8.40% | N/A | 2.80% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for Seagate is weaker than the industry average of 0.20.
| Debt-To-Equity | Cash | Long-Term Debt | |
| STX | Best Value Stocks To Own Right Now0.96 | $1.87 Billion | $2.82 Billion |
| SNDK | 0.24 | $3.31 Billion | $1.72 Billion |
| WDC | 0.24 | $4.06 Billion | $2.01 Billion |
T = Technicals Are Strong
Seagate has outperformed its peers over a three-year time frame. This is in addition to offering the highest yield.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| STX | 0.37% | 20.61% | 29.39% | 109.10% |
| SNDK | -4.60% | 20.53% | 39.52% | 24.77% |
| WDC | 9.92% | 30.79% | 48.41% | 31.13% |
At $36.84, Seagate is trading above all its averages.
| 50-Day SMA | 34.64 |
| 100-Day SMA | 33.49 |
| 200-Day SMA | 31.57 |
E = Earnings Have Been Inconsistent
Seagate's annual earnings have been up and down over the past several years. Revenue has been just as inconsistent.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
| Revenue ($)in billions | 12.71 | 9.81 | 11.40 | 10.97 | 14.94 |
| Diluted EPS ($) | 2.36 | -6.40 | 3.14 | 1.09 | 6.49 |
When we look at the previous quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings both declined on a sequential basis.
| 12/2011 | 3/2012 | 6/2012 | 9/2012 | 12/2012 | |
| Revenue ($)in billions | 3.20 | 4.45 | 4.48 | 3.73 | 3.67 |
| Diluted EPS ($) | 1.28 | 2.48 | 2.36 | 1.42 | 1.30 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Might Support the Industry
The good news is that there has been increased usage in digital content. The bad news is that the U.S. consumer is weak and there has been slowing demand in emerging markets. However, the scariest factor, and the reason earnings don't matter, goes deeper.
Some people believe in the current stock market rally while others feel it's unsustainable. While the rally has potential to continue, it would be difficult to make a solid argument that it's sustainable. Taxes have increased, employment is weak, and deleveraging is imminent. Many companies throughout the broader market are improving earnings by cutting costs. They're not growing. The big problem here is the first thing they cut is employees. If that's the case, then employment weakens further, which then leads to a reduction in consumer spending.
Once again, the market has the potential to continue its momentum as long as Ben continues to be as creative as Oscar Wilde. However, if the market begins to unwind, then this industry, and Seagate in particular, is a dangerous place to be. There is no resiliency. For example, on Jan 2, 2008, Seagate's adjusted close was $17.89. On December 1, 2008, Seagate's adjusted close was $3.78. Those who bought at or near such levels made a bold and superb move. Though there is still room to the upside, greed can lead to trouble.
Conclusion
Seagate is a good company. On a company-specific basis, it simply needs to catch up a little on the technological end. Seagate is likely to figure out solutions if it finds itself behind the pack. The real concern is the industry's extreme sensitivity to a steep market correction. Since capital preservation is always the priority here, Seagate is a STAY AWAY.
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