Hard-Disk Drive Stks To See More Demand - Bear Stearns
DOW JONES NEWSWIRES
December 2, 2005 10:58 a.m.
By Donna Fuscaldo
Of DOW JONES NEWSWIRES
The ever volatile hard-disk drive sector got a boost Friday when Bear Stearns raised its investment rating on the group, citing better industry conditions.
In a research report, Bear Stearns long-time computer hardware analyst Andrew Neff said he raised his investment rating on shares of Maxtor Corp. (MXO), Western Digital Corp. (WDC), Segate Technology (STX) and Komag Inc. (KMG) to peer perform from underperform because of strong demand for desktop and notebook computers, low inventory for hard disk drives and a improved pricing environment.
"HDD industry conditions are clearly strengthening," wrote Neff in a research report. "While we note that the sector is highly volatile, the last 2-3 data points have been positive." Neff was referring to Western Digital and Seagate, both of which raised their financial targets for the December quarter.
Late last month, Irvine, Calif.-based Western Digital said it now expects earnings in the December quarter to come in between 34 cents to 37 cents a share, higher than its past target for earnings of 31 cents to 34 cents a share. The company also raised its revenue target to between $1.04 billion to $1.075 billion, up from $1.025 billion to $1.075 billion. Western Digital cited better-than-expected pricing and strong demand as part of the reason for the upgrade.
Meanwhile, on Thursday, Scotts Valley, Calif.-based Seagate also raised its December quarter financial targets, citing better-than expected demand and product mix for the upside. Seagate now expects earnings in the December quarter to come in between 49 cents and 53 cents a share, up from its past target of earnings between 44 cents and 48 cents a share. Revenue is now expected to be $2.2 billion, compared with its previous projection of revenue between $2.1 billion and $2.2 billion.
Recently shares of Maxtor were up 2.6% to $4.32, while Western Digital was down 0.8% to $14.85, and Seagate was off 2.6% to $18.53. Komag was recently trading up 1.8% to $35.80.
While Neff is upbeat on the hard disk drive sector's near-term prospects, the analyst did caution that the December quarter is typically a strong three-month period for the hard-disk drive makers because of the holiday selling season when consumers are known to plunk down cash on computers and consumer electronics. Neff said that a seasonal lull and easing inventory constraints could hurt the group in early 2006.
"The major issue is whether the HDD industry will maintain its current discipline while inventory is healthy," wrote Neff. "Though history may argue against it ... the HDD vendors are now better positioned exiting 2005."
Indeed the hard disk drive sector is notorious for boom and bust cycles that are all the more pronounced by aggressive pricing. Hard-disk drive makers burst on the scene in the 1980s with the advent of the personal computer. Over the years, brutal competition and the costs of staying ahead of the technology curve brought many vendors to their knees.
In conjunction with Bear Stearns rating increases, the investment firm also upped its unit growth forecast for the PC sector this year. Bear Stearns now expects PC units to grow 16% this year and revenue to increase 10%, that's up from 14% and 8%, respectively. For 2006, Bear Steanrs now sees PC unit growth of 13% and revenue growth of 4%, up from 12% and 3%, respectively.
"Despite rising interest rates and high oil prices, we see favorable global economic momentum continuing into 2006, driven by resilient consumer demand and stable IT spending environment," said Neff. He noted that he expects normal PC upgrades in the first half of next year, with the possibility of an even stronger upgrade cycle in the second half of 2006, once Microsoft Corp. (MSFT) launches its new operating system Vista.
Neff does not own shares of the hard disk drive stocks, but Bear Stearns intends to seek an investment-banking relationship with the companies.
-By Donna Fuscaldo, Dow Jones Newswires; 704-371-4263; donna.fuscaldo@dowjones.com |
