Seagate: Pay Attention to Stock Buyback Signals
Stock buybacks often get a bad name in the financial press, but evidence continues to mount that, outside of a few glaring issues, the concept rewards shareholders. One recently unlikely success was the massive 2012 stock buyback programs by Seagate a leading supplier in the commodity enterprise storage sector that has seen its stock soar in 2013, along with fellow storage player Western Digital .
With the PC market in decline, the storage business, and new methods of storage lurking to overtake the historical disk-drive-based systems of Seagate and Western Digital, the tandem thrived anyway. At the time, EMC was the dominant stock to own in the storage space. Ironically, that stock hasn't seen any gains in the last couple of years, despite better growth. Ironically, the lagging stock is now ramping up buybacks.
Solid profits without growth
In general, a lot of the rebound in storage stocks was tied to beating expectations more than growth. For a stock to gain, surviving a period of weakness can provide more rewards to shareholders than thriving during a period of expected strength. A beaten down stock only needs stability to reward investors.
Seagate generated roughly $14.4 billion in revenue for fiscal 2013. Analyst expectations for both fiscal 2014 and 2015 amount to a decline in revenue during that two-year period. The key, though, is the expansion of earnings from $5.31 in fiscal 2013 to nearly $6.00 in fiscal 2015. It's not earth-shattering for a technology company, but definitely substantial progress for a stock that traded below $10 near the end of 2011. Considering the market cap was around $4 billion and the company still generated $14.4 billion in sales, you can quickly surmise why the company might have been eager with the buybacks.
Western Digital has a similar financial position with stable revenue and growing earnings per share. Also, the stock trades at a similar price to sales ratio around 1.25. The irony, again, is that EMC has better growth metrics, but only now trades at a similar multiple to Seagate and Western Digital. Taking into account growth rates, EMC should probably trade at higher multiples.
Speaking of stock buybacks
While Seagate wasn't attractive to investors back in 2010-2012, the company was generating enough cash flow to pull off substantial stock buybacks. The chart below shows the amount of quarterly buybacks and the net buyback yield over the last five years:
Buybacks were material enough at the end of 2012 to send the net buyback yield soaring to over 25%. In essence, the company was buying enough stock to purchase a quarter of the company over the previous 12 months, based on the market cap. Notice how the buyback mostly took place below $35, while the stock has now soared to $55.
The board of directors placed a major hold on the stock buyback plans while the stock soared during 2013. Interestingly, Seagate repurchased a net $143 million worth of shares during the quarter ending in September, after the stock swooned below $40. The company hasn't been aggressively buying shares during the last year, and investors should probably take this as a hint from the board.
With higher valuation metrics, Seagate and Western Digital no longer provide the solid return potential from the past couple of years. In addition, Seagate no longer sees valuation potential, suggesting that shareholders should go elsewhere. New forms of flash storage might finally take a hit out of the traditional disks sold by Seagate and Western Digital, as the cash generated these days isn't large enough to handle the much-higher market valuation.
Fundamentally, EMC is the better company, with annual revenue growth in the 8% range. After valuation metrics have declined over the last couple of years, EMC is more attractive. As 2011 progressed, EMC got too pricey, while Seagate and Western Digital became incredibly undervalued. Seagate's buybacks were a signal to investors, but went ignored by most. Now, EMC is growing buybacks, while Seagate has mostly eliminated them. Investors should take note of this shift and follow the leads of the associated board of directors.
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The article Seagate: Pay Attention to Stock Buyback Signals originally appeared on Fool.com.Mark Holder has no position in any stocks mentioned. The Motley Fool owns shares of EMC and Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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