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Seagate (STX) to Report Q2 Earnings: Disappointment in Store?

Zacks Equity Research

Seagate Technology Plc STX is scheduled to release second-quarter fiscal 2019 results on Feb 4.

The company has surpassed the Zacks Consensus Estimate in the trailing four quarters, recording average positive surprise of 8.6%.

Seagate delivered first-quarter fiscal 2019 non-GAAP earnings per share of $1.70 per share, which surpassed the Zacks Consensus Estimate of $1.55 per share. The figure also improved 96 cents from the year-ago period and 4.9% sequentially.

Revenues of $2.992 billion outpaced the Zacks Consensus Estimate of $2.959 billion and also improved 13.7% from the year-ago quarter and 5.5% sequentially.

Both the top and bottom line witnessed year-over-year improvement, driven by robust adoption on account of strong demand of Seagate’s storage drives. Moreover, increasing traction for mass storage solutions across the company’s edge and enterprise markets remained a tailwind. Notably, exabyte shipments during the reported quarter increased 41% year over year.

Seagate Technology PLC Price and EPS Surprise


Seagate Technology PLC Price and EPS Surprise | Seagate Technology PLC Quote

Guidance & Estimates

Management anticipates second-quarter revenues to be in the range of $2.7 billion to $2.75 billion.  The corresponding Zacks Consensus Estimate is pegged at $2.74 billion, representing a decrease of approximately 5.9% from the year-ago quarter.

Seagate projects gross margins to be at the lower-point of the company’s long-term range of 29-33%, primarily owing to lower-than-expected demand for nearline HDDs.

For second-quarter fiscal 2019, the Zacks Consensus Estimate for earnings is pegged at $1.27 per share, indicating a decline of 14.2% from the year-ago quarter.

Let’s see how things are shaping up prior to this announcement.

Challenges Faced by Seagate

Seagate is the second-largest manufacturer of hard disk drives (HDDs) in the United States. The company is facing challenges owing to NAND flash pricing, which is currently on the decline on account of oversupply and weaker-than-expected growth in end-market demand. Consequently, a drop in prices could impact the company, and may offset the benefits from improved demand and prices of DRAM products.

Moreover, Seagate faces stiff competition from Hitachi, Samsung and Intel INTC in the storage market.

Additionally, ballooning debt levels have been plaguing Seagate for some time now.  At the end of first-quarter fiscal 2019, net debt amounted to $2.88 billion. Moreover, any downturn in macroeconomic and foreign exchange volatility conditions is likely to make it difficult for the company to pay or refinance debts, going ahead.

Further, frequent management changes, though made with an intention of a turnaround, is raising skepticism.

PCs remain the greatest users of HDDs and Seagatestill derives the bulk of its revenues from these devices. According to the recently released worldwide PC shipment data by Gartner and IDC, even the back-to-school season failed to lift the PC market. Per Gartner’s preliminary data, PC shipments in the fourth quarter of 2018 fell 4.3% year over year to 68.6 million units. Going by IDC, worldwide PC shipment also dipped 3.7% on a year-over-year basis and totaled 68.1 million in the final quarter. A declining trend in PC shipments is detrimental to business prospects of Seagate, which continues to depend substantially on PC sales.

Product Rollouts to Aid Seagate

Seagate kicked off the year by showcasing latest data storage solutions at CES 2019. The company expanded LaCie family by unveiling LaCie Mobile Drive and LaCie Mobile SSD, which it anticipates shipping by end of January.

In a bid to offer sturdy backup solutions, Seagate debuts Backup Plus family with Backup Plus Slim, Backup Plus Portable and Backup Plus Ultra Touch. Moreover, Seagate unveiled FireCuda 510 PCIe NVMe SSD, which is tailor-made for gaming enthusiasts.

Seagate also unveiled IronWolf 110 SATA SSD custom-made SSD for Network Attached Storage (“NAS”) appliances to primarily target enterprise customers and business professionals.

We believe this move is in sync with company’s attempt to capitalize on growing HDD requirement. The company’s expanding portfolio will not only bolster the top line in the to-be-reported quarter but also strengthen its competitive position against Western Digital.

Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily in order to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications.

Moreover, increasing traction for mass storage solutions across the company’s edge and enterprise markets is a tailwind.

What Our Model Says

According to the Zacks model, a company with Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP has a good chance of beating estimates. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Seagate has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of -3.15%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With a Favorable Combination

Here are some companies you may want to consider as our model shows that these stocks have the right combination of elements to post an earnings beat:

SkyWest, Inc. SKYW has an Earnings ESP of +2.77% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcBest Corporation ARCB has an Earnings ESP of +4.78% and a Zacks Rank #2.

Zacks' Top 10 Stocks for 2019

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