3SOF

KOMG - KOMAG INC.

Sector:         Technology
Industry:     Data Storage Devices

Profile: Komag, Incorporated engages in the design, manufacture, and marketing of thin-film media (disks) that are incorporated into disk drives. These drives are used to record, store, retrieve, and protect digital information. The company's products offer a range of coercivities, glide height capabilities, and other parameters to meet specific customer requirements. Komag sells its products to original equipment manufacturers in the disk drive market worldwide. The company was founded in 1983 and is headquartered in San Jose, California.

Komag website  (http://www.komag.com)

Komag profile  (http://finance.yahoo.com/q/pr?s=KOMG)

--------------------------------
Fundamentals and News

2005 was a great year for Komag. Earnings per share was up 107% driven by a shortage of media:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19665;image)

According to a recently released report from iSuppli total global HDD shipments reached 376 million, up 23 percent from 305 million in 2004. The growth was driven primarily by the mobile PC and consumer electronics areas as devices such as MP3 players, Personal Media players, and digital video recorders saw explosive sales. For 2006, iSuppli predicts global HDD shipments will rise 14.4 percent year-over-year to 428.4 million units.

Quote"For nearly all HDD makers, 2005 was the best of times," said senior storage analyst Krishna Chander. "The biggest problem was a component shortage due to booming sales of HDDs." And the report continues On the negative side, the HDD supply chain was slow to react to the explosion in demand, leading to shortages of disk media.

Every industry expert I have seen do forecast that the tight supply of Media will continue in the years to come. Komag which is the clear market leader has made the following forecast:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19669;image)

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19670;image)

This is based on a 15% increase in unit shipments, which is similar to iSuppli's forcast of 14.4% increase.

The expected future shortage of media is confirmed by the leading HDD supplier's eagerness to sign long-term delivery agreements with Komag on very favorable terms. The latest such agreement was from Hitachi:   Hitachi and Komag Expand Strategic Supply Relationship for Hard Disk Drive Growth  (http://biz.yahoo.com/prnews/060405/sfw134.html?.v=7).


The HDD producers are so keen to ensure supply of media in the years to come that they prepaid $103 million in 2005 for products that has not even been produced.

Seagate reported earnings yesterday  (http://www.seagate.com/cda/newsinfo/newsroom/releases/article/0,1121,3117%5E2,00.html) after close and the outlook disappointed the market but for Komag it was great news. The unit shipments excited Komags forecast for the total market and when Mark Moskowitz from JPMorgan asked if Aluminum media constraints have affected STX and if they anticipate future constraints. COO David A. Wickersham answered that Aluminum media constraints still remain "tight" for the June Quarter, and very very very (he repeated it three times) tight for the September quarter and beyond.

In a comment today Bear Stearns analyst Andrew Neff said that Western Digital and Komag could see some "collateral" weakness from Seagate's report, but that Western Digital stands to gain market share after the Seagate-Maxtor deal is completed, and that Komag should benefit from more demand for Western Digital's products.

The shortage of media is not the only reason for the HDD suppliers to want to have strong ties to Komag. Komag also has a clear leadership position in perpendicular recording technology. Again according to iSuppli's report:

The industry as a whole this year is planning to make a transition to perpendicular recording technology, which will dramatically increase HDD capacities. As the HDD industry gains confidence in this transition they will ship increasing volumes of hard drives based on perpendicular technology.

Komag has developed  a industry revolution in granular, oxide-isolated Perpendicular Magnetic Recording media (PMR). Komag's PMR technology is constantly being tested by all of its customers for qualification into their drive programs with great success.  Additionally, Komag has recently started manufacturing PMR media in its Malaysian factories and will gradually increase its ratio of PMR to LMR media produced in mass volume.  This transition is strictly timed with their customer's demands and requirements for PMR media.

Financials

The shortage of media has and will continue to give Komag very strong pricing power. This is obviously reflected in their financials, which are absolutely stellar. Their balance sheet is extremely strong with more than $200 million in cash and only $80 million in long term debt.

Komag is expected to grow earnings this year with 22%. I personally think that is very conservative and it is worth noting that Komag consistently has exceeded the earnings forecast. But even using the analyst forecast for earnings for 2006 the PE is 10.9. This is very cheap for a company with this kind of earning visibility and quality.

Technical

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19672;image)

This is a hard core value pick. The stock has been in a short term down trend after a phenomenal run. It does however seems that 45 provides good support. With the growth, earnings visibility, and strong balance sheet Komag should trade at a forward PE of 20 or a PPS around 90. That is significant upside with limited downside.

Komag is reporting earnings on Wednesday next week. They are expected to earn 1.05 per share. This is a year over year 77% increase in earnings. I expect them to beat the earnings forecast. We want to hold this stock over earnings so we will buy KOMG at the opening tomorrow.

Hutchinson reported earnings yesterday and they disappointed the market. Hutchinson supplies suspension assemblies for hard disk drives and whereas KOMG has had consistent increases in earnings HTCH has really shown lackluster performance during the last year with falling EPS. There is a very simple reason. The market for suspension assemblies is highly competitive whereas the market for media has very little competitive pressure due to the shortage.

For some reasons the market still draws parallels between HTCH's performance and KOMG's so there might be some more collateral damage today.

By the end of the day KOMG will be valued based on their earning power and we are confident that they will continue to show great earnings in the coming years. They will release earnings on Wednesday next week and we want to hold the stock over earnings.

Michael,

You are usually right on with your picks.

I am with you on this one.  Just bought $ 43.95.

