Five Reasons Seagate Can Climb 20%+: Brean Capital
September 1, 2015, 10:00 A.M. ET
By Teresa Rivas
Seagate ( STX) will hold its analyst day on Wednesday, and Brean Capital sees good news to come.
Analyst Ananda Baruah reiterated a Buy rating and $65 price target on the stock today, writing that he likes the company’s positioning heading into its analyst day, and he believes Seagate’s normalized earnings per share remain at $5 minimum.
He writes that Seagate has issued “a significant response” to weak PC demand by slashing operational expenditures by 20% in the year that will end with the March 2016 quarter, and that the company can keep its revenue steady despite a declining total addressable market thanks to a material increase in blended average selling prices.
Therefore, the shares look attractive and much less risky at current levels. Even if the shares only get to $60 in the next year ($5 below his target) that would still be 20%+ upside, and he sees the company’s stock repurchases continuing.
His five main upcoming catalysts for the stock:
1) We believe Sep Q GM guidance of ~27.0% is set up to be beat (perhaps by >100bps), as we believe that Sep Q sell-out TAM is tracking at least to the high-end of 110M – 115M unit guidance and that we believe STX may be building some additional inventory which this Q could actually help INCREASE GM given a drawdown in the Jun Q that led to under-absorption.
2) STX has more room to reduce Opex $ below their ~$450M / Q Mar Q ’16 guidance level if FY16 revs are softer than anticipated. The takeaway here is that while it’s accurate that STX is now targeting a 20% Opex $ reduction from Mar Q ’15, we believe that is predicated on a revenue outlook of flat for FY16. Said another way, if FY revenue should decline, then STX will further flex down their Opex $ to reflect that reality.
3) We believe STX L-T share count target of 250M outstanding remains in play (we note that STX could be at <300M exiting the Dec Q). This means there is another 15% – 18% of share count to come out. While we believe it could take STX 2 – 3 years to reach 250M shares, we believe this level is where they want to be.
4) For FCF generation, if revenue doesn’t reached normalized growth, normalized Capex levels will move to 4% of revenue from the current 6 – 8% model. Again, as with Opex $’s, if revenue growth isn’t achievable, then adjustments to the Capex model should be made. We note that every 100bps of revenue (to the Capex model) is $120M – $130M in Capex spent / saved.
5) STX absolutely believes that the cloud story / data storage story as they’ve envisioned it is on track. As part of this, per conversations with their Cloud customers, they anticipate the shift to 6TB / 8TB Cloud drives will accelerate in 1HCY16 / 2HFY16, to perhaps 50% of Ent ships from perhaps 20% currently. This has very material ASP and GM mix implications. Softer PCs are unfortunate and 2H14 overbuild along with consequent 1H15 inventory drain makes for a clunky transition along the way to Cloud, but the Phone/Tablet data which is impacting PC shipments eventually makes it to the cloud over time.
Seagate was 0.5% lower in recent trading.
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