Shares of hard-drive maker Seagate Technology
How it got here
What we've got on our hands between Seagate is a fight between deep value investors and those who feel that earnings disappointments should be punished.
On the downside, Seagate recently preannounced that its earnings estimates wouldn't be up to par. Its officially reported $4.48 billion in revenue for the quarter was a clean $500 million below where the company had originally pegged its forecast as supply chain constraints and quality control issues still relating to the flooding in Thailand affected its results.
Despite its reduced forecast and results, Seagate still produced a 57% increase in revenue over the year-ago period and registered 42% global market share for hard drives shipped. Operating income more than quintupled as research and development costs shrank considerably.
The story behind Seagate and its rival Western Digital
How it stacks up
Let's see how Seagate stacks up next to its sole publicly traded peer, Western Digital.
This round goes decisively to Western Digital, which has vastly outperformed Seagate over the trailing five-year period.
Source: Morningstar; Seagate's yield is projected.
Not to sound completely like a bird, but this highly commoditized sector is cheap, cheap, cheap! Although you probably won't go wrong with either company, they each offer distinct advantages.
Favoring Western Digital, it trades at a considerably lower price-to-book and cash flow ratio than Seagate. It also maintains a net cash position of $1 billion whereas Seagate has a net debt position in excess of $700 million.
For investors looking at Seagate, you'll be privy to a sizable dividend boost that now places its projected yield at a whopping 3.9%! In addition, Seagate's five-year projected earnings growth rate trounces Western Digital's by a count of 28% to 18%, according to Wall Street analysts.
Like I said, there's really no wrong answer here.
Now for the $64,000 question: What's next for Seagate? That question is going to depend on whether spending for the cloud remains robust, if it can control its debt and expense levels, and if it can quickly remedy its supply chain issues.
Our very own CAPS community gives the company a three-star rating (out of five), with 92.1% of members expecting it to outperform. Although I've yet to make a CAPScall on Seagate in either direction, I've decided it's time to enter a limit CAPScall of outperform on the stock at $28.
Seagate has had an impressive run since announcing an additional $1 billion in share buybacks on top of the $2 billion it authorized in 2010 and a 28% boost in its dividend. The company is doing what it can to return value to shareholders and it's being reflected in the company's share price. I feel investors are getting a great deal on Seagate at these levels, but even I understand that no company goes straight up. Seagate is vulnerable to macroeconomic weakness and input price fluctuations -- that's just part of its business. Taking the good with the bad, however, I feel you can't go wrong at less than five times forward earnings with a nearly 4% yield, especially if I get a retracement to $28.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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