Let's see how it develops.   ;)

Looks like a good buy fill_the_gap.  I just nibbled a little.  Disk drive makers down 3.6% at this time.  Let's get a rebound and good earnings

http://moneycentral.msn.com/investor/market/secind.asp (http://moneycentral.msn.com/investor/market/secind.asp)

Just in at 43.95 as well. KOMG should recover nicely going into earning next week. Today's big drop was a gift to buyers.

reason for drop:

Techs: Hardware, Flash, Network Names Down
Friday , April 21, 2006 09:31 ET

The Nasdaq futures lost their positive momentum in approaching the market's opening bell. Citigroup cut DELL (-3.5%) to Sell from Buy and cast a shadow over the broad hardware sector. HTCH (-15%) warned on current quarter revenue and earnings and picked up 2 downgrades. KOMG and EMC are lower as well. FDRY & FFIV missed. Flash devices (SNDK, FLSH) look heavy after SanDisk missed. (LEXR is holding up on a SNDK buyout rumor.)  ERICY, CSCO & VTSS are also down.

http://www.knobias.com/individual/public/news.htm?eid=3.1.2cba7a08195b6925415d4a1e88176a9b72dc54b566ea672899dd91a06ec6b8be

I am invested since last autumn (32.40$) and I will hold KOMG for long term prespective  8)

Is anyone looking at buying calls ?  They do not go out past September, but a selloff can produce a nice entry for an option play.

Current support and resistance levels please...

I think this goes up next week ahead of earings. I bought today at 43.95, 43.77, and 43.27.
Hope I'm not catching a falling knife here. Next week will tell.

There is actually an area of support from about $40.75 to $42.75 (give or take a quarter).  I was going to post a chart but I see that the bargain hunters have stepped in and are helping into the close.  Hopefully, they'll keep it up. :)

from yahoo board:

06-Apr-06
07:54 KOMG Komag secures key Hitcahi agreement, providing visibility into 2007 - Needham (48.00 )

Needham notes with all of their customers now signed for long term, strategic agreements, industry wide media supply remaining tight, and overall unit demand continuing, the firm believes Komag is fundamentally well positioned to generate significant revenue and EPS upside over the next 12-24 months. Although the press release was not specific, the firm suspects that the terms of the HGST deal are comparable to the previous agreements (i.e. cash transaction), where specified volume is required to be in place at a certain time. At 10.6x their conservative 2006 EPS estimate, the firm believes KOMG is compelling at current levels. The firm reiterates their Strong Buy rating and $62 price target based on 14x their 2006 EPS estimate of $4.53.

>:D >:D
Oliver

Still have it from last summer/fall at $31.5 based on Michael's original recommendation. May consider add a bit on Monday.

Quote from: valueseeker on April 21, 2006, 10:01:30 PM
Still have it from last summer/fall at $31.5 based on Michael's original recommendation. May consider add a bit on Monday.

Hi Louis

I am also holding my stocks from September last year and inspired by Jeff, Calguy and Wrasse I added on Friday. I could almost repeat my post from September last year:

Quote from: Michael on September 01, 2005, 01:34:11 PM
Have you ever been punished for a misdeed somebody else did?

Well KOMG has been punished because Hutchinson guided lower citing weak demand: http://biz.yahoo.com/bizj/050830/1157601.html?.v=2

It fell from 37.5 down to the support at 32.5 (13%). It is always important to follow sector news when you consider to buy a stock. Not only can it warn about potential weaknesses or strength in the sector but it can also offer great buying opportunities,

In the case of KOMG I think the drop was unwarranted. I have therefore bough at 32.57.

A few things have however changed since then. KOMG earnings visibility is much better. When Seagate in their earnings call says that media supply is tight and is going to be tighter in Q3 and Q4 I actually believe them. Why would they lie about something that potentially can hurt their business  ::). If Seagate (and more or less every HDD analyst out there) is correct then Komag's profitability will basically depend on how fast they can increase their capacity.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19917;image)

The capacity has already been increased a few percentages this quarter but the large increase is still to come.

Another thing that has changed since September is the volume. Last year the drop was accompanied with a 600% surge in Volume and the stock suffered from months thereafter. Heavy shorting which continued until November fueled the volume surge. Even though the shorts have tried to cover ever since most of the short position is still in place and they are deep under water.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=19921;image)

The drop this year happened under rather moderate volume and really seems just to be in sympathy with the general decrease in the HDD sector. It certainly seems like the short community has lost their appetite for shorting additional KOMG shares.

I don't expect at blowout quarter from KOMG. Their earnings are as said quite visible and the analysts seem to have got it almost right (a little lower than my expectations) but a good set off numbers combined with a confirmation of the outlook should do the trick. After all this stock is now trading at a PE of 9.5 (2007) and their earnings this quarter is expected to grow 77% year over year.

Short-term the stock can go a little up, down or sideways but long-term there is only one way and that is up.

Also to note, the recent pullback brought the stock back to the 50% fibonacci retracement (starting from the late Dec run).

Need to free up some funds...nice pic.


Good luck...Jody

I hate this kind of game  :-[

KOMG: Am Tech Starts @ Sell; Sets Tgt @ $29; Analyst Notes
Monday , April 24, 2006 09:23 ET
Issuer: Komag Inc (NasdaqNM: KOMG)
Analyst Firm:  American Technology Research
Ratings Action: INITIATE
Current Rating: Sell
Target Price Action: INITIATE
Target Price: $29.00
Analyst Comments: The firm cites longer-term competitive pressures.

Long and strong IMO  >:D

HI Oliver,

I really have a hard time trying to take this research serious. The timing and content is suspicious. It most of all look like paid research. I have to admit that I have never heard about American Technology Research before and I haven't been able to find much information about them so I might be unfair.

