How This Tech Company Turned Disaster into Desire
In October of 2011, dikes north of Bangkok gave way, flooding a slew of industrial facilities. One of the victims was Seagate Technology (NAS: STX) . Though the floods were devastating to the region, the hard drive manufacturer was able to turn water into profits.
A flood of business
During the endless summer monsoons, Seagate and its component suppliers faced a manufacturing nightmare. Factory flooding forced some of its subcomponent suppliers to basically cease production. Many investors swam away from the scene as fast as possible, thinking the company was facing doom. Value investors jumped on the opportunity when the company was priced for death. And while there has been a substantial rise in stock price since then, the company is still cheap and holds a bright future.
Seagate has made a fantastic recovery and is slowly approaching its historical capacity levels. In the meantime, demand soared for the products to the degree that Seagate couldn't match. Because the company can charge full price for products that still get swept right up, the portion of revenue from discounted items is much lower than historical averages.
For a company that analysts were worried would suffer from the rise of the cloud, things sure don't seem to be slowing down.
Trading at a little over three times forward earnings, Seagate is still one of the cheaper tech bets out there. You would think at such a low valuation, there would be something wrong with the company. Well, at a glance, there isn't.
- First-quarter revenue is up 39% from the previous quarter.
- Gross margins are at a mouthwatering 37%.
- The company has been buying back stock, and it recently authorized another $2.5 billion buyback.
- There is built-in earnings growth as the company is trying to catch up to the pent-up demand for its products post-Bangkok.
It's worthwhile to note that it's easier to have a great quarter after a not-so-great quarter. Seagate will not be doubling revenue every quarter, but their product pipeline and pricing power will keep the company sailing for a while.
The Michael Phelps of hard drive manufacturers
Seagate isn't the only shop in town trading at an attractive valuation. Western Digital and SanDisk (NAS: SNDK) are also appealing on certain valuation metrics.
Western Digital trades close to Seagate's forward P/E at a little over four times earnings. The company's production was also slowed down by the Thai flooding (the region north of Bangkok is home to most of the world's hard drive manufacturing facilities), but did not capitalize on the opportunity as well as Seagate. Western Digital also took a hit when the company's CEO suggested hard drive sales will slow down.
SanDisk is a somewhat richer valuation at 11 times forward earnings, though a massive sell-off in April following lackluster earnings make the stock a little more interesting. SanDisk is slightly better insulated from the cloud trend as its business focuses on flash storage for portable devices.
When it comes to margins, Seagate blows its competitors out of the water. The aforementioned 37% gross margin places the company a point ahead of STEC at 36%, a few points ahead of Western Digital at 32%, and far beyond SanDisk's product gross margins of 29%. STEC's gross margins, though pretty on the surface, couldn't help the company from swinging to a loss in the most recent quarter. Though gross margins are not the ultimate measure of profitability, it highlights Seagate's supreme pricing power and ability to move product. The metric doesn't say much about their bottom-line profitability, but with net income margins in the midteens, the company has an above-average bottom line as well.
Both Seagate and Western Digital should be able to meet demand in the coming quarters, which should then ease the hunger for the drives and erode some of the amazing pricing power the companies have now.
Cloudy with a chance of solid state drives
CEO Steve Luczo views the cloud trend as a benefit to his company -- contrary to analysts' predictions. As the booming cloud industry continues its massive buildup, Seagate is in place to provide the infrastructure.
Seagate's continued foray into solid state drives has buoyed the company as well. As noted in a recent Fool blog post, STEC (NAS: STEC) was the herald of solid state drives a few years back and was on deck to take over the hard drive world. Unfortunately for STEC, Seagate and Western Digital (NAS: WDC) hopped on the train not long after and leveraged their economies of scale and all-around massiveness to steal away much of the market share STEC had cornered early on.
Now, Seagate is readying its latest SSD, capable of transfer speeds of up to 12 gigabytes per second. The product isn't about to hit your neighborhood Best Buy anytime soon, but the company is already enjoying a good bit of hype and anticipation for the high-speed drive.
An ever-changing industry
Typically, I avoid technology companies because they are too difficult to predict more than a few years out. Luckily, the computer hardware landscape has evolved in a way that even tech morons like me can determine what will stay and what will go. As more and more data is stored on consumer devices, the cloud, and enterprise networks, I know there will be a need for storage 10 years from now.
Instead of determining if a business will be around in five years, you may want to know which ones are just now coming to power. For some ideas along that line, I would recommend the free report 3 Stocks to Own for the Next Industrial Revolution.
At the time this article was published Michael Lewis does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Western Digital and Best Buy. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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