GS on STX Seagate Technology (STX): Aggressive pricing already in the stock
What's changed
In the midst of what we believe are improving hardware fundamentals, the drive industry
is facing a contrasting variable in the form of more aggressive pricing, specifically on the
notebook side. For Seagate, the combination of slightly better-than-expected volumes with
slightly-worse-than-expected pricing yields in-line results for the September quarter,
enough to fulfill modeled expectations but clearly less than hoped for at this time of the
year.
Implications
Our sense is that many hedge funds are actively short Seagate. With the price down
around 11% since the beginning of September, this would tend to confirm that much of
the disappointing news is already in the stock, a key reason why we are sticking with our
Buy rating for now. In addition, there are early signs of growing demand in businesses,
such as PCs, that directly relate to Seagate. Low fundamental expectations and a low
valuation imply that Seagate could bounce appreciably as volumes start to build into the
seasonally best quarter, which means that, apart from maintaining our watch over pricing, our main focus will be on the magnitude of volume build and sell-through.
Valuation
As one of our mature company stocks, our 12-month target price of $28 is based on a combination
of our fundamental framework and our quantitative valuation which is comprised of target earnings
multiples, cash flow metrics and DCF.
Key risks
Our assumptions are predicated on a moderation in desktop pricing pressure as a result of firming
demand in the latter portion of the year. The major risk is that demand does not materialize as
expected causing continuing pricing which will negatively impact Seagate?s revenue, margin, and
earnings. |