They cites long-term competitive pressure saying:

QuoteFirm believes the Street is underestimating the high likelihood of customer attrition at two of KOMG's largest customers (Seagate and Hitachi) as they move more media capacity in-house to increase competitiveness and to lower costs.

They conveniently forget to mention that Seagate just hours after the announcement of the take over of Maxtor reconfirmed their long-term relationship with KOMG and that Hitachi just a few weeks ago signed a strategic supply agreement covering 2007. They also forget to mention WDC, which is the second largest customer and who other recognized analysts have said will most likely increase their purchases from KOMG.

The lower cost for in-house production is purely speculation from the analyst site. I am pretty sure that KOMG's cost base is significant lower than the HDD's in-house production but that is obviously impossible to confirm.

For now American Technology Research are the only analysts forecasting an oversupply of media in 2007. The forecasts and actions from the industry leaders seems to confirm that the tight supply will continue in 2007 and we rather base our investment on the fundamentals of the industry than some highly speculative notes from an analyst.

It seems the market also choose to ignore the so-called research. After an initial sell off in the morning the stock recovered nicely and actually performed better than the HDD sector.

update:
KOMG: Short Interest UP 8.2% to 6.2M in Apr 2006
Wednesday, April 26, 2006 06:00 ET

According to new short interest data from NASDAQ, short interest for Komag Inc (NasdaqNM: KOMG) INCREASED 8.2% to 6,248,816 shares for the month ended mid-April, 2006.

SYMBOL          MARCH           APRIL          CHANGE       %CHANGE      DAYS/COVER
--------   -------------   -------------   -------------  ------------  ----------
KOMG           5,774,184       6,248,816        +474,632        +8.22%           7

Based on KOMG's 20-day average daily share volume of 1,010,975, it would require approximately 7 day(s) of buying to cover this short interest.

&

KOMG: To Release Q1 Results Apr 26 [AMC]
Tuesday , April 25, 2006 13:00 ET

Komag Inc (Nasdaq NM: KOMG) is scheduled to release its Q1 financial results on April 26, 2006, after the close of the market (AMC).

CONSENSUS ESTIMATES:

Q1 Revenue: $199.54 million
Q1 EPS: $1.05 per share

PREVIOUS PERIOD:

Prev Q1 Revenue: $140.28 million
Prev Q1 EPS: $0.56 per share

KOMG reported Q1 earnings today  (http://biz.yahoo.com/prnews/060426/sfw056.html?.v=51) and they were as expected absolutely superb. They once again beat the analysts expectations confirming the strong business environment for media. PE based on one quarter earnings is 41 and we still have three quarters to go. Most shares with this kind of earnings quality, visibility and growth would trade at a full year PE of 41.

In light of the recent speculations around the demand for media going forward the most important part of the earnings release is the forward looking statements and again as expected they are very bullish:

QuoteEarly indications for 2006 are that overall demand continues to be very strong and our factories are continuing to run at full manufacturing capacity. Our capacity expansion plans remain on or slightly ahead of schedule and we expect to have 35 million finished disk capacity in the second quarter of 2006. Based on current demand, we expect total revenue in the second quarter of 2006 to increase 5% to 10% from the first quarter of 2006. Net margin in the second quarter is currently expected to be similar to the first quarter at around 17%

Q2 is the quarter that I was most concerned about as the demand/supply imbalance is hitting the lowest point in this quarter so a confirmation that there will continue to be a shortage is excellent (remember that at this point in time the production for the full quarter is already planned).

Q3 and Q4 is a no-brainer. Unless the world falls apart they will run at 100% to quote again from the earnings release:

Quotebased on the anticipated demand for finished media, our plans are to exit the fourth quarter of 2006 with capacity of 43 million disks per quarter. With this expected capacity expansion, we would anticipate increasing sequential revenue during each quarter of 2006.

I would be very surprised if they don't significantly exceed the analysts forecast for earnings for 2006 which stands at 4.31. That would mean that net income for the next three quarter should be lower than Q1 and that is almost impossible even if they tried.

Concerning 2007 they highlight the continued expansion of capacity based on the agreement with Hitachi and the other long term agreements with the major HDD suppliers:

QuoteIn April 2006, we announced a strategic agreement with Hitachi Global Storage Technologies, which includes some incremental capacity planned for early 2007.

Our current capacity expansion plans are based on strategic supply agreements with each of our four major customers. As part of these agreements, Komag has made certain commitments to increase capacity and our customers have agreed to purchase certain amounts of media. In addition, our customers have agreed to make certain pre-payments for media to help mitigate the cash impact of the capital spending required for Komag to increase capacity.

Having in mind the recent highly speculative suggestions that Hitachi would produce their media in-house in 2007 it is interesting to note that they have already committed to finance the expansion of Komag's capacity.

Some members of 3SOF used the weird sell recommendation to buy into KOMG but for those that still are on the sideline there might still be a chance to ride the wave of a hard core value pick (http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=3073)

STX yahoo board quotation:
Neff on KOMG 1
by: duedilly    04/27/06 08:14 am
Msg: 35349 of 35364

Delivers Another Strong Quarter And Outlook Reflecting Healthy Near-Term Trends; Raising Estimates

