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Seagate Technology Public Limited Company Message Board

  • paul.fo84 paul.fo84 Nov 30, 2011 11:16 AM Flag

    Industry Consolidation Not Reflected in Stock

    In three months there will only be two real disk drive competitors. WDC's balance sheet will have far more debt, so it will not want a price war. The first whiff of earnings upside potential (STX management implying this mow monthly), + earnings stability, and giant cash flow/dividend increases, STX 3.5 P/E multiple is going a lot higher and stock will reflect best fundamentals industry has ever had. By the way, investor skepticism is great right now: that will change.

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    • Unlike your "STX 3.5 P/E multiple "

      "WDC's balance sheet will have far more debt, so it will not want a price war. "

      So the $3.5 BILLION cash on WDC balance sheet is irrelevent; AND WDC prefers to cede market share, sales, revenues and profits lost to STX from a 100 year flood rather than produce as much as possible as HDD producers ALWAYS DO!!!

      You're a moron just like vikes.

      • 1 Reply to vikesisamoron
      • It's great to see that skepticism persists with these HDD stocks, luring in hapless chump short sellers whose eventual panic will help fuel the rise.

        All this emphasis on historic average PEs and such will be out the window not too many months from now. It was a horrid industry for 25+ years, which is about how long it took to recover from the c. 1983 belief that "you can't have enough disk drive production capacity". As such, single digit multiples on whatever earnings occurred during occasional "fat" years (likely to be given back when the cycle turned down) were justified. Fast forward to 2012. Does any one really expect a company with a 40%+ market share to start a price war (i.e., take less per unit on 60MM+ units so they can get a couple MM more units), especially one that has performed the way WDC has since its near death experience a decade ago? I don't think so.

        I think we can glean a clue about what consolidation will do for the HDD industry from another industry that was grossly overcapitalized for a couple of decades at least and then one day wasn't. Capacity to build aircraft, engines and related parts was grossly overdone due to WW2 and the Cold War (technologies that apply to both military and commercial aviation). The business was grossly cyclical, low margin (on average) and single digit PEs were commonplace. Consolidation took a couple of decades, but by around the time we were coming out of the 2002 recession the supplier base was in a different place. Still competitive, but no longer a buyers' market. Cyclicality became much less benign, margins rose and investors were rewarded with decent PEs for the first time ever.

        Of course there are major differences between the two industries, but they are irrelevant to understanding the difference it is going to make for the industry to be done with interminable episodes like HGST floundering as it did all those years or Maxtor in its death throes. Couple that with the dynamic of what will easily be a 100MM+ cumulative unit shortfall before HDD deliveries catch up with the TAM sometime well into 2012 and a belated product refresh finally getting underway, and you have to pity the fool who shorts either STX or WDC because they are too clever and short term focussed to notice an industry sea change.

    • Toshiba is still in the HDD business, and it is a "real" competitor on the consumer side. WDC will be a very fierce competitor. Beyond next year, STX is aspiring to a sustaind gross margin of 26%. If it executes, STX will be highly profitable and (given its industry niche) will deserve a P/E of around 7. That should take the share price to $20+ which will be 3 times the tangible book value. (And IMO, book value considerations are relevant to a company like STX.)

      • 2 Replies to c757172
      • High Estimate





      • Toshiba may be a "real" competitor but not one who, in my view, will be putting the marginal dollars into growing their capacity and footprint in the disk drive space that the other two companies for whom that is their only business.

        After the consolidation, there will effectively be two true competitors in this space, STX and WD, and duopolies, even in a declining industry, can generate great profits and cash flow.

        This is why STX and eventually WD should continue to emphasize a dividend cash return model going forward. It is no longer a growth story but rather a harvest story now.

    • Continued skepticism as I said before. You are being a historian and not an analyst. The industry consolidation is unprecedented. Seagate's investor friendliness with this dividend payout is unprecedented. You will see the difference. The 3.5x multiple is loaded with skepticism. Each P/E multiple point increase will be $5 upside in stock.

    • Nice try, sport.

      HDD stocks have never been big money makers.

      This POS isn't going's DEAD MONEY.

      There are MUCH better places to invest your you will find out.

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