Here is the Info for you all patient SEG Investors .....
For Contrarians Only
Value-oriented investors might consider a second way to
profit from surging demand for data storage: Load up on
shares of disk-drive makers such as Seagate (SEG),
Western Digital (WDC) or Quantum (QNTM). Ongoing price
wars have destroyed those stocks: Shares of Seagate have
declined 56.6% since their peak in May 1997, while
competitors such as Western Digital (down 66%) and
Quantum (down 40.8%) have also suffered mightily.
Sector Price
Quote:
How are the
storage
device
stocks doing
today?
Before you adopt the contrarian stance that their business is
out of the woods, consider that several major analysts made
the same call six months ago. Investors who took their
advice got creamed.
Fans of disk-drive companies in the autumn figured that
consolidation in the notoriously cyclical business would
crimp supply and put an end to price wars, just as it had in
the past. Then disk-drive makers would be well-positioned
to grow along with demand for computer storage. Moreover,
they noted, the industry leaders were trading at relatively low
valuations.
Since last October, however, those valuations have slipped
even further as the industry's woes have worsened. "These
stocks have been a disaster," says Michael Murphy, a
high-tech fund manager and newsletter writer in Half Moon
Bay, Calif.
What happened? Competition in the business got worse
instead of better. Fujitsu, Maxtor and Samsung moved to
increase production capacity. "A lot of players were
stepping up," Danielle Levitas, an analyst at IDC. "Everyone
thought that someone else would lose market share. They
figured it wouldn't happen to them."
If 12 of 16
analysts
already hate
Seagate stock,
how much
worse can
things get?
It did. In fact, market leader Seagate has seen its 80% share
of the high-end disk-drive business shrink dramatically. Only
four of the 16 analysts who rate the company's stock give it a
moderate or strong "buy" recommendation, while 12 rate it a
"hold." Given analysts' reluctance to hand out "sell" ratings,
those 12 "holds" are equivalent to a big thumbs down.
Then again, those are the kind of numbers that true
contrarians -- patient, value-hungry investors -- relish. If 12 of
16 analysts already hate Seagate stock, how much worse
can things get? Eventually, industry cutbacks will ease
competitive pressures and the industry will recover. When it
does, the best-positioned disk- drive companies will thrive
again -- at least until the next round of price cuts.
Seagate's record as the leading drive manufacturer makes
it a strong candidate to lead any rebound in the sector.
Murphy notes that Seagate's technology still puts it well
ahead of the competition in high-end disk drives, which he
thinks should help the firm regain market share in that
sector. Meanwhile, Seagate's position as low-cost producer
also will help it survive price wars.
Moreover, the disk-drive business has always been cyclical.
Seagate, led by flamboyant disk-drive pioneer Al Shugart,
has weathered its share of setbacks in the past -- in part by
cutting costs. This time the firm has taken restructuring
charges of $205 million, including $162 million for plant
closures.
Seagate also has consolidated its design process for
desktop products, turned to outside sources for some
products, and focused its development spending on areas
that offer the greatest product opportunities.
"Shugart has faced these slumps before, and he's always
pulled the firm out of them," says Murphy, who has been
buying the stock on weakness. He plans to buy aggressively
when disk-drive prices stabilize -- probably early this
summer. Murphy believes the stock will rise better than 30%
to $32 this year, and will rise 70% to $55 in 1999.
If he's right, this could indeed be a great time to stock up on
storage. |