KOMG delivered a strong qtr/outlook reflecting robust media demand and capacity expansion, continued media constraints, and favorable mix trends (enabling ASP expansion). We're raising ests and note that our model could still be conservative (100bps margin improvement yields $0.30 in EPS).
Despite investor anxiety on the HDD biz, KOMG is benefiting from a supply constrained environment and remains a strong capacity expansion story. Further, we're encouraged about growth drivers from new ventures, including 2.5" aluminum-based notebooks (volume expected in 2Q06) and PMR for enterprise (mid-2006).
While inventories were a source of contention (up 34% seq), KOMG indicated that most of increase was due to higher raw materials, as finished goods were down seq. Moreover, KOMG appears proactive in addressing the STX/MXO integration risk (offsetting w/ higher volumes to WDC, HGST).
KOMG reported 1Q06 EPS of $1.09 (incl. $0.02 in options), above our est. of $1.07 (Street at $1.05), driven by higher GM and stronger revs of $208.5mm (above high end of guidance of $201mm). ASP of $5.73 (up 1% seq) was higher than expected given mix (strong growth in high-capacity drives).
We're raising our ests but still see upside potential with near $5.00 in '06 EPS power. We're raising post-option EPS for '06 from $4.61 to $4.85 and for '07 from $5.10 to $5.30. For 2Q06, we're raising EPS from $1.09 to $1.17 on revs of $229mm (up 10% seq) - guidance is revs of $219-229mm (up 5-10% seq) and EPS of $1.14-1.19 (using flat net margin of 17.4%).
We're increasing our CY06 target from $62 to $65 by applying a 12.3x P/E multiple (slight upward bias from prior 12x given inclusion of options in EPS) on our post-option 2007 EPS. We continue to monitor industry capacity coming online and STX/MXO internalizing media production, but we believe KOMG can navigate through these risks and growth opportunities remain (mobile, PMR, higher volumes at WDC).


Delivers Another Strong Quarter And Outlook Reflecting Healthy Near-Term Trends. Komag reported another strong quarterly results driven by better-than-expected unit shipments from measured capacity expansion owing to continued robust demand from prevailing media constraints. While we remain concerned about industry capacity additions, as well as the longer-term risk of Seagate/Maxtor internalizing more media production in 2007,
we believe that Komag can successfully navigate through these risks owing measured capacity additions, volume commitments by customers (Seagate, Maxtor, Western Digital and Hitachi) and expansion into new opportunities (mobile, perpendicular recording). In addition, some of the volume losses resulting from the Seagate/Maxtor merger could be offset by gains at Western Digital and other customers (as seen during 1Q06).
From a larger perspective, we view the drive industry as a "cyclical growth" sector, and as such, we believe that the health of the industry is determined more by supply than demand. As a cyclical sector, industry conditions can dramatically change very rapidly, but with continuing shortages in media expected to persist throughout 2006, we believe that industry dynamics are likely to remain favorable, with media constraints acting as a  stabilizing factor.
Nonetheless, we remain vigilant about the potential for dramatic changes in industry fundamentals from supply/demand imbalances and overcapacity.

1Q06 EPS/Revenues Exceeds Expectations And Provides Positive Guidance. Komag reported 1Q06 post- options EPS of $1.09 (vs. $0.58 a year ago), excluding a $60,000 gain from an asset disposal (which was immaterial to EPS) but including $1.8 million (or $0.02 per share) from options expense, restricted stock and accelerated vesting expenses, which was at the high end of Komag's EPS guidance of $1.01-$1.09 (reflecting a net margin of 17%-18%) but exceeding our $1.07 estimate and First Call at $1.05. Stronger EPS was driven by revenue and gross margin upside as well as lower-than-expected tax rate, partially offset by higher spending and
lower interest income.
• Revenues Above Guidance/Expectations: Revenues of $208.5 million (up 8% sequentially and 49% year/year) were better than our estimate of $200.4 million, First Call consensus of $199.6 million and above Komag's upwardly revised guidance from its analyst day for revenues to be at the high end of its prior expectations of a 2%-4% sequential increase (or about $201 million assuming 4% growth).
• Stronger Finished Disk Revenues On Unit/ASP Upside. Finished disk units of 31.9 million were
stronger than our 30.9 million estimate, with capacity utilization again reaching over 100%, as Komag drew down finished goods inventory to meet the demand (i.e., actual production was less than 31.9 million). Driven by higher unit shipments and higher ASP, finished disk revenues of $182.8 million were up 48% year/year and 9% sequentially and ahead of our estimate of $174.1 million.
• ASP Upside On Favorable Mix Shift. ASPs of $5.73 also exceeded our estimate of $5.64, owing to favorable mix shift to higher-capacity drives. During the quarter, high capacity 3.5-inch drive (120GB+) shipments increased from 14% (or 4.2 million) to 24% (or 7.7 million) of total finished disk shipments, with Komag noting that it began initial shipments of 160GB disks.
• Other Disk Revenue: Other disk revenues of $25.8 million were slightly below our $26.3 million estimate and comprised 13% of sales, although continuing to benefit from tight industry supply of aluminum substrates.
• WDC/Hitachi/Seagate Up, MXO Down Sequentially: With imminent closure of MXO/STX merger, sales to Maxtor declined by 19% sequentially to $49.1 million with desktop unit shipments of roughly 5 million units, down 40% sequentially. On the other hand, with new capacity ramp and share gain for Western Digital, sales to Western Digital rose 26% sequentially on 13 million unit shipments. In addition, Komag saw sales increasing to Hitachi, with total revenues up by 14% sequentially. Owing to continued media constraints, Komag also experienced sales increase to Seagate, which rose by 39% sequentially. As a percentage of total disk sales, Maxtor declined from 31% to 21% sequentially while Western Digital increased to 30% from 35%, Hitachi increased from 20% to 21% and Seagate increased from 14% to 18% sequentially.

