I was wondering why we lost the 7/8 ask. Maybe you've landed on a possible answer. The following from the Motley Fool has some interesting points that fit JTS as well as HTCH. JTS traded up when they preannounced sequentially lower revenues, though, disn't it?
HUTCHINSON TECHNOLOGY (Nasdaq:HTCH) , the disk drive suspension assembly maker that holds 70% market share, acted as the bellwether for the disk drive industry this morning, falling $3 1/4 to $30 3/8 after pre-announcing weak fourth quarter results. Following last quarter's strong EPS of $0.68, the company reported yesterday that it will be in the break-even area for the quarter and that unit volume will fall 22% sequentially and will grow 6.3% year-over-year -- anemic-looking results in a business where the unit volume bogey is above 20% (the year-over-year growth rate for disk drive unit volume plus a multiplier for yearly increases in the number of suspensions per drive). There are a few features of Hutchinson Technology in particular -- and the drive industry in general -- that investors might want to keep in mind.
The disk drive business sells capital goods, not consumption goods. Even if a disk drive is consumed (depreciated or rendered obsolete for many applications in a very short time) very rapidly, thus making for very good repeat purchase economics, business results for capital goods industries are always more uneven than for a company like Coca-Cola or a company selling laundry detergent. In this regard, one should remember that the disk drive industry began to cook on high earlier than normal in the third calendar quarter last year, making year-over-year comparisons for this quarter very tough. Last quarter, too, the drive industry was unusually active, with nary a peep about poor European demand. All of this is relates to inventory levels in the retail and wholesale channels. While the stocking of a depleted inventory channel can show up in the production numbers at a company like Hutchinson or Fool Port holding INNOVEX (Nasdaq:INVX) , it doesn't indicate what demand is at that moment with the final customer, the business or consumer that is buying the server or PC.
Hutch investors will also tell you that profitability is highly leveraged to unit volume. Above a certain point, its workforce and capital inputs are very efficient. With planned growth rates of 20% each year, though, both of those inputs have to be increased every year. The company is run by some of the best operators in the
business, all the way from finance to production. That's a good situation for Hutch investors, as this is an extremely difficult business to run, it does not generate a lot of free cash flow, and it does not reward too many mistakes. Finally, Hutchinson is ramping an advanced Trace Suspension Assembly program, and that's going to
hurt gross margin for a little bit, especially as it tweaks the production process. Hutch officers look at that suspension as a major growth driver for the future. All in all, Hutchinson and the drive sector are not easy to follow, given the complicated factors affecting the business. The only thing linear about demand growth is a long-term chart -- in the short run (quarter to quarter), it's always jagged at Hutchinson and in the industry in general. |
