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A Potential Winner Out of Thailand's Flooding Disaster

Hard drive builder Seagate Technology (Nasdaq: STX  ) isn't resting on its laurels. Instead, the company is pouncing on a rare opportunity.

The hard drive industry is in shambles right now due to flooding in Thailand. This large-scale disaster is cramping the whole sector's style, as 40% of the world's hard disks are assembled there. But Seagate's Thai factories weren't flooded.

This will hurt you more than it hurts me, my friend
The supply chain is damaged, because TDK and other parts manufacturers make many of the hardware parts in Thailand and crucial chips from ON Semiconductor (Nasdaq: ONNN  ) and others also flow through Thai factories. In short, Seagate may not be able to get all the components it needs. But this company is relatively unaffected by the storms while archrival Western Digital (NYSE: WDC  ) is scrambling to survive. So Seagate is in prime position to steal some market share right now.

Management just updated its outlook for the current quarter. Seagate expects to make and sell about 43 million units out of a total market for 120 million units at most. By comparison, Seagate sold 50.7 million drives in the previous quarter but the total market was much larger at 177 million units.

In other words, the company hopes to boost its market share from 29% to 36% in just three months. At the same time, Western Digital's take shrinks from 33% to about 21%. Moreover, prices tend to jump when demand outstrips supply so gross margins should expand from 20% to roughly 28%. The last time Seagate saw gross margins like that (in the summer of 2010), net margin came in about three times as rich as what the company saw last quarter.

So even though the Thai floods limit Seagate's production volumes, others are suffering more and it's generally a bonanza for the company. The longer it takes Western Digital to rebuild its severely damaged facilities, the longer Seagate's gold rush will last.

But wait -- there's more!
This chaotic era in the history of hard drives could also be a boon for solid-state drive manufacturers OCZ Technology (Nasdaq: OCZ  ) and STEC (Nasdaq: STEC  ) . As traditional disk drives get more expensive, the reasons not to buy SSD alternatives shrink away. For some enterprises and consumers, the difference may be small enough to justify the faster but smaller and more expensive solution.

But Seagate isn't going to let SSD opportunities slip through its fingers either. In a separate release, the company also introduced a new line of hybrid drives intended to combine the speed of SSD with the low-cost bulk of spinning magnetic disks. The Momentus XT series is nearly as fast as an entry-level Intel (Nasdaq: INTC  ) or Samsung SSD under some circumstances, but the price premium is much smaller.

It may not be quite good enough to steal the SSD vendors' thunder, but certainly enough to keep Seagate relevant as the new technology moves into the mainstream.

And there's one market where SSD drives won't touch Seagate's bread-and-butter products for years to come. The Big Data trend toward enormous data sets in massive storage arrays will keep Seagate and Western Digital afloat even if they do miss the SSD bus. Learn all about Big Data in this special report, and you'll see the name of one stock that rides this market like nobody else. Grab your copy right here -- it's totally free.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Western Digital and Intel, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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  • Report this Comment On November 29, 2011, at 9:37 PM, soiseesurfer wrote:

    Anders, you are quite right to identify Seagate as being in a unique position as a result of the Thailand floods. The long list of suppliers that the flood impacted is startling, many of them are suppliers to Seagate as well as Western Digital, HGST, & Toshiba. There are some things worth clarifying. The T.A.M. for the current quarter is somewhere north of 170m, a number that the damaged supply chain just cannot hit. The 120m figure you mention is a guess at what the HDD supply chain can hit.

    Investors may want to review last guidance from Seagate & Wesern Digital. Seagate's new guidance says they will ship 43m drives, narrowing their last issued guidance of 40m - 45m. Ho hum...right? Except that Seagate indicated that gross margins would exceed their prior high end estimate. One would think that a theme would have emerged here of Seagate being the least ugly sister at a dance. To be sure, in the last 3 mos. Seagate shares have risen 40%+ while WD's have declined approximately 8%. However, over the last two days both have risen, gapping up sequentially. My guess is that the market is beginning to understand the shift in pricing power, from buyer to seller, that accompanies a disruption such as this. Most analysts agree that the shift is one with some legs, lasting at least through 2012. However, don't expect to see extreme price gouging or windfall profits here. The HDD industry is only too aware of the solid state disk ((SSD) pack that is nipping at their heels. NAND flash prices have been falling, while HDD prices have been rising, narrowing the fundamental argument that favors the older technology. Still, there is a lot of field for the two sides to settle in to a differential, which was roughly 10X per gigabyte prior to the recent events. In the meantime Seagate has just announced a new entry in their "Momentus" hybrid drive line, with very interesting specifications cllaiiming the new product is 70% faster than the prior model. Western Digital has their fingers in the solid state memory field as well, with their prior acquisition of Silicon Systems, and their pending acquisition of Hiatchi GST. However, this part of the plot thickens with the acquisition by Seagate of Samsung's HDD operations xpected to a close before year end. The announcement referenced a favorable supply agreement and cooperative development with Samsung of NAND flash devices. Oh, I should mention here that WD's expected acquisition of HGST has only a contingency approval by the EU, and they must make certain divestitures widely observed to be related to the 3.5 inch HDD market. That divestiture is key to WD's closing of HGST (which has been the 3rd string player in terms of volume for quite some time.)

    The shift in pricing fulcrum is a very attractive feature going forward, for both companies. Western Digital's extremely lean manufacturing prowess, dominance in external storage, strong position in consumer storage, and vast network of distributors and retailers, remain intact, and with care through these tough times, will continue to remain so. Seagate's position has definitely been enhanced for now, but a 40%+ stock price gain tucked in already might give some pause. With OEM/ODM markets that demand an alternative supply base, their advantage may wilt as WD claws back after remediating their flood damage. Still, Seagate's price management has shown some real brilliance of late. If they show the same brillliance in taking a proactive position in the rehabilitation of their supply line, they can easily compound their advantage. There are suggestions that this is happening and at both companies, all operating hands are on deck.

    I would say there is quite enough here to keep even non-commital observers entertained for quite a while. For my money I like both firms, and took new positions in both shortly after news of the flooding occurred.

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