Disk drive stocks down on Western Digital earnings woes, but not out
Tuesday, September 30, 1997
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by Michael Brush
As might be expected, Western Digital's (NYSE: WDC)
announcement Monday that it will miss earnings
expectations this quarter sent shock waves through the
disk drive industry and left investors mulling a
familiar question.
Will Western Digital's problems spill over to hurt
other companies in the field, especially Quantum
Technologies (NASDAQ: QNTM), and suppliers to the
sector like Read-Rite (NASDAQ: RDRT), Applied
Magnetics (NYSE: APM) and Hutchinson Technologies
(NASDAQ: HTCH)?
The short answer is probably not.
But given historic concerns in the disk drive sector
about nasty price cutting to protect sales volume and
market share, Western Digital's announcement could
leave stocks in the sector treading water for a few
months.
Looking ahead to 1998, however, the disk drive sector
looks strong, and remains a solid place to invest,
several buy-side analysts say.
"When the dust settles, I think the disk drive
companies have the potential to be one of the better
performing sectors in 1998," says Marc Klee, the co-
manager of the John Hancock Global Technology Fund.
"But during the next few months or so, the stocks will
probably mark time more than anything else."
Not long ago, the sector was made up of a multitude of
players which did not hesitate to use vicious price
cutting to protect market share and the sales volume
needed to cover the high cost of capital equipment
used to make disk drives.
More recently, though, the disk drive sector has been
"rationalized" down to a handful of key players,
namely Seagate (NYSE: SEG), Western Digital and
Quantum, which seem to have at least a tacit agreement
that price cutting is a no-no.
Seagate's announcements earlier this month of trouble
ahead, followed by Western Digital's statement
yesterday that Seagate had been cutting prices to move
excess inventories, brought fears of price cutting
back into the minds of some investors. Price wars, of
course, can wreak havoc with stock prices.
"It is a very inexpensive group based on earnings
potential," says Klee. "But there have been a number
of shoes that have dropped in the high end of the
market and now the low end. So I think it is going to
be a while before investor confidence returns. I would
be surprised if prices move down much from here," Klee
said during the trading day Tuesday. "But I would also
be surprised if three months from now the stocks were
much higher than they are today."
While Seagate has been on a downward path recently as
analysts revised earnings expectations downward,
Quantum should have more protection from the kind of
price cutting that occurred in the disk drive sector.
That's because it gets a good portion of its revenue
from other product lines, mainly digital tape.
Even Western Digital is not in any serious trouble in
the medium term, some sell-side analysts said Tuesday.
Goldman Sachs analyst Richard Shutte told fund
managers that the pricing and margin pressures, which
became more intense in the final weeks of the quarter,
were not the start of a trend. He expects gross
margins to increase next fiscal year.
Lisa Rapuano, an analyst with Legg Mason Funds,
agrees. "Western Digital and Quantum are both
attractive at these prices," she says. "But Seagate I
would not put a blanket buy on, because there is more
company-specific risk." Since the company is
vertically integrated, meaning it makes many of the
parts that go into its final product, it is affected
more by kinks in the market . "When they are executing
well, they blow the others away. But what helps you on
the upside hurts you on the downside."
At least two brokerages do not share her support for
Western Digital and Quantum, however. Credit Suisse
First Boston lowered its rating on Western Digital
Tuesday to hold from buy. And Bear Stearns lowered its
rating on Quantum to attractive from buy.
By 5pm Tuesday five out of 14 analysts reporting had
revised estimates downward for this quarter for
Western Digital, according to IBES
(https://www.ibes.com) a company that compiles and
analyzes earnings estimates. But only one out of six
reporting estimates for 1998 had revised those numbers
downward: Salomon Brothers cut its estimates from
$4.32 from $4.91.
Only one out of 18 analysts covering Seagate had cut
this year's estimates Tuesday: to $2.65 from $3.16.
And one out of eight analysts had cut estimates for
Seagate for next year: to $3.87 from $4.33. But
nearly all analysts covering Seagate have cut earnings
estimates for the company in the past four weeks or
so, painting a dark picture for the company.
None of the analysts covering Applied Magnetics, Read-
Rite, or Hutchinson Technologies had cut estimates for
any of those companies Tuesday. Estimates for each of
those companies, however, have been revised downwards
significantly in the past few weeks. |
