QNTM: Stock of the Day.DLT/systems part is worth $25 and HDD part $6.50
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. |
