SEAGATE: HARD DISK CRASH (FROM SMARTMONEY)
ÿ
WILL IT ever end? The nightmare that is the disk drive sector continues for its market leader, Seagate Technology (SEG), which announced late Tuesday that it will report a substantial operating loss in its second (December) quarter. On the news, the stock was down as low as 18 1/2, a 52-week low, and by the early afternoon was trading down 1 1/4, or 6%, to 19 3/8.
Analysts were expecting Seagate to earn 3 cents for the quarter, but now Seagate management says that it will see a "substantial" operating loss instead. "This will now be their second ugly quarter in a row," says Todd Bakar of Hambrecht & Quist. "It seems that no matter how much they try to write off, the recovery is going to be slow and gradual." The company was originally scheduled to report results tomorrow, but now that date has been moved back to January 20.
So has Seagate hit bottom? In terms of stock price, it's getting close. Over the last 12 months, the stock has fallen from a high of 56 to its current levels. One potential snafu could be its earnings shortfall. If it does take a loss for its 1998 fiscal year, and its problems don't begin to improve in 1999, then this stock could fall still further. The question, then, is: When can Seagate turn around its prospects?
Patrick Tenney, a respected disk drive analyst at BancAmerica Robertson Stephens, believes that the disk drive maker -- and for that matter the entire disk drive industry -- still has way too much inventory. "And that portends weakness for the next several quarters." Tenney foresees more inventory write-downs, further reductions in capital equipment expenditures, and an eventual removal of certain capacity segments.
For Seagate to turn things around, "it will have to remove another chunk of capacity," says Tenney. Tenney interestingly compares the industry's oversupply problems with the "parity" in the National Football League. "The hard drive disk (HDD) industry has temporarily entered time-to-market parity," he explains. "As a result, price advantages and margin expansion stemming from new introductions of products have disappeared." Some of the newer, more powerful hard disk drives put out by Western Digital (WDC), Quantum (QNTM) and Seagate have all come out within a few months of each other, thereby overwhelming consumers with too much of what is essentially a very similar product. This is precisely what happened after the recent release of the 2.1-gigabyte hard drive.
Seagate is the biggest independent maker of the computer data-storage devices, and is often seen as a bellwether technology stock, but the company has been losing market share in the high-end disk drive market. International Business Machines (IBM), which has invested heavily in its storage business, has made inroads in this market, as have Quantum and Western Digital.
After yesterday's news, analysts were quick to pare down earnings numbers. Bakar, who just months ago expected Seagate to earn 70 cents a share in this December quarter, now forecasts a loss of 28 cents a share and a loss of 9 cents for the 1998 fiscal year, down from $2.67 in 1997. That's an incredible drop for one of the strongest stocks of the decade. Tenney's numbers are no better: 32 cents for the December quarter and a 30-cent loss for the fiscal year. That means this $9 billion (in 1997 sales) company will have no price-to-earnings ratio for its 1998 fiscal year. And Morgan Stanley's Gillian Munson, who had the lowest quarterly earnings number on Wall Street of an 8-cent loss, now sees a 41-cent loss for the quarter and a 48-cent loss for the year. Ugly may be an understatement.
There are no easy answers for the disk drive sector and Seagate has provided very little long-term forward guidance over the last two quarters. Instead of preannouncing repeatedly each quarter, Seagate would be wise to admit that it has tough times ahead. Bakar, who is maintaining his Hold rating on the stock, says that Seagate "is gradually moving closer to the bottom, and the significant restructuring charges being taken by the company [$300 million over the next two quarters] will eventually help."
In November, the company said it expected to be marginally profitable in the second quarter, although it warned that a restructuring charge would come in at the high end of a previously announced $50 million to $100 million range. Now, the company said it would take a much larger charge, $250 million this quarter, and another $50 million in the next one.
But Bakar says for the next six months at least, estimates are still likely to trend lower. So for now, stay away from this decimated disk drive sector and if any bright spots emerge, we'll be sure to let you know.
-- By Eric Moskowitz
|
