Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : QUANTUM -- Ignore unavailable to you. Want to Upgrade?

To: Will Cunningham who wrote (4936)	11/13/1997 1:21:00 PM
From: Rob S.	Respond to of 9124

Lehman's report is right on target. Although there is some risk that Quantum could see slightly lower than the 69c forecast for this quarter's earnings, the risk is only a few cents. If PC and network storage system sales are as strong through the next six months as many predict, the increased sales could mitigate any errosion in earnings due to overly agressive pricing in the mid range capacity desktop drives. The market still appears very nervous, much more willing to react negatively to minor bad news than positively to good news or upgrades. I think it may be another week or so for nerves to calm and the tech stocks to move up. When the move does occur, Quantum should move more than most.

To: Will Cunningham who wrote (4936)	11/13/1997 1:33:00 PM
From: AJ Berger	Read Replies (2) \| Respond to of 9124

Lehman Brothers Text conversion of PDF file on QNTM Headline: Quantum Corp: CORRECTION - Use Weakness as Buying Opportunity Author: Kimberly Alexy, CFA 1(212)526-3141 Rating: 1 Company: QNTM WDC SEG Country: COM CUS Industry: COMPUT Ticker : QNTM Rank(Prev): 1-Buy Rank(Curr): 1-Buy Price : $27 7/16 52wk Range: $43-12 Price Target: $43 Today's Date : 11/12/97 Fiscal Year : MAR ------------------------------------------------------------------------------ EPS 1997 1998 1999 - - QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.04A 0.61A 0.61A 0.75E 0.75E - - 2nd: 0.04A 0.62A 0.62A 0.83E 0.83E - - 3rd: 0.36A 0.69E 0.69E 0.90E 0.90E - - 4th: 0.56A 0.75E 0.75E 0.97E 0.97E - - ------------------------------------------------------------------------------ Year:$ 1.02A $ 2.66E $ 2.66E $ 3.45E $ 3.45E $ - $ - Street Est.: $ 2.64E $ 2.67E $ 3.24E $ 3.23E $ - - $ - - ------------------------------------------------------------------------------ Price (As of 11/10): $28 5/16 Revenue (1997): 5.3 Bil. Return On Equity (97): 20.7 % Proj. 5yr EPS Grth: 20.0 % Shares Outstanding: 154.7 Mil. Dividend Yield: N/A Mkt Capitalization: 4.38 Bil. P/E 1998; 1999 : 10.6 X; 8.2 X Current Book Value: $6.44 /sh Convertible: YES Debt-to-Capital: 22.1 % Disclosure(s): C ------------------------------------------------------------------------------ ****************************************************************************** HDD stocks have been under severe pressure from increased pricing aggressiveness. While all HDD vendors are affected, the actual risk to earnings signif. varies by vendor. We do believe that while Quantum is experiencing margin pressure on the desktop, such pressure is signif. less severe than its peers and actual risk to earnings is minimal. * Still, Quantum's stock has been punished in line with its peers while the fundamental outlook remains essentially unchanged. * We believe the strength of the tape business coupled with QNTM's strength in higher-capacity desktop products will shield the company from any meaningful earnings risk. * We believe that the stock is a compelling value - with the tape business alone valued at over $40 per share. We re-iterate our Strong-Buy on the shares. ****************************************************************************** HDD Trends While we believe the severity of the supply/demand imbalance - and corresponding price pressure - occurring in the enterprise drive market is generally well understood, we believe the desktop drive environment - and its corresponding impact on each of the 3 drive vendors forthcoming earnings results - is not. In short, unit demand remains strong for desktop drives while pricing, however, has weakened. We believe demand for desktop drives is particularly strong at high (4GB and >) and low (<2GB) capacity points. This trend reflects the current trends witnessed in the PC market. Throughout recent months, HDD pricing at lower capacity points (<2GB) has been aggressive as several vendors priced more aggressively to clear supply. This weakness impacted both Western Digital and Seagate in the September quarter. Quantum was largely insulated from this weakness as a result of the company's desktop product mix which favors higher capacity drives. Pricing aggressiveness has now bled upwards into 2.0 and 2.5GB capacity points. This weakness culminated in Western Digital's pre-announcement that it would fail to meet earnings expectations for the December quarter. Correspondingly, we reduced estimates. We also believe that there is further risk to our Seagate earnings estimates as a result. And while we readily admit that the risk for Quantum to meet our $0.69 3Q estimate has increased, we believe that the likelihood of any meaningful earnings risk is minimal (see sensitivity analysis below). Furthermore, we believe the share price compression which has already occurred severely over-estimates such risk. First, with respect to mix, Quantum is significantly less exposed to the pricing aggressiveness occurring in the desktop drive market. The company is more focused on higher-capacity points which are not experiencing similar price pressure. The following table illustrates 1997E vendor market share of 3.5 drives by capacity point: 2.0-2.99GB 3.0-4.99GB >5GB QNTM 18% 23% 28% WD 28% 22% 10% SEG 29% 22% 12% IBM 3% 21% 22% Source: IDC *This analysis fails to address the 5.25 market where QNTM also ships Bigfoot drives in 4GB and > capacities. Quantum's relative strength in higher-capacity points insulates it from much of the price pressure occurring at lower capacity points. Concerns surrounding the risk of further bleeding into higher-capacity points have also surfaced. And while we believe this is possible, we believe that the risk is minimal with few vendors offering competitive, volume product at 4GB and above. Quantum Outlook We recognize that Quantum's desktop business is subject to the pricing erosion occurring at 2.5GB capacities and below and would anticipate some modest earnings impact from this trend. Below, we outline some sensitivity analysis to our estimates. EPS est. 3QE Downside Desktop $0.36 $0.30 Tape $0.46 $0.46 Enterprise -$0.14 -$0.14 Total $0.69 $0.62 % -10% Stock Price Change 1 month -36% We anticipate that the desktop margin pressure may remove several pennies from our 3Q estimate. However, the stock has declined as if the market were expecting a much more significant miss. Assuming absolute worst case scenario in which the company simply broke-even on its desktop business, tape alone is expected to contribute $2.00 of earnings over the next 12 months. We believe this business alone should be valued at >$40 per share. Investment Recommendation We believe the stock sell-off is overdone given the actual risk to earnings estimates. The stock is now trading at a deep discount to the value of the tape business alone. We continue to believe that tape affords the company a solid cushion in this tougher HDD environment. We believe the stock is deeply under-valued at this range, particularly given our earnings outlook. We re-iterate our Buy on the shares. Western Digital (WDC, $21 1/4, rated 2) Seagate (SEG, $24 1/2, rated 3) BUSINESS DESCRIPTION: Founded in 1980, Quantum Corp. designs, manufactures and markets storage products for personal computers, workstations, high-end computers, network servers, and disk arrays. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.