Capacity Utilization
We estimate that Komag's capacity utilization for the quarter was 103%, up from full utilization with the addition of about 2 million unit capacity during the quarter. Komag reiterated its outlook for adding about 4 million unit capacity per quarter, with 35 million in 2Q06 and exiting 2006 with total capacity of 43 million.
Higher Gross Margin On Utilization/Mix. Gross margin of 28.3% was 31 basis points above our estimate of 28.0% and up 334 basis points (or about flat sequentially) driven by with full capacity utilization and favorable mix – Komag had not provided specific gross margin guidance.
Higher Operating Expenses On Options Expense. Total operating expenses of $23.1 million were above our estimate of $20.1 million, although $0.8 million was from stock-based compensation and $1.0 million was from accelerated vesting of stock options and restricted stock. The company expects stock-compensation-related expenses to increase sequentially by $1 million (or $2.8 million in aggregate) reflecting increased expense from the acceleration of vesting options ($2 million).
Lower Tax Rate From Tax Holiday. Tax rate of 2.7% was below our 4.0% estimate, which added about $0.015 to EPS. Moreover, the company lowered its outlook for 2006 tax rate from 4.0% to 3.0% owing to the tax holidays in Malaysia, which do not expire until 2016.
Balance Sheet Remains Strong. Total cash of $191 million declined by $14 million sequentially, translating to cash per share of about $6.27 (net cash per share of $3.63 excluding convertible debt). DSO of 52 days decreased from last quarter's 55 days owing to higher revenues and the timing of customer payments. Total inventory of $73 million grew about $19 million sequentially or 34% due to raw materials given the need to mitigate materials shortage concerns and to support production levels to meet continuing strong customer demand. Komag noted that finished goods inventory declined sequentially during the quarter.
Raising 2006 Estimates. Reflecting Komag's positive 2Q06 outlook with stable margins and higher ASPs, coupled with continued media supply constraints and potential for growth from new applications (e.g., mobile), we are raising our estimates for 2006 and 2007. We are increasing our pro forma post-options EPS estimate for 2006 from $4.61 to $4.85 (which includes the impact of stock-based compensation expense of $3.2 million). Following assumptions were used to arrive at our EPS estimate:
• Revenues of $962 million, up 40% year/year and raised from our previous estimate of $907 million
• Finished disk units of 148 million, up 39% year/year and raised from our prior 142 million assumption
• ASP assumption of $5.75, increased from our prior assumption of $5.59
• Gross margin of 28.0%, raised from 27.6%
• Tax rate of 2.9%, raised from our prior assumption of 4.0%
Raising 2Q06 (March) Estimates. For 2Q06 (June), we are also raising our post-options EPS estimate from $1.09 to $1.17 (vs. $0.86 a year ago) on revenues of $229 million (up 32% year/year and 10% sequentially) – Komag is forecasting revenues to grow 5%-10% sequentially from the March quarter's $209 million (or about $219-$229 million) and achieve a net margin about 17%, implying an EPS range of about $1.14-$1.19 (including options
expense).

Raising 2007 Estimates. For 2007, we are raising our post-options EPS from $5.10 to $5.30 (including the impact of stock-based compensation expense of $0.13).
We assumed:
• Revenues of $1.10 billion, up 15% year/year and raised from our previous estimate of $1.05 billion
• Finished disk units of 169 million, up 14% year/year and raised from our prior 165 million assumption
• ASP assumption of $5.77, increased from our prior assumption of $5.60
• Gross margin of 27.7%, raised from 27.6%
• Tax rate of 4.0% (no change)

Valuation: Raising 2006 Year-end Price Target From $62 To $65. We are increasing our 2006 price target from  $62 to $65 by applying a 12.3x P/E multiple (slight upward bias from prior 12.0x target multiple given the inclusion of options in our pro forma EPS calculation) on our post-option 2007 EPS. While concerns remain regarding industry capacity coming online as well as the potential negative impact from Seagate/Maxtor internalizing more of its media production in 2007, we believe Komag can navigate through these risks and growth
opportunities remain (mobile, perpendicular recording, more volumes at Western Digital).

&

Blount on KOMG 1
by: duedilly    04/27/06 08:21 am
Msg: 35353 of 35364

Investment conclusion Komag's (KOMG N/R - Not Covered) March quarter results suggest that Western Digital is likely to post stronger than expected results when they report after the close, while Komag's strong June quarter guidance (rev+5%-10% q/q) was in contrast with Hutchison and Seagate's June guidance. Mgmt noted that HDD media will continue to be tight throughout 2006 and that they are on track with production ramp. We believe the contrast reflects HTCH's higher relative exposure to Maxtor (and potential share shifts to Magnecomp)
and Seagate guiding as if the Maxtor deal will not close. In fact, we believe Seagate is putting in place the supply chain capacity to assume a substantial portion of Maxtor's capacity immediately following the closing. It is also possible, though we believe unlikely, that
Komag may be seeing some stockpiling of platters by drive manufacturers due to continued aluminum platter supply constraints and anticipated seasonal upticks in the 2H06.

Summary Komag's Jun rev guidance was up 5%-10% q/q or $219M- $229M. Expect units to grow from 31.9 million in 1Q06 to 35 million units in 2Q06 --up 10% q/q. Still targeting finished capacity of 43 million finished units by end of 4Q06. Komag unit shipment estimates to WDC indicate that WDC is likely to exceed our revenue and unit forecast for the March quarter of
$1.06B and 17.4M units. High capacity units (100 GB and higher capacity platters) constituted 31% of units versus 18% in year ago period but down q/q from 36%. 120 GB and higher is now 24% of sales vesus 2% y/y and 14% q/q. In 1Q06, KOMG's largest customers were Western Digital (35%), Hitachi Data Systems (22%), Maxtor (21%), and Seagate (18%). ASPs q/q were up about 1% to $6.54 from $6.50 in 4Q05.

