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

To: Duker who wrote (826)	4/16/1999 5:08:00 PM
From: LK2	Read Replies (3) \| Respond to of 1989

Summary of SEG price versus current fundamentals by one analyst. Conclusion of analyst--sell SEG PS--Anybody notice how much the tech stocks got hit this week? Cyclicals massively strong, while tech and growth get slammed. For Personal Use Only >>>>>>>>>>>>>>>>>>>>> iionline.com Individual Investor Online Industry Analysis Apr 16, 1999 Computers: Seagate Beats Street -- But Peril Awaits Analyst: Chris Bulkey Shares of Seagate Technology (NYSE:SEG - news) rose Wednesday after the company exceeded Street expectations for its third quarter. Although Seagate turned in a good quarter, for the period ended April 2nd, we think there are still some challenges ahead for the company, as well as for the disk drive industry. Seagate's third quarter revenue was $1.8 billion, an 8% increase from the prior year, and essentially flat from the second quarter. Earnings came in at $0.49 per share (excluding restructuring charges), up from a loss of ($0.10) per share last year, and $0.42 per share in the preceding quarter. Although Seagate exceeded consensus estimates by $0.03 per share, cost cutting and a reduced share count played a role. The company reduced operating expenses below the average of the previous four quarters, and bought back 23 million shares. The reduction in operating expenses added about $0.05 per share to the bottom line while the lower share count boosted earnings per share (EPS) by another $0.02 per share. So if we normalize these adjustments earnings would have been closer to $0.42 per share -- below expectations. Analysts generally agree that the strength came from sales of high-end (enterprise) drives along with cost cutting. High-end revenue rose 15% sequentially, while desktop (PC) based sales fell 17%. It has been widely speculated that disk drive sales into the PC sector would be weak, but the drop-off looks to be worse than originally forecasted. Prudential Securities analyst Kimberly Alexy had expected a 'modest' sequential decline, and seemed to be surprised by the precipitous drop-off. Within the desktop market, the key for the disk drive vendors will be the sub $1,000 PC market. The market for low-priced PCs is fueling tremendous demand for drives that can be manufactured at extremely low price points ($60-70) per unit according to Michael Carboy of BT Alex Brown. The race is on to see, which vendor will win in this area, but for now it seems that Seagate has the lead with its U-4 product line. Carboy notes that other vendors will likely follow Seagate's lead or lose market share. This says to me that pricing will be intense in future quarters, which could worsen Seagate's already struggling desktop business. Some issues in Seagate's enterprise business could also help to make these latest results short-lived. There is no doubt that the company has done a great job in this segment with its high-end Barracuda and Cheetah drives. IBM (NYSE:IBM - news) and Fujitsu are Seagate's primary competitors in this segment with IBM having taken the lead in market share over the past year. The tide has lately begun to shift, as Seagate has introduced its third generation of high-end offerings, while IBM remains on their first generation -- according to Olde Securities analyst Jeff Van Rhee. This division is expected to help Seagate meet or exceed expectations in the next quarter, but the momentum could be tempered, as Fujitsu steps-up efforts to take market share in this segment. BT Alex Brown analyst Carboy describes Fujitsu's strategy to take share, as 'playing for keeps.' Essentially competition in this segment is going to heat-up from two well-capitalized competitors, which could be a catalyst to slow momentum in this area, which is currently Seagate's source of strength. Challenging Outlook for Industry The outlook for the overall disk drive industry remains challenging to say the least. In January, the industry appeared to be in the midst of a sustained turnaround, which turned out to be nothing more than a 'head-fake.' Unfortunately for us, we were snagged having recommended Seagate in January at a price of $39.06 (Nasdaq:SEG - news). The stock closed Thursday at $28.75. We did not realize in January how bad the industry conditions actually were. Since then two key component suppliers -- Read Rite (NASDAQ:RDRT - news) and Hutchinson Technology (NASDAQ:HTCH - news) -- issued profit warnings that caused Dain Rauscher Wessels analyst J.P. Mark to summarize the uncertainty by saying 'it's pretty clear they just don't know it is going to happen in the next few months'. Within the industry there is uncertainty regarding the transition to GMR (Giant magnoresistive) technology, as well as the race to win share in the sub-$1,000 market. When you factor in continued pricing pressure in the desktop and enterprise space, you have the ingredients for a very uncertain industry landscape over the next few quarters. Wednesday's rise in Seagate stock is more due to coming out of an oversold position than the belief that the company and the industry have turned the quarter. Several analysts have raised their rating on Seagate on the heels of the third quarter earnings surprise. Michael Carboy of BT Alex Brown raised his rating to strong buy calling Seagate his favorite pick in this 'unsettled market.' We think there is simply too much weakness in critical business segments to consider this a sustainable rebound. Prudential analyst Kimberly Alexy sums up the outlook that I think makes the most sense. She notes that enterprise strength and cost cutting helped this quarter's results and may enable the company to meet or exceed expectations, despite desktop weakness, but remains neutral on the stock until 'broader' health among the industry becomes apparent. Bottom Line: Use Seagate's small pop of strength as a chance to sell. Copyright © 1999 Individual Investor Online <<<<<<<<<<<<<<<<<<<