Is Seagate Technology Inc. (NYSE: SEG) a bad apple, or is the sky falling on desktop disk pricing? Turns out Seagate may be one of the few survivors in the tough disk-drive sector.
Seagate shares were up marginally to 26 3/4 Friday morning, well below a 52-week high of 44 1/4. Shares in the largest independent disk-drive manufacturer have plummeted since it warned Monday that earnings in its fourth quarter would be between 32 and 37 cents a share, well below First Call's consensus of 49 cents a share.
Seagate's warning isn't unexpected considering recent reports from competitors in the sector. Komag Inc. (Nasdaq: KMAG), which makes parts for disk drives, said it expects wider-than-expected losses Thursday. The other companies blamed, as Seagate did in its press release, "weaker than anticipated demand for its disc drive products, together with price deterioration for its desktop disc drive products that has exceeded expectations."
And prices may not have hit the bottom yet, said analysts who blame the fast advancing technology that allows companies to pack more density onto each platter for the downward pressure on disk drive prices.
"Disk Drives should price closer to value," said one analyst who expressed surprise at the aggressive pricing pressures. "I thought they had hit bottom already."
But "Seagate is the leader best positioned to weather the storm," said Rob Cihra, who rates the stock a "buy," among 10 analysts still rate it "buy" or "strong buy." Besides, "the disk drive industry has incredible resiliency," Cihra said, "and customers want to see multiple suppliers."
Other analysts agreed that compared to Western Digital Corp. (NYSE: WDC) and Quantum Corp. (Nasdaq: QNTM), Seagate's broad product line, large cash holdings, and R&D strategy give them the biggest advantage in the industry.
Its success with high-end drives for enterprise networking should continue, especially into the fall as consumer and corporate demand picks up. Their relatively strong enterprise business, network and storage management software, has a 40 percent market capitalization, though it is also under pressure, Cihra said.
And aside from the $1 billion in net cash they have at their disposal, Seagate is actually making money, compared to Western Digital, which is expecting a loss of 95 cents a share. Quantum is expecting a gain of 10 cents a share.
Seagate's other equity interest in Sandisk (Nasdaq: SNDK), which makes flash data storage for digital imaging, and Veritas Software Corp.(Nasdaq: VRTS), a data storage software company, will also guard against future losses. Seagate also works with privately owned Gadzoox, Microsystems and Dragon Systems, Inc., Cihra added.
Cihra blames the pricing pressure on the drop in PC prices to below $1,000, which has cut the price of drives to sub $100 levels, half what they were a year ago. It has to bottom out at some point, though, and in an industry where "every vendor is losing, someone like Seagate could pressure weaker vendors out."
According to company statements, restructuring did manage to drive down the average cost of each disk drive produced, increasing the gross margin as a percentage of revenue to 24.0% for the quarter ended April 2, 1999, compared with 12.2% and for the comparable period last year. But sales from all disk drive products may be about $100 million, or 6 percent below the prior third quarter. Revenue decreased to $5.159 billion in the first nine months of fiscal 1999 from $5.244 billion in the same period in 1998.
Seagate said that falling prices for disk drives will also hurt results for its first quarter ending Oct. 1.
Quantum orchestrated a $ 200 million share buyback in early May to drive up stock prices, but "those gaining market share by buying back may be pricing to lose next quarter," said an analyst who didn't wish to be named.
Seagate will report official fourth-quarter on July 15.