Komag, a supplier of substrate and disk media for the HDD industry reported 1Q06 sales up 49% y/y to $208.5M with disk shipments of 31.9M units up 7% q/q and 44% y/y. KOMG performance suggests healthy demand in the storage industry for aluminum platters used principally in the desktop, server, and many stationary consumer electronic products (PVR, media center, external drive). In terms of market trends, mgmt is seeing growth in high capacity PVR/DVR and consumer application.

Komag's largest customers continue to be Western Digital (35%), Hitachi Data Systems (22%), Maxtor (21%), and Seagate (18%). Shipments of >120GB platters were 24% of mix targeting applications such as PVR/DVR, high definition television (HDTV), external storage, and other home entertainment devices. This is in line with the shift of storage consumption from computing to CE devices in the digital home due to MP3, video and digital photo downloads.

Of the 31.9 total media units shipped in 1Q06, Komag is estimated to have shipped to Western Digital 11.2M units (+25% q/q), Hitachi 7.0M units (+18% q/q), Maxtor 6.7M units (-27% q/q), and Seagate 5.7M units (+38% q/q) with ASPs increasing
1% q/q to $6.51 from $6.50 in the march qtr.

Sales of large platter Enterprise media (70mm and 84mm) were 7% of mix. Overall ASPs were up 1% q/q, due to growth in high- capacity platters. The transition from LMR to PMR will allow areal density to grow 40% y/y, and mgmt expects transition to
begin in 2H06.

March quarter Laterals. Komag's March quarter results appears to bode well for Western Digital's March quarter results which will be reported later today. WDC appears to have purchased approximately 2 million more aluminum platters from Komag in the March quarter than they did in December. We believe WDC also purchases platters from Showa Denko and
Fuji Electric, however, neither is believed to have added a meaningful amount (if any) aluminum platter capacity recently.
Therefore, the increase in platters from Komag to WDC is likely representative of actual WDC results (the same could not be said for Seagate due to internal sourcing). If we assume the industry average of 1.7 platters per drive, this would suggest that WDC shipped approximately 1.3 million more 3.5" drives in March than they did in the December quarter. At approximately
$60/drive, this would suggest a sequential revenue increase of ~$80 million. However, it is more likely that WDC used many of the incremental platters for higher capacity drives (as has been their trend over the last few quarter) which would suggest the unit progression might be modestly lower but with higher ASPs. Either way we get back to a similar answer. WDC is
likely to exceed our revenue and unit forecast (shown below) for the March quarter.

June quarter Laterals. Mgmt expects 2Q06 rev to be up 5%-10% or $219M- $229M vs. current street estimates of $206M. This is in contrast with Hutchison's guidance of flat to down 5% sequential growth and Seagate's of down 2%-8% for the June quarter. It is possible that Komag's strong guidance reflects some customer stockpiling of platters (Seagate's raw material inventory has grown from $131 in September 2005 to $156 in March 2006) in front of potential share shifts from Maxtor and a return to expected platter tightness in the 2H06. We also believe HTCH's weaker guidance reflects Seagate's anticipated acquisition of Maxtor. HTCH is the primary supplier to Maxtor while Seagate procures suspensions from both Magnecomp (HTCH's primary competitor) and HTCH. Further, we believe Seagate's guidance reflects their "standalone" expectations when, in fact, we believe that Seagate is preparing internally and with its suppliers, to capture a significant amount of Maxtor's incremental volumes upon the closure of the merger (which we believe will be ~May 18).

Komag's future growth. Mgmt is ahead of schedule in their capacity ramp, and is expected to ship 35M finished units in 2Q06 from 31.9M in 1Q06 with up to 43M units by the end of 4Q06. With the addition of Hitachi Data Systems, Komag now has long term supply agreements with all its major customers. The Hitachi capacity (amount undisclosed) is expected to come on line in early 2007. Most of the upcoming capacity growth is customer financed. Western Digital has the majority share of the capacity coming online.

Pretty quiet around here, alot of blood letting going on. Kaufman downgrades KOMG from buy to hold. It just doesn't seem right.

uc.

Seems like some big guys want to stuff their pockets before letting it run. These downgrades are annoying, but in the end the fact that the company has sound financials now and going forward should prevail.

Kaufman Bros downgrades Buy to Hold. Target $50. Kaufman downgraded to Hold from Buy with a $50 tgt saying they no longer think that Komag's shares are attractive due to multiple challenges (elaborated herein). The firm says shares could rally today on yesterday's earnings report as the co guided for growth of 5%-10% sequentially in the June quarter, and there could be a short-squeeze (short interest is nearly 20% of float). The firm believes that the co faces three key challenges in 2007: 1.) higher depreciation leading to a gross margin decline from 28.3% in 1Q06 to a projected 24.9% in 4Q07, 2.) the growing risk that STX/MXO (39% of rev in 1Q) will take more media internally as it builds out its media capacity in Singapore, and 3.) the growing risk that the volume purchase agreements with several customers are not extended.

Yukii and Oliver,

Thanks for the updates on the analysts research. It seems that there is a growing concern about the supply/demand balance in 2007. I honestly don't pay too much attention to the analysts. They have a history of being very wrong about the HDD market. Compared to previously the price target for KOMG is all over the place. I have seen figures ranging from 29 to 65. My conclusion is that they don't have a clue.

I certainly understand the Demand/supply concern. It is very rare that these imbalances continues for extended periods and it is correct that a lot of new capacity will come online during the coming quarters but at the same time the HDD shipments will also increase very significantly.

I am still convinced that the supply will be tight in 2007 but I think it is worth to remember that even if the market normalize KOMG still has a very profitable business.

With the present valuation the market expects Komag's business to collapse in 2007 and that is very unlikely.

