We've written a couple of times about the market's love affair with flash memory and it's bitter acrimony with hard drives. We have another related article up on our sidebar right now. Barron's, this weekend, has an interview with value manager Robert Marcin who likes Seagate (NYSE: STX). His case is simple and compelling:
Seagate the largest disc-drive maker, is down to 15 from 21 earlier this year.
Marcin: And the run rate of earnings is $2.20 a share.
So this is a classic Marcin, Defiance stock?
Marcin: It's a classic stock where the P/E is too good to be true. One of two things has to happen. The stock price has to go up meaningfully, or the earnings have to degrade materially. We believe that the investment community has it wrong this time on Seagate
What's the knock against Seagate?
Marcin: The knock is that the disc-drive cycle is as good as it gets. And Seagate is doing so well from a profitability and competitive perspective that it can't possibly do any better. We think that's silly. What's the reality of the disc-drive business? Seagate is the market leader with a 30% market share. Unit growth is accelerating because of consumer-electronic applications and pricing degradation is slowing.
For the first time in five years, the industry is experiencing double-digit revenue growth. Yet there are only two companies making money, Seagate and Western Digital . The others -- Toshiba, Fujitsu, Samsung and Maxtor -- are losing money or breaking even. There is no incentive for the industry to embark upon a price war when the industry on the whole is only breaking even.
What's going right for the industry?
Marcin: Well, the consumer-electronics market, which was only two million units two years ago, could be 75 million units this year. Disc drives are in MP3 players, set-top cable TV boxes. The home-run application would be cellphones. We don't know whether small disc drives or flash memory takes over the storage function of a cellphone handset. Nokia makes a phone that has a hard disc drive in it. If the industry gets 10% of the cellphone market in three years, that'll be 100 million of hard drives in cellphones. If that story plays out, Seagate, with its 30% share, would be a major beneficiary.
Could Seagate hit $25 in a year?
Marcin: It could be a $30 stock. The stock was at $30 two years ago when it had a run rate of earnings of $1.50 a share. It wouldn't be unreasonable to put a 13 or 14 P/E on $2.20 of earnings for a globally dominant technology company with double-digit growth ahead of it.
Generally, if something seems too good to be true it probably is, but we generally agree with Marcin's assessment. Because the market is sipping Apple-flavored kool-aid, with Steve Jobs anointing flash as the storage technology of the future, Seagate looks like a contrarian opportunity
We've talked about Seagate a few times, so of course all of the standard disclosures (see disclosure on the right) apply. Currently this author owns none, though may take a position at some point in the future.
UPDATE: HD isn't dead, rumor is that the next Sony (NYSE: SNE) PSP (Playstation Portable) will incorporate one:
Sony's next generation PSP may integrate a tiny hard drive to store music and videos, a pair of Wall Street analysts said this week. In a research note obtained by PSPworld, Piper Jaffray analysts Anthony Gikas and Stephanie Wissink said that Sony may launch the new PSP as soon as mid-2006.
The analysts also forecast PSP sales in the coming years. They predict that Sony will sell 3.8 million units in 2005, 5.5 million in 2006, 5.0 million in 2007, and 6.0 million in 2008. "We estimate that total hardware unit sales (all platforms) will grow near 30% during the next six year cycle -- 2006 to 2011. We project that console hardware unit sales will increase near 10% and hand-held unit sales will increase near 45% during the next cycle."
As for the PSP, go read Engadget, which seems to feature another PSP-hack everyday. If only Sony would get out of the way and let their customers have some fun with this thing, it could be a force.
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Posted by: MP3 Players | December 15, 2010 at 12:40 AM