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SAN FRANCISCO
— Investors willing to make early bets on the recovery
of the PC sector have scored big with
Seagate Technology
and
Western Digital Corp.
— two makers of hard-disk drives that have seen their
market values more than triple so far this year.
When the
year started, there were few reasons to believe that
Seagate
and
Western Digital
would be any better than they were during 2008.
Many tech
companies saw their businesses and stock prices take a
beating last year, and the two hard-drive makers were
among the most-bruised of the sector. Declines in
corporate spending on high-end tech gear, including
storage products, was largely to blame for the downfall
that dragged down
Western Digital's
stock by more than 61 percent, while
Seagate
shares plummeted by 83 percent.
Things
became so bad for
Seagate
that in early January, the company went to the extreme
of shaking up its executive ranks by replacing CEO
Bill Watkins
with Chairman
Stephen Luczo
.
But since
then, both hard-disk drive makers have seen their
fortunes turn. When
Western Digital
reported its fiscal fourth-quarter results in July, net
income came in at
$173 million
, or
76 cents
a share — blowing away
Wall Street's
estimates for earnings of
28 cents
a share for the period. The company's
$1.9 billion
in revenue also easily exceeded the
$1.6 billion
expected by analysts.
And while
still in the red,
Seagate
managed to cut its fourth-quarter loss to
$81 million
, or
16 cents
a share, on sales of
$2.35 billion
— also exceeding
Wall Street's
estimates for the period.
Also,
Seagate
announced on Tuesday that, because of
stronger-than-expected demand, hard-drive shipments and
revenue will be above previous forecasts for the current
quarter.
The
results — along with forecasts for a recovery in the
PC sector later this year — have boosted sentiment
around the companies' shares. Since the first of the
year,
Seagate
shares have soared by 241 percent, while
Western Digital
has gained a comparable 206 percent. The Nasdaq, by
contrast, is up about 36 percent for the year.
Analysts
who follow the hard-disk drive market say there have
been several factors that have contributed to the
turnaround for
Seagate
and
Western Digital
, and should continue to bolster both companies through
the rest of the year and into 2010.
According
to
Mark Moskowitz
, of
JPMorgan
, the reasons for the upbeat feeling about the industry
include expected improvements in seasonal demand and
anticipation over the planned October release of
Microsoft Corp.'s
Windows 7 operating system.
Additionally,
Moskowitz said hard-disk drive price and inventory
levels are becoming more favorable due to increases in
drive demand and reductions in industry production
capacity.
"Better
than expected demand for both desktop and notebook
drives is a key driver," Moskowitz wrote in a
report last week, adding that upgrades involving servers
running on
Intel Corp.'s
Nehalem chips "are leading to some stabilization
within enterprise 1/8hard-disk drives]."
Moskowitz
recently raised his hard-disk drive shipment forecast to
146.1 million units for the September business quarter
and 154.5 million for the three months ending in
December. He also estimates there will sales of 607.4
million hard-disk drives in 2010, up from his earlier
forecast of shipments of 525.7 million units.
At UBS,
analyst
Arun Sharma
recently began coverage of both
Seagate
and
Western Digital
with buy ratings. Sharma called
Western Digital
the "best in class in a volatile landscape,"
and said
Seagate
was "a turnaround play" with a new management
team focusing on expanding the company's margins.
Sharma
cited
Western Digital's
"history of execution" as being a positive
factor for the company's current position.
"The
company was not immune from the sudden drop-off in
demand for hard-disk drives in late 2008 and early
2009," Sharma said. 1/8But3/8 we believe
Western Digital
was the most efficient vendor in the industry at
adjusting its cost structure and restructuring its
business to reflect the current demand
environment."
Sharma
also was upbeat about what he called
Western Digital's
leadership in the markets for notebook PC and external
hard-disk drive storage.
With
regards to
Seagate
, Sharma said the company presents greater risk and
reward possibilities than
Western Digital
. Sharma said
Seagate's
lead in the desktop PC and enterprise hard-disk drive
markets give it some momentum to build upon its recent
gains, and that company's long-term gross margin targets
of between 18 percent and 24 percent could end up being
conservative.
However,
Sharma said
Seagate's
turnaround plans remain predicated on the company's
ability to execute. He said the recent changes in
management, and more focus on the notebook PC market
suggest
Seagate
is taking some of the right steps to build upon the
confidence that has helped improve its stock growth this
year.
Keith Bachman
of
BMO Capital Markets
favors
Seagate
over
Western Digital
, based on the former's exposure to the enterprise
market, which is seeing gains from demand for servers
and storage.
"Consistent
with our 1/8previous3/8 note, we believe drive industry
fundamentals remain healthy, with strong demand levels
and lean inventory," Bachman wrote in a
Sept. 18
report, in which he raised
Seagate's
price target to
$18
from
$13
and
Western Digital
to
$40
from
$36
.
Both
stocks are currently trading near their median price
targets.
Seagate
closed Tuesday at
$15.68
. Price targets on the stock range from
$10 to $20
, with the median at
$17.25
, according to data from
Thomson Reuters
.
Western Digital
last closed at
$36.25
, near its median target of
$38
. Current price targets range from
$21 to $44
.
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