Sometimes the market decides to take a stock down and we need to limit our risk. We will have set a stop at 37.4. Komag benefits from a heavy short interest so we will leave room for all kinds of manipulation.

Mike, What is target price on this hard core value pick?

I want to pick some but looks bearish in the weekly chart.. should I wait when the price comes back up @ SMA(9)?

Hi Terlisa,

You were probably the last person I expected to show up in this thread. It must mean that the fundamental story is even stronger than i suspect because the chart for sure isn't something to write home about  ;)

Komag was from the outset not a technical pick. Those who bought KOMG back in September last year probably also remember a long period when the stock was depressed due to all kind of worries until the fundamentals suddenly shined through and the stock took off. I expect this to happen again (both the waiting and the take off  ;D)

Personally I wouldn't use SMA(9) to determine my entry. I would rather wait till the stock has formed a base. It could seem like we are building some support around 42.

As you know I am already invested in the stock and I am convinced that any purchase at this level will be very profitable long term. I have previously put a quite aggresive target on KOMG but now when it is an official 3SOV pick we should probably be conservative and set the target based on a PE of 15 (06) this equals a PPS of 65.

We got some nice coverage from SmartMoney:

QuoteNo Flash in the Pan
SmartMoney
08:36 a.m. 05/01/2006 By Jack Hough

MATURE TECHNOLOGY OR new technology: Which deserves your investment dollar? The answer isn't as obvious as it seems. Consider data storage. Hard drives have been around for decades. They're cheap and meet the high-capacity needs of PCs and certain hand-held devices like Apple Computer's (AAPL) big iPod. Flash memory is in its adolescence. It's used in the little iPod, as well as cellphones and cameras. Flash is smaller and more durable than a standard hard drive and it uses less power, but flash can't match hard drives on price or capacity - at least not yet.

Wall Street loves flash. We've focused more on hard drives over the past two years. Our rationale: The attention paid to flash has left hard-drive companies with cheap shares and underappreciated growth prospects. In September we called readers' attention to the impressive free cash being generated by Western Digital (WDC), the No. 2 hard-drive maker ("Driving a Hard Drive Bargain"). In April 2004 we introduced readers to Komag (KOMG), pointing out its sparse analyst coverage and bargain share price. Shares of Western Digital and Komag have gained 65% and 116%, respectively, since those stories. That tops by far the returns produced by flash makers like M Systems (FLSH), Silicon Motion Technology (SIMO) and SanDisk (SNDK) .

We're giving Komag a fresh look today, but not because it's still an undiscovered gem. A parade of analysts has signed on to cover the stock since we wrote about it. Rather, we're interested in the company's low share price relative to the excess cash it's generating; it turned up recently on our Free Cash Flow screen.

Spotlight Stock
Komag (KOMG)
Designs, manufactures and markets thin-film media, or disks, that are incorporated into disk drives, the primary storage medium for digital data.
Friday's Close $42.04
Market Value $1.3 billion
Trailing 12-Month Sales $686 million
2006 P/E 9.7

Free cash flow is the money companies have left each quarter after paying their operational expenses and making lump-sum investments in plants and equipment. It differs from earnings in its treatment of such investments, called capital expenses. Earnings accounting breaks capital expenses into bite-size quarterly charges called depreciation. That keeps companies from reporting big losses one quarter followed by fat profits the next. But it doesn't tell investors how much actual cash they're generating to use for things like dividends, share repurchases and projects. That's where free cash flow comes in.

We find free cash flow most useful for value screens, rather than growth ones. That's because mature companies are the ones that tend to produce most of the stuff; young ones spend all of the profits and then some to fund expansion efforts. Our screen looks for companies with low price/free-cash-flow ratios, healthy sales growth and projections for brisk earnings growth. Run it anytime you like using our stock screener and recipe of search criteria. Recently it produced a list of 10 survivors from a starting database of 8,000 companies. Let's look at Komag.

Hard drives have four main parts. There are suspension assemblies, made by companies like Hutchinson Technology (HTCH), and read/write heads, made by TDK (TDK ), Alps and Western Digital. There are spindle motors, made by Nidec (NJ) . And there are media platters. San Jose, Calif.-based Komag is the industry's largest platter maker. It counts all of the major sellers of finished drives including Seagate Technology (STX), Maxtor (MXO) and Western Digital as customers.

Trailing 12-month sales for Komag total $686 million, up from $343 million at the time of our last story. Analysts say, though, that virtually all of the company's recent sales increases have come from Western Digital. Komag's customer list is set to shorten once Seagate completes its acquisition of Maxtor. (European regulators gave their OK to the deal last week, removing the final legal hurdle.) The combined company will account for nearly 40% of Komag's sales initially, but analysts say Seagate/Maxtor may build out its media manufacturing capability in Singapore and bring more of its platter sourcing in-house. That's obviously a negative for the stock. But then, that's also why Komag is trading at just 9.7 times 2006 earnings estimates right now.

There's also plenty to like about the company right now. Disk-drive manufacturers expect media supply to remain tight at least through 2006, driven by demand for laptops and hand-held devices. Komag has increased its research and development spending in an effort to gain approval from manufacturers for more platter sizes to accommodate new devices. And hard-drive technology is poised to get its biggest capacity boost in a decade with the uptake of so-called perpendicular recording. (See our February story for more on that.)

Komag's earnings are expected to more than double this year. Over the next five years analysts figure earnings per share will increase by 12% annually. That gives the stock a PEG ratio (price/earnings ratio divided by earnings growth forecast) of 0.8. To get into shares of SanDisk, the largest pure-play flash company, you'd have to pay a PEG of 1.4. The broad market's PEG is about 1.6. And Komag trades at about 14 times its trailing 12-month free cash flow, vs. 18 for SanDisk and a median of 19 for the S&P 500 index. All told, flash memory may be making the headlines, but this less-glamorous hard-drive company seems poised to generate bigger returns.

