A Tech Value Play

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Disk drive manufacturer Maxtor (NYSE: MXO) led the midday market losers today with an 8.4% decline. All told, the stock's down 33% from its October 17 high of $15.38. Are the prospects really so dim?

Likely not. Maxtor just finished a strong third quarter with revenues up some 30%. Net income rose from a loss of $163 million to a profit of $29 million, and the seasonally strong fourth quarter lies ahead.

For what it's worth, analysts expect the company to earn $0.75 this year and $0.89 next year, putting the stock at about 12 times 2004 estimates. Could this be a value-priced technology stock? Is that even possible?

In fact, estimates for 2004 are probably light. Corporations have not spent to replace aging computer gear. The three-year "refresh cycle," as Maxtor calls it, is going on four years. With an improving economy, the computer replacement cycle should finally kick into high gear.

So what's the problem?

Maxtor's fall from grace is likely tied to price increases it forced through last month and the threat of competition. Maxtor tried to use the strong fourth quarter to raise prices, hoping the strength would carry over into the seasonally slow first quarter. A negative analyst comment and modest downgrade didn't help.

Yes, investors should be concerned with whether competitors Seagate (NYSE: STX) and Western Digital (NYSE: WDC) do not raise prices, thus making a play for market share. Then again, the competitive nature and technology risks inherent in the disk drive market are precisely why the stocks in the group trade at multiples in the mid-teens.

Which is, in turn, what makes Maxtor, with its solid balance sheet -- $575 million in cash and $422 million in total debt -- so interesting at today's prices. Particularly with capital spending ticking up and the business environment turning positive.

Besides sharing the same initials are Western Digital, W.D. Crotty is an information systems consultant who enjoys the ups and downs of the computer industry. Join W.D. and other investors on the Motley Fool discussion boards. Click here for a 30-day free trial. You can reach W.D. at wdcrotty@fool.com .