ML on 4/12: Investment Highlights:
· We think positive customer feedback supports
our positive view on the company and its
ability to profitably gain market share.
· The shares are trading at under 8X our 1999
EPS estimate and at a steep discount to its
comparables. We think the weakness in the
shares presents a unique buying opportunity
and reiterate our intermediate term Buy
rating.
Fundamental Highlights:
· We spoke with Phil Willson, Materials
Manager of Mass Storage at HP, about their
selection of Maxtor and the industry, which
supported our positive view of the company.
· HP said it qualified Maxtor due to its focus,
ability to execute, and lean overhead
structure. We think HP will qualify Maxtor's
7,200 rpm DiamondMax 5120 with GMR.
· HP said disk drive pricing remains very
aggressive, but that channel inventories of
both PCs and disk drives are low. We are
hearing that demand rebounded in March.
· Dell awarded Maxtor its Gold award, its
second highest, in its annual Supplier
Excellence Awards last week. Dell cited
Maxtor's understanding of its direct model.
We spoke with Phil Willson, Materials Manager of
Mass Storage at HP, about their selection of Maxtor,
which supported our positive view of the company. HP
said it qualified Maxtor due to its focus, ability to execute,
and lean overhead structure. We think Maxtor's expense
structure is best in class and has allowed the company to
price competitively while growing in a profitable fashion.
HP also said Maxtor met the company's highly selective
quality requirements.
We view HP as a significant customer win, supporting
our view that Maxtor is taking share. IDC estimates
that HP is the fourth largest PC vendor with a 6%
worldwide market share in 4Q. Recall that HP qualified
Maxtor's 5,400 rpm DiamondMax 4320 (code-named
Quasar) last December for its Vectra corporate offering
and began taking shipments in 1Q. We think Maxtor is
augmenting HP's existing capacity, but could potentially
displace other vendors over time, notably Quantum. HP
also sources from Western Digital for its smaller consumer
offerings. We think Maxtor's shipments to HP are
ramping in a conservative manner, as expected, and could
grow to 5% of sales or nearly $150 million next year.
We think Maxtor's relationship with HP could expand
to include additional drives. We think HP is looking to
qualify Maxtor's 7,200 rpm DiamondMax 5120 with GMR
(code-named Nova) and could qualify its DiamondMax
4320 for its Brio offering to small and medium business
and its. HP's procurement strategy appears to be
relationship oriented seeking to source product families
from key strategic vendors. Maxtor confirmed that Dell
and IBM have already qualified its DiamondMax 5120
with GMR and are taking shipments.
HP said disk drive pricing remains very aggressive, but
that channel inventories of both PCs and disk drives
are low. Mr. Wilson said earlier expectations that supply
would be tight in 1Q/99 did not materialize. HP said the
drive industry still has too much capacity with supply
exceeding demand. Some disk drives have fallen to less
than $100 per drive as had been predicted last year. In
addition, all of the four largest drive vendors are now
shipping 4.3 gigabytes-per-disk drives.
However, channel inventories of both PCs and disk drives
are very low. HP said disk drive shipments in 1Q were in
line with original expectations, resulting in disk drive
inventories comparable to or a bit less than PC inventories,
which we estimate are 3 to 3.5 weeks. Our sense is that
demand rebounded somewhat in March to achieve this
result, which could bode well for visibility in 2Q.
Dell awarded Maxtor its Gold award, its second
highest, in its annual Supplier Excellence Awards last
week. Dell's annual awards are based on suppliers' quality
performance, delivery, total cost, flexibility, technology,
and pricing. Dell cited Maxtor's understanding of its
direct business model and alignment of its overall business
strategy.. We view this award as a strong endorsement for
Maxtor and particularly noteworthy given that Dell
represented nearly 27% of the company's revenue in 1998.
Growth in desktop storage capacity appears to have
accelerated. Annual capacity increases have climbed to
80-100% last year, up from about 60% in prior years due
to improvements in technology. HP is seeing
“evolutionary” growth in demand due to the Internet, video
conferencing, and other multimedia applications. HP
expects a gradual transition to 7,200 rpm in the desktop
drive market and estimates 15-20% of industry volumes
will be 7,200 rpm by C4Q, depending on pricing and
whether vendors pursue cannibalization or differentiation.
HP's commercial offerings require less storage due to the
use of central storage attached through networking.
However, applications are typically stored locally.
Whereas, small business and consumer offerings require
much more storage since they are generally not networked.
HP said the ATA66 interface has little importance until
Intel supports it. Western Digital has been shipping
ATA66 enabled drives since last November, which the
company thinks has enabled Gateway to differentiate its
offering, perhaps at a slightly higher cost. Maxtor has said
that it currently has ATA66 technology and will support
the interface when Intel does. We hear Intel will support
the ATA66 interface with their chipsets in 3Q. |
