A company beats estimates -- and its stock plunges. This may sound counterintuitive, but it's all too common during earnings season. Today's target for illogical behavior: Seagate Technology (NYSE:STX), which reported solid third-quarter results yesterday after the market closed.
Seagate's $2.3 billion in revenues and $0.53 in diluted EPS were both slightly higher than the average analyst estimates. However, the company also gave slightly disappointing guidance for the June quarter, which seems to be the main culprit for investors' after-hours jitters. Seagate expects Q4 revenues of $2.1 billion to $2.25 billion, and diluted EPS between $0.46 and $0.49. But analysts' average estimates call for $2.23 billion in revenues and $0.49 in diluted EPS. The company's conservative estimates stem from the new product releases it's pushing into the second half of 2006.
If you can look beyond the next quarter, there's a lot to like about the company. It has continued to benefit from the diversification of its product lines, which has helped to buffer it from the cyclical PC market. Weaker desktop and notebook sales so far in 2006 were offset by increased shipments of drives for other devices. Shipments for DVR applications, the gaming market, and mobile communication products increased 100%, 39%, and 112%, respectively. Applications outside the PC market now account for 30% of revenues.
Along with the positive trends in the data-storage market, a recovery in desktop sales could hugely benefit the company in the near future. That recovery may largely depend on how promptly Microsoft (NASDAQ:MSFT) can release its Vista operating system.
Seagate's merger with Maxtor (NYSE:MXO), and the seasonality of its business, may continue to fuel investors' caution. However, CEO Bill Watkins has been quite creative in building a culture at Seagate that celebrates teamwork. The desire for a positive work environment most likely stems from Watkins' involvement in a tough merger that saw his company, Conner Peripherals, purchased by Seagate. His most recent brainchild is Eco Seagate, a company retreat for 200 selected employees in New Zealand. At $9,000 a head, investors may be wondering whether the money could be better spent elsewhere. However, it might help ensure a smoother transition of power during the merger.
With a reasonable P/E ratio, a well-run business, and fast-growing market, it looks like investors still have an opportunity to do something where Seagate is concerned.
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Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.
