All of this good press today, and we're only up 1/16! Wow, I'd hate to see what bad news would do.
fnews.yahoo.com
Stock of the Day
Mar 10, 1999
Quantum
Quantum: Back on Track
Analyst: Bob Hirschfeld 3/10/99
What does Quantum Corp. (NASDAQ:QNTM - news) , the disc drive company, have in common with General Motors (NYSE:GM -
news) ?
If all goes according to plan, both will have separate tracking stocks for their disparate businesses.
Last week, Quantum announced plans to replace its existing shares with two separate tracking stocks. The new shares would separately track the performance of the storage
systems business, which includes its DLT storage unit, and the hard disk drive business.
If the plan is approved by shareholders, holders will receive one-half share of the hard disk drive-based stock and one share of the storage systems-based stock for each
share of existing Quantum common stock held. Quantum, the first tech company to split into separate stocks, would continue to be one company with one board of directors
and one senior management.
Why is Quantum doing this? Obviously because the company thinks investors would place a higher value on its two parts than the overall company is currently receiving.
This announcement comes at a time when the disc storage business in general is staging a recovery after suffering from overcapacity and the Asian crisis.
Quantum's shares rose nearly 20% last week when it announced these plans. They closed Tuesday at $19.94.
When separated, Quantum's hard disk drive (HDD) unit will include workstation, desktop PC, and server hard drives, along with the company's new QuickView drives,
which target the consumer electronics market. Quantum has been the leading supplier of desktop HDDs for the past five years. The DLT (Digital Linear Tape)/storage
systems unit will include DLTtape, tape drives, and storage systems, such as tape libraries.
About 30% of Quantum's business currently comes from tape-storage products, and it is thought that the value of the high-growth tape unit will be enhanced by offering
separate stocks and separate financial reports. In fact, Quantum has recently been focusing more on tape than disk. In September, Quantum bought ATL Products, a maker
of jukebox-like machines that retrieve information tapes, for about $300 million in stock.
In disk-drives, Quantum is beset by very strong competition. Squeezed by IBM (NYSE:IBM - news) at the high end and Maxtor (NASDAQ:MXTR - news) at the low end,
the company last year lost 2.7 points in disk drive market share, and now owns a 17.2% share, according to market research firm TrendFOCUS.
The general market for data storage is fine. According to estimates from IDC, storage device sales should rise to $31 billion in 2002 from $18.1 billion in 1998, which works
out to an 11% compounded annual rate. More specifically, IDC sees the network-attached disk storage market (one of the markets Quantum is targeting) as growing to $3.5
billion from a current $500 million, a compounded rate of 48%. Whew!
Last week, Quantum also announced strategies to accelerate growth in storage systems and strengthen its position in hard disk drives. The initiatives include extending
automated tape libraries into enterprise-level network applications, entering the storage appliance market by targeting workgroups, and developing system software for future
storage systems. Management believes ATL offerings will complement higher-end products from Storage Technology (NYSE:STK - news) at the enterprise level, and intends
to develop hard disk drive products that provide "plug and play" ways to enhance storage capacity at the workgroup level.
There is an explosion occurring in demand for storage capacity, fueled by the rapid growth of digital content, along with the pervasiveness of networked computers, and the
phenomenal rise of the Internet," notes chairman and CEO Michael Brown. What's more, storage is the fastest growing segment of information technology, he adds.
Not all observers see a near-term Quantum leap forward, however. Michael Carboy, analyst at BT Alex. Brown applauds Quantum's stronger focus on networked attached
products as an attempt to move "up-market" by capturing higher-margin NT storage spending. But, he says the impact of the new strategies may not occur until fiscal 2001.
The separation will highlight Quantum's differing businesses, both for good and bad. As Carboy notes, HDD is a slower-growth, thin margin business, emphasizing asset
velocity, while DLT tape and tape systems are high growth businesses (growing at 20% and 40% respectively) with gross margins in the 30-45% range. Though
DLT/systems represents but 30% of Quantum's revenue, that unit, with its 40-45% gross margins and 25-30% operating margins, is the company's main profit driver.
HDD is a difficult business for Quantum, having run up operating losses for the past five quarters while continuing to generate 70-75% of annual revenue. CEO Brown
insists, however, that disk drive sales had been "very strong" of late, adding that, despite typical declines in March, unit sales were flat this year, a development the CEO
interprets as "a sign of strength."
Dan Niles, analyst at BancBoston Robertson Stevens, says the stock is a buy, since Quantum shares are currently cheap in relation to their intrinsic value of $31.50. He
figures the DLT/systems part is worth $25 and HDD part $6.50. "Even if you don't assign any value to the drive business, you still have $25 in value for the tape business,"
says Niles.
Bottom Line:
The stock is clearly undervalued, but investors must be patient. |
