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Last quarter, storage module builder Xyratex (Nasdaq: XRTX  ) disappointed analysts and investors alike, and the stock has been suffering ever since. At the time, I told you to consider shares of Western Digital (NYSE: WDC  ) or Seagate Technology (NYSE: STX  ) if you really had your heart set on a storage buy, and that turned out to be good advice: Xyratex is down a heart-stopping 43% since that day, while Seagate nearly preserved your capital with a 1.7% loss and Western Digital's 14% gain straight-up beat the market.

That includes a 13% drop in Xyratex shares today, because last night's second-quarter report was another disaster. Sales fell by 9% from the first quarter, to $360 million, at the low end of management guidance and well below the $374 million expected by your average analyst.

Management points to "soft" demand for 2.5-inch disk-drive components and fallout from Western Digital's acquisition of Hitachi's (NYSE: HIT  ) storage division, as both halves of that deal are customers of Xyratex. One company's synergies and cost savings are another's lost sales, you know.

All is not lost as gross margins in the networked storage segment improved and helped Xyratex beat earnings estimates with $0.24 of non-GAAP earnings per share. Assuming that the damage from the Hitachi deal has already been dealt, Xyratex could become a tremendous turnaround story from this low point. The company also announced a $50 million share repurchase plan, which seems perfectly timed to take advantage of an undervalued stock and could end up reducing the share count by nearly 10%.

However, it'll take a couple of quarters before that turnaround really kicks in, and I expect the share price trough to last for some time. In other words, there's no need to rush into any buy-or-sell decisions today. Itchy trigger fingers often get hurt.

You're better off just adding a basket of storage stocks to your watchlist, ready to take action when a real opportunity comes up. Click here to get started.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On April 01, 2011, at 4:39 PM, CROIC wrote:

    XRTX is also starting a dividend in Q3.

    This quarter was mediocre but guidance was seriously bad. I agree it's not a buy until they guide better earnings.

  • Report this Comment On April 01, 2011, at 9:22 PM, Enzo5000 wrote:

    I don't see complaining much about BC that is almost bankrupt with huge multiples in business that can take 10 years to recover.

    The same goes for MTW and a load of these companies with less than zero equity for shareholders, MTOR is also one.

    Both The NAZ and the DOW have hundereds of these companies but some how XRTX gets picked on because they did not cook their books.

    They could have shaved 8 Million off the R & D and would have delivered big, the same with Q2 a loss of 12 cents represent only $3.5 million, with $8 million , they would have had 15 cents.

    IN any events, they will eventually recover , as they still have over $1.3 Billion in sales and no debts, and I can't see how many companies can brag about these sales.

    To be fair, you have to have a couple of pieces about BC, MTW, MTOR, CAR, NCS, and few more.

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Related Tickers

12/31/1969 7:00 PM
XRTX.DL $0.00 Down +0.00 +0.00%
Xyratex CAPS Rating: *****
HTHIY $50.37 Up +0.97 +1.96%
Hitachi, Ltd. (ADR… CAPS Rating: *****
WDC $53.86 Up +0.26 +0.49%
Western Digital CAPS Rating: ***