Seagate Is a Top Tech Pick

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Hard drive manufacturer Seagate Technology (NASDAQ: STX  ) soared to new highs this week on what should have been a predictable business update and earnings release. The company pays a 4% dividend and has near-perfectly executed an adaptation strategy to address the shift away from PCs -- all while analysts and pundits have predicted its demise along with its peers'. To top things off, Barron's released its top 500 American companies, including Seagate as a top 10 pick. The best part of the story is that Seagate is still cheap, even after a 12-month gain of nearly 40% and more than 30% year to date.

It's time to get over your fears of PC demand and take a serious look at this industry leader.

To avoid a company such as Seagate because PCs are approaching extinction is like not eating because you're scared of choking. For years, the company has been in motion to protect itself from the declining segment and has built out a product lineup via development and acquisition that addresses new hard drive trends, such as solid state drives, along with rising industries such as the cloud. By the time PC revenue drops to a negligible amount, Seagate won't even be in the business. So why let a macro trend blindly dictate individual company performance?

In the past week, it looks like maybe, hopefully, investors are coming around to reality.

Starting from 2012's June quarter, Seagate has generated more than $3.3 billion in cash flow from operations, implying a trailing P/OCF of less than five times. Now, the two earlier quarters were still benefiting from market share domination and pricing advantages from the Thai floods, but even if we adjust going forward, the company is trading cheap. On an EV/EBTIDA basis, the company trades at 4.5 times.

With all of this free cash flow, Seagate is just buying back shares and paying dividends. Share buybacks aren't always ideal, but as Barron's mentions in its flattering article, the company has shown that its buyback strategy is anything but short-term focused. It's bought shares throughout the downtrends and wild swings, while reducing share counts by more than 1%.

In the first nine months of fiscal 2013, Seagate returned 75% of its cash to shareholders.

Strong outlook, weak valuation
The market will come around to Seagate's mispricing, at some undisclosed point in the future. It doesn't matter when, because we all know stocks eventually drift toward their intrinsic value.

Still think its business is shrinking? The company shipped 33% more exabytes this quarter compared to a year ago.

Investors can also look at Western Digital (NASDAQ: WDC  ) , which is similarly valued and well managed. The only reason I would take Seagate over Western Digital (as I view the businesses nearly identically) is that the dividend is quite a bit chunkier than Western Digital's 1.7%.

Seagate was an unbelievable bargain a year ago, and remains a pretty good deal today. If you are scared of the PC's demise, don't invest in Dell. But try not to let analyst and pundit scare tactics work their way into your portfolio.

While Seagate Technology pays a significant and growing dividend and seems able to generate the cash flow to support it, a global slowdown in demand for digital memory storage has begun to put pressure on margins. Is Seagate worthy of your investment consideration (and dollars)? The Motley Fool answers this question and more in our most in-depth Seagate research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

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