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STX. Seeking Alpha. Why Seagate Looks More Compelling Than Apple
August 27, about: STX, includes: AAPL, SDY
http://seekingalpha.com/article/831061-why-seagate-looks-more-compelling-than-apple

Seagate Technology (STX) is a $13.53 billion large-cap Ireland-based company that manufactures hard disk drives. In addition to being used in desktop and notebook computers, Seagate's products are also used in enterprise servers, mainframes, workstations, DVRs, game consoles, personal data backup systems, portable external storage systems, and digital media systems. The company also provides various data storage services.

Seagate has a compelling undervaluation with a trailing P/E ratio of 5.25, a forward P/E ratio of 4.88, and a PEG of 0.16. The stock price has not kept pace with the company's earnings. This is a positive characteristic as the stock will continue to gravitate toward the company's earnings growth.

The company has a high profit margin of 19.16% and an operating margin of 20.98%. For the past 12 months, Seagate has pulled in $3.26 billion in operating cash flow and $1.61 billion in free cash flow. The company has 1.87 times more current assets than current liabilities.

Although the company missed earnings estimates by 4% in its most recent quarter, it beat estimates for the previous three quarters. The company also had record revenue of $4.5 billion and record shipments of 66 million units for the quarter. This comprised a market share of approximately 42%.

Seagate is expected to grow earnings annually at a high rate of 28.28% for the next five years. When you combine the company's generous dividend of 3.8%, investors have the potential to triple the performance of the average S&P 500 company. If this 32% CAGR is realized by reinvesting dividends, a $10,000 investment in Seagate could be worth $40,000 in five years.

Seagate currently looks more compelling than Apple (AAPL) in terms of valuation and growth. Let's take a look at a side-by-side comparison of these two companies.

Granted, the two companies are different in terms of the type of technology that they produce. However, when we compare them as potential investments, what matters is a good entry point and the potential earnings growth. When looking at valuation in terms of P/E and PEG ratios, we can see that Seagate presents a much lower valuation than Apple. Since Seagate is operating in the eurozone, the stock has been unfairly suppressed and has not caught up to its earnings growth. Apple also tends to grow earnings at a faster rate than its stock appreciation rate, keeping it undervalued.

Seagate's dividends are more than twice as generous as Apple's. With a 3.8% dividend, Seagate's yield is even higher than the SPDR S&P 500 Dividend Aristocrats (SDY) average of 3.22%. However, Seagate has not been as consistent as the dividend aristocrats in raising dividends over time. Therefore, the stock should be viewed more as a growth company than a dividend-paying company, in my opinion.

It is quite compelling for both Apple and Seagate to be undervalued and also have expected earnings growth above 20%. Some may argue that Apple's expected growth of 22.26% is too low, and that may turn out to be true. If Seagate can achieve its expected annual growth of 28.28%, the stock should continue to perform well. Seagate's stock performance may even surpass Apple's stock performance since it currently has a lower valuation and a higher expected earnings growth rate. Overall, both companies should continue to perform well above average for the next five years. With Apple getting a lot of attention in the investing world, I thought that Seagate also deserves a serious look.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

David Zanoni.