Comments from Value Line
Read-Rite probably will show marked improvement in fiscal 1999. (The accounting period began September 28th.) The company suffered heavy losses in fiscal 1998. Read-Rite's sales were hurt by the transition to magnetoresistive (MR) recording heads from earlier technology, intense competition, and an industry-wide move to fewer heads per disk drive. In response, the company is cutting costs and working to improve productivity, cycle time, and asset utilization. Consequently, and assuming some gradual improvement in demand now that inventories of personal computers and components have been worked down, we look for the losses to narrow in the first half of fiscal '99 and for a return to profitability in the closing six months of the year.
Longer term, the company's prospects look good. Read-Rite is working to stay at the forefront of technology in the industry, a necessity in this highly competitive field. It is developing products based on Giant MR technology, which will allow more data to be recorded on each disk, and, further out, on optically assisted products that will increase data density even more. Such moves should help sales climb to record levels within 3 to 5 years. Factoring in further benefits from the company's efforts to cut costs and increase efficiency, we look for earnings to snap back to the $1.25-$1.75-a-share level by the early years of the next century.
This neutrally ranked issue is probably too risky for most investors. If our forecast of an earnings recovery by 2001-2003 is near the mark, the stock price should rebound sharply by that time. This is a highly cyclical industry, though, so our forecast must be regarded as tenuous. And there are other risks. The company's customer base is very concentrated and the small number of disk-drive manufacturers means that it will be difficult to expand that base. Too, unexpected losses could again put Read-Rite in violation of debt covenants. Finally, the company is the subject of a class action lawsuit. George A. Niemond October 23, 1998 |
