LE/ Seagate Technology (STX - US$ 21.00) 1-Overweight
Change of Price Target
Reducing ASP assumptions, EPS, Px Tx
Investment Conclusion
While the rate of industry price erosion appears to
be slowing, the pricing assumptions built into our
previous Seagate forecast appear aggressive.
Our blended ASP moves from $70 to $68 for
FY07. As a result, we are lowering EPS
December quarter, FY07 and FY08 to reflect
current competitive trends. We are leaving our
2HCY06 unit estimates largely unchanged but
reducing our 1HCY07 unit assumptions. As a
result, we are lowering our CY07 EPS estimate
from $2.70 to $2.43 and our px tx from $31 to $29.
We maintain our 1-OW rating as we expect
signficant margin accretion near-term due to the
completion of the Maxtor integration.
Summary Fine tuning our Sep EPS estimate from $0.17
($0.07 GAAP) to $0.16 ($0.05 GAAP). Reducing December revenue from $3.0B to $2.8B
and EPS estimate from $0.43 to $0.33 We are lowering our FY07 estimates from $11.9B
and $1.90 to $11.0B and $1.60 ($1.29 GAAP). We are reducing our FY08 estimates from $13.8B
and $2.95 to $12.6B and $2.64. We are reducing our CY07 EPS estimate from
$2.70 to $2.43 and our CY08 EPS from $3.26 to
$2.85.
We are maintaining our 1-OW rating on STX, but moving our Sep EPS estimates to $0.16 from $0.17. We are moving our
December quarter estimates to $0.33 from $0.43 and our FY07 estimates to $1.60 from $1.90. Our CY07 estimates go from
$2.70 to $2.43.
We believe HDD unit demand remains relatively solid. However, with several HDD players expected to bring more capacity
on line in 2007 and Hitachi and Toshiba likely to defend share in 2.5” and 1.8” markets, pricing pressures are likely to remain.
Our reductions in estimates are principally predicated on concerns that the competitive pricing environment experienced in the
June and September quarters will continue but at a somewhat lower rate, particularly in notebook PCs and, too a lesser
extent, in desktop.
While we are reducing estimates, we believe downside will be limited by the company’s plan to purchase up to $2.5B (~20%
of market cap) of stock over the next 24 months now that the $1.5B debt deal has been completed.
For the September quarter, we continue to believe HDD unit shipments for the industry overall are generally in line – however,
desktop units are likely to be below normal seasonality, notebook stronger than seasonal, and enterprise in line.
$1.5B Debt Offering.
STX recently raised $1.5B in debt to retire $400M of 8% notes, and also accelerate its $2.5 billion share buyback program.
Though debt service should weigh in on earnings, we believe it will more than offset with lower weighted average coupon
payments and reduced share count. It will be 3 tranches with $300M or 20% of the proceeds bearing an interest rate of 84
bps above LIBOR, ~$600M or 40% of the proceeds with a fixed interest rate of 6.375%, and the remaining $600M bearing an
interest rate of 6.8%. This currently has a weighted average interest rate of 6.52%, which is below the 8% on the $400M bond,
and may slightly vary due to the change in daily LIBOR rates.
Valuation
We are reducing our price target on Seagate from $31 to $29. Seagate has historically traded at a high-end P/E multiple of
12x. Using our new CY07 EPS estimate of $2.43 (versus previous estimate of $2.70) with a 12x relative P/E results in a price
target of $29. Our old price target of $31 was based on a 0.8x relative P/E multiple using our previous CY 2007 EPS estimate
of $2.70 with the 2007 S&P 500 multiple of 14.0x. |
