Folks,
Following are recent comments about SEG from Gruntal (David Takata) after touring Asia. Gruntal does a good job of covering this sector IMO. Like me Takata sees strength at the high end and has less alarm concerning the desktop then the recent news piece quoting Watkins would have led us to believe. While he makes no comments about Veritas, SanDisk, or Dragon, and stays focused on the disk drive business in this report, each of these companies have compelling business stories at this juncture IMO. I also like what SEG is doing on the tape side. Finally, Watkins is the next "BSD" in the storage industry IMO. (Anyone who has read "Liars Poker" will know what I reference with this). SEG is simply a powerhouse in the storage arena, which in turn is a "sine qua non" of computing and the rapid deployment of info technology. All IMHO of course.
Posted for personal use only:
EXPECT HIGH-END SHARE GAINS IN QUARTER. 10K PRODUCT IN FULL RAMP.
REASONS FOR STRONG BUY
• Notes on Asia. About half of our working hours were spend in conference sessions in Penang, Malaysia and Singapore, and the other half visiting disk drive facilities. Overall, we were impressed with the changes occurring in the industry in response to the extended industry downturn. On a relative economic basis, Singapore is booming, while other Asian countries are still feeling pains. As for the disk drive industry, it is clear that the activities now taking place (i.e., elimination of duplicated R&D, partnerships with OEM system vendors) are setting the way for recovery. It is still too early, however, to say that we see the rising tide lifting all ships. At this stage of the recovery, management talent, execution, and balance sheets count. Many people we talked to at the conference believe a consolidation will occur, especially as the capital intensity to play in this market increases. Two of the big topics of the sessions were electrostatic discharge (ESD) and contamination. Disk drive facilities are beginning to move from Class 100 clean rooms to Class 10 in order to deal with the contamination issue.
• Positive company analyst meeting. Seagate hosted a tour of its Woodlands, Singapore media facility and provided a view of definite upside potential cost savings and efficiency opportunities over the coming year. The company's head operations are next on the list for improvements. There are points of margin available just in internal improvements, despite external events, such as price pressures. We believe a news article last week quoting Executive VP and COO, Bill Watkins was simply poorly written and badly misconstrued the context of his meeting with the press in Singapore. Seagate is not a uni-dimensional company with only a desktop product.
• High-end provides for upside. We heard since our arrival that the company will likely pick up high-end share from IBM (IBM-NYSE-$178; Hold) both due to Seagate's ability to ramp the 10,000 RPM product in volume and IBM's stumble in the quarter. Desktop units should be flat, in line with management's earlier guidance. Seagate is improving its desktop position, with a 5.4GB drive soon to be announced, followed shortly after by a 6.xGB capacity drive. Seagate has some breathing room on the desktop, as the transition from MR to GMR heads looks to be more difficult than expected for the industry. We heard this from more than one vendor during the week.
• Positive management meeting. Watkins detailed some of the results obtained in the last year (design, inventory management, and process controls) and expectations for the future. Watkins is a dynamo with a loyal contingent who would walk over hot coals under his leadership. It is clear that he has everyone's attention and will get the expected positive results. Things have changed at Seagate. We would be buyers now. Seagate is, in our view, in the best position to make noticeable progress over the coming years, as the industry moves from a people intensive to capital intensive environment. With $2.2 billion in cash on the books, the most diversified product line, and an aggressive management team, competitors are beginning to talk. In offline meetings, numerous industry insiders are reporting a change.
VALUATION / PRICE TARGET
We have a $60 price target, a 25 multiple on our F2000 EPS estimate.>>
Best,
Stitch |
