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

To: Sam who wrote (4740)	3/9/1998 4:57:00 PM
From: Jacky AY	Respond to of 7841

Indeed, that was old news. But Briefing.com just posted an update for DD sector outlook... Updated 03/06/98 StreetBeat is designed to provide you with additional insights on the market from recognized financial experts on (and off) Wall Street. Please note that the views and opinions expressed by the panelists below are not necessarily those of Briefing.com. This week's topic: Disk Drive Companies Panelists Jean Orr, Disk Drive Analyst at Fahnestock & Co.. Jeff Gentle, Associate Analyst at A.G. Edwards & Sons, Inc. Matthew Russo, Senior Equity Research Analyst at Sands Brothers & Co . Q&A Briefing: Do you agree with contentions that the disk drive stocks have bottomed out and that there won't be much more bad news from the group? Jean Orr: I think we have probably seen the worst of it. However, that doesn't mean that future news will necessarily be positive, just that we won't see the same negative surprises that we've had since the worst of the problems are already known. Jeff Gentle: Yes, the drive stocks have probably come close to their cyclical lows. Will there be more bad news? This question should be asked of Asian and Japanese drive manufacturers. Their quest for market share could drag out this industry downturn. Matthew Russo: I expect that first quarter reports for Western Digital and Seagate will be below expectations and will cause additional weakness in the disk drive makers in the near-term. Briefing: How much longer will it take for disk drive companies to work off excess inventory levels, and for prices to recover? Jean Orr: Getting rid of excess inventory depends on demand. Currently, disk drive manufacturers are cutting back production schedules in an effort to bring the supply/demand relationship into greater equilibrium, but they still have plenty of room for improvement given that the industry had higher inventory levels at the end of December than it did at the end of September. As for prices, they never recover in the disk drive business, and the bigger issue at the moment is how rapidly prices have declined. In a normal environment, prices typically drop 4%-8% on a quarterly basis, yet we have seen two to three times as much pricing pressure in recent quarters. While these pressures have eased some, we would expect a recovery to take an additional 1-2 quarters. Jeff Gentle: That is hard to say, and once again, depends largely on the actions of Asian and Japanese drive manufacturers. Matthew Russo: It is always difficult to peg the bottom, but my estimation is that these companies will not work through excess inventory and subsequent pricing problems until the end of the second or beginning of the third quarter 1998. Briefing: How has the growing popularity of the sub-$1000 PC changed the way the disk drive makers do business? Which companies are in the best position to capitalize on this market segment? Jean Orr: The sub-$1000 PC hasn't really changed the way these companies do business. Rather, it has put pressure on the industry to bring manufacturing costs down more quickly since OEMs are requiring lower cost drives. Currently, all of the disk drive makers are in the process of restructuring operations in order to lower manufacturing costs across-the-board, and these efforts are definitely needed given that they operate on thin gross margins to begin with. Western Digital seems to have the best record of keeping costs down and has fairly aggressive plans to continue to be the leader in the desktop disk drive market. However, Seagate in particular has targeted bringing costs down on desktop drives in order to be more competitive. Jeff Gentle: Drive manufacturers are now working with PC OEMs on new, low-priced drives. The lower-cost producers should have an advantage. I would think Seagate is probably the company most likely not to benefit. Matthew Russo:The strength in the sub-$1000 PC market has created a dislocation of inventory for the disk drive makers. I think it caught some of makers by surprise as they were not geared up to make drives for the sub-$1000 machines. It has driven prices down a bit and has left the disk drive makers feeling pressure from the PC manufacturers. At this point, it is hard to say which companies are best positioned to capitalize on this market segment because to date, PC manufacturers have mostly been using older technology and consequently cheaper disk drives in these machines. New products usually translate into higher margins for the drive makers, but that is not necessarily the case for the sub-$1000 machines, where no advances in technology are needed. Briefing: Which stocks are you recommending and/or avoiding? Jean Orr: I am not recommending any of the disk drive manufacturers (Seagate, Western Digital, Quantum) at this time. While the worst is over for this group, it will still take a couple of quarters until we see better results; and for now, we're still looking at negative comparison periods. Long-term investors, though, might want to consider these stocks since the worst of the industry's problems have already been factored into share prices. We do have a BUY rating on Box Hill Systems (BXH) which makes data storage systems and integrated backup products. Jeff Gentle: Given the shift toward lower-priced PCs, and subsequent demand for lower-priced drives, we would be avoiding Seagate (SEG) at this time. Matthew Russo: At this time, I am neutral on the group. My favorite disk drive stock is still Quantum (QNTM). The company focuses on higher-end desk top drives, has made a complete transition to MR technology, and shows consistent earnings from its DLT tape back-up drives.