Thursday, April 16, 2015

Seagate Earnings Preview: Look for STX Landslide to End

It's been a difficult few months for Seagate and its shareholders

Seagate Technology PLC (NASDAQ:STX) hopes to begin turning around its 2015 fortunes when it reports its fiscal Q3 earnings on Friday. A powerhouse in the digital storage arena, STX has seen its stock fall nearly 15% since Jan. 1.

Seagate manufactures hard drives and solid state drives for both personal and enterprise applications. The majority of revenue for STX stems from sales of computer and laptop hard drives, as Seagate is the second-largest manufacturer in the U.S., trailing only Western Digital Corp (NASDAQ:WDC).

Recent downtrends in the desktop-based digital storage market have been a challenge for Seagate, particularly with respect to NAND flash-based storage and solid state drives that have numerous advantages over traditional hard drives.

Revenue estimates for the quarter ended in March are $3.4 billion, or $1.05 per share. Analysts have provided an average target price for STX stock of $63.40, with 12 brokers considering Seagate a “buy,” 12 a “hold” and one who calls STX stock “underweight.”

Clearly, Wall Street experts are divided on what to expect from Seagate stock going forward.

STX stock has been on a roller-coaster ride. The first half of the company’s fiscal year saw returns of 27.4%, but most of those gains were given back in the recently-ended third quarter, when STX dropped 21.8%.

Seagate’s upcoming earnings report will likely determine if the landslide continues or if STX shares begin to stabilize. At the end of the second-quarter conference call, management guided for a minimum of $3.4 billion in revenue for the third quarter, gross margin of at least 28.5% and operating expenses of approximately $570 million.

If Seagate can at least match its own guidance, investor confidence in STX will have a good chance at pushing shares higher.

A compelling argument for Seagate stock can be made by both the bulls and the bears. On one hand, the company’s primary product is quickly becoming antiquated, at least as far as the technology industry is concerned. Newer forms of digital storage technology — such as SSDs — are not only more expensive, they’re also being manufactured by a host of competitors with more market share.

As users of traditional spinning-disc HDDs slowly shift to SSDs, Seagate Technology must compete with the likes of Samsung Elect LTD (NASDAQ:SSNLF), Intel Corporation (NASDAQ:INTC) and SanDisk Corporation (NASDAQ:SNDK). Because Seagate was late entering the SSD market, the company will struggle to carve out a larger share.

That, combined with the continuing shift from desktop PCs and laptops to tablets, could spell trouble for Seagate stock.

However, STX also has a number of characteristics that make it extremely attractive for investors. The company’s 4% dividend yield is impressive, and the fact that dividends have increased more than 200% over the past four years makes Seagate stock ideal for income-oriented portfolios.

Seagate Technology has also been buying back outstanding shares — provided STX remains below $60 — and has re-acquired more than 30% since 2010. No plans to cease buybacks have been announced.

Expect Seagate’s third-quarter earnings to exceed both management’s guidance and analyst expectations, helped in large part by nearly $200 million in net revenue stemming from the acquisition of Xyratex.

Article originally appeared on InvestorPlace (04/16/2015)