Seagate Technology (STX)

[eastunder]

STX Up 5%: Longbow Adds to ‘Best Ideas,’ Replacing WDC


By Tiernan Ray

Shares of Seagate Technology (STX) are up $2.03, or almost 5%, at $43.83, after Longbow Research‘s Joe Wittine today added the stock to the firm’s “Best Ideas List,” replacing Western Digital (WDC), with an expectation consensus estimates will rise in coming quarters given opportunities in solid-state drives (SSD), with the added appeal of a coming 20 million in share buybacks.

Wittine rates both Seagate and Western stocks Buy, with an $81 price target on Western shares and a $54 target on Seagate.

The disk drive market has probably bottomed, he thinks, and Seagate’s valuation is “attractive,” while it continues to produce good cash flow:

First, we continue to believe the HDD industry bottomed in 1HCY13, consistent with comments from WD, Seagate, and other suppliers. The PC-related risk has faded in importance for the HDD stocks, since non-PC HDD sales are now eclipsing PC HDD sales led by double-digit unit growth for enterprise and branded drives. Second, Seagate is well-positioned to outgrow the industry in FY14 driven by organic investments in hybrids, enterprise and client SSDs, and services. Third, supply/demand fundamentals are attractive with the industry fully consolidated, allowing Seagate and WD to defend industry gross margin at 27-32% and allow any future capacity additions to lag demand. Fourth, valuation is attractive with the shares now trading at only 7.6x our FY14 (June) EPS forecast, and we expect Seagate’s forward P/E multiple to expand back toward the 10x historical mean once investors become confident the market, and Seagate’s free cash flow has bottomed. Finally, despite the weakening free cash generation throughout 2HFY13, we forecast Seagate will continue to generate $1.9B of free cash annually, representing a 13% free cash yield today, with the vast majority being returned to shareholders including the $1.52/share quarterly dividend (3.7% yield).

Western shares today are up 76 cents, or 1.2%, at $65.44.