Seagate's Short Term Tepidity Doesn't Change Long-Term

While its biggest competitor saw earnings come in above analyst estimates and a subsequent share rally, Seagate Technology (NASDAQ: STX  ) witnessed the near opposite. One of the storage-industry behemoths, Seagate saw sales drop in the same amount that its rival Western Digital (NASDAQ: WDC  ) gained. Margin pressure and a hiccup in the company's cloud-storage segment kept the results from satisfying Wall Street analysts and sent the stock tumbling down into the double digits. Still, Seagate has the cloud-storage winds at its back for years to come. As the company continues to invest in more efficient, more advanced high-capacity products, all levels of the income statement should improve. Here's why Seagate is still a good business to own.

Earnings recap
Sales dipped down year over year for Seagate's fiscal second quarter to $3.53 billion from $3.69 billion, along with an adjusted bottom line of $1.32 per share. Analysts had wanted about $30 million more on the top line and an additional $0.07 per share on the bottom.

Shipped units fell about 3%, which also comes in contrast to Western Digital's increased unit count (though the latter did show a drop in average price paid), and as noted by company management, the culprit appears to have been the high-growth cloud-storage area. Over the long term, the cloud industry's demand for high capacity storage is undoubtedly attractive, but as the cloud companies themselves are in high-growth mode, their resource build-out (read: asset growth) is somewhat unpredictable. This can make short-term cloud-enterprise-related earnings lumpy, which is exactly what happened this quarter with Seagate.

Looking ahead
According to Barron's, some analysts weren't thrilled with the company's guidance for the coming quarter either, but this should underscore the idea that an investment in Seagate today is a long-term play on demand and tremendous cash flow.

Starting with the latter, Seagate has for years been an absolute cash machine. Throughout the endless claims that the declining PC industry would bring the death of Seagate (and Western Digital), the company continued to deliver huge sums of cash back to shareholders. Seagate continues to pay a healthy 2.7% dividend while buying back shares. For the fiscal year, CEO Steve Luczo has said the company is on track to deliver 70% of cash flow back to investors. That goal was higher (and met) last year, but the company has increased capital expenditures to solidify its position at the forefront of the efficient, high-capacity-storage business.

Investors need to keep in mind the massive potential that lies before these storage companies. While today's earnings may not impress and the drop in cloud-product demand could be viewed as unnerving, Seagate is very well positioned to benefit from the industry's growth. Data is the emerging currency of business and it needs a place to live.

Seagate may not fly high in the next few months, but any short-term drop-off in stock price, especially at under 10 times earnings, is a chance to buy a long-term winner with a shareholder-focused management team.

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