The Komag fundamental story is strong and it is nice to see that the word is spreading!

please check MACD, bounce back has started already IMO

Not a good day for the market today and KOMG didn't escape the general down draft.

In the meanwhile the company continues to generate cash for the shareholders (http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=3073)

By the end of the day we all invest in the future earnings of the companies and for every piece of information I see from KOMG I get more and more confident about the future.

KOMG made a pronouncement of the content of their presentation at Piper Jaffray's Hardware and Communications Conference tomorrow:

QuoteAt the conference, the Company's executives expect to provide updates regarding conditions in the hard disk industry. Specifically, the Company expects to make the following comments:

*Market demand for the Company's disks currently continues to be very strong. As the Company previously stated, the Company expects revenue in the second quarter of 2006 to increase 5% to 10% over first quarter of 2006 revenue of $208.5 million.

*In addition, the Company currently continues to expect sequential revenue growth in each quarter of 2006.

*The Company currently believes that supply of finished media and substrates continues to remain tight and that the Company is continuing to run at full manufacturing capacity.

*The Company's capacity expansion plans continue to be on, or slightly ahead of, schedule. With the current schedule, the Company continues to expect to reach total production capacity of approximately 35 million finished disks per quarter during the second quarter of 2006.

*Further, the Company continues to expect to exit the 2006 calendar year with a quarterly production capacity of approximately 43 million finished disks to meet commitments to customers.

*A significant production ramp of 160GB per platter disks is underway in the second quarter of 2006, with expected shipments to several customers. Further, the Company continues to expect volume shipments of 2.5 inch aluminum disks in the second quarter of 2006.

*The Company's qualification activity for perpendicular products remain on schedule with expected shipments to begin in the second half of 2006.

Q2 is the weakest quarter of this year so it is nice to see that they continue to run at 100% of their capacity. Even more important. They are now shipping 2.5 inches dishes, which is a large new market for them and they will also start to ship dishes using perpendicular recording.

Hi Michael, considering re-entry here. Looks like a great spot. Michael, do you have an opinion about UNH. They have been beaten down real good and yesterday looked interesting.

Thanks

uc.

May presentation with nice updates:
(slides 20-30!)
http://www.komag.com/investors/presentations/KOMG1Q06_May06.pdf

Quote from: la-onda on May 11, 2006, 08:58:28 AM
May presentation with nice updates:
(slides 20-30!)
http://www.komag.com/investors/presentations/KOMG1Q06_May06.pdf

Thanks for the link. It is good to see that KOMG keeps spreading the word sooner or later the market will listen!

There was not much to celebrate on Friday it was a miserable day for stocks but at least KOMG managed to close in the greeen.

I haven't be able to find any news that can explain the strong performance so either there are some news in the pipeline or shorts used a down day to cover.

UC

I like UNH. Good bounce on Friday. I do however think it is too early to buy the stock.

Another great day for Komag. While the AMEX HDD index was down KOMG closed up with 1.5%.

Is the fundamentals starting to shine? It might be too early to celebrate in this depressed market but the double bottom that has formed is for sure encouraging  :D

Nice upgrade today:

QuoteTuesday , May 16, 2006 08:24 ET

Issuer: Komag Inc (NasdaqNM: KOMG)

Analyst Firm:  Brean Murray

Ratings Action: INITIATE

Current Rating: Accumulate

Target Price: $54.00

Analyst Comments: The firm expects KOMG's dramatic turnaround to continue and for the company to post higher revenues & earnings in 2007.

As time pass and the demand for Hard disks continues to increase I would expect to see more upgrades from the Analysts. KOMG has already told that their capaicity utilization is 100% in Q2. Q3 and Q4 will be even stronger. The analysts now start looking into 2007 and I think they will like what they see.

What a miserable day for the market and 3SOF!

Nasdaq is down for the fifth consecutive day. The good news is that KOMG is up for the fourth consecutive day  :)

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=21392;image)

This is an extremely strong performance in a market that is undergoing a correction.

It would be easy to say that this is due to the strong fundamentals and low valuation of the company but I think there is more into it than that. As discussed earlier KOMG has a huge short position initiated when the whole market was very bearish on the HDD industry. The people that are short KOMG has already lost a lot of money on their position and I believe they are using this opportunity to close some of there positions.

Let me use this opportunity to discuss the market in general. I guess that the question that is on everybody minds is should I sell or buy  ::)

During a correction like the one we are going through now you should in my opinion go cash with at least 50% of the money you have invested in the market and wait for the market to turn.

There are several reasons for this. The most important is to preserve wealth but also look at this as an opportunity to buy value stocks close to the bottom when the market eventually will turn.

All bear markets bounce so use this as an opportunity to reduce your exposure to the market if you haven't done it already. This is a difficult as I am sure that every stock you are holding is a winner but try to ask the following questions:

• Would I buy this stock today?
• Is this stock's price backed up with solid earnings or other strong fundamentals?
• Would I feel comfortable holding this stock a year from now.

If the answer is no to any of these questions and if you are over exposed to the market I would use a bounce to sell some of these stocks. What I wouldn't recommend is to go out and panic sell all your stocks. I am confident that most of the damage has been done but the US market will most likely remain weak in the months to come and you need to adjust your investment strategy accordingly.

I am personally very concerned about the US economy. Try to look at it like this. If US was a company would you buy the stock?  Unfortunately you can't buy or short United States of America. But you can vote on the health of the US economy by buying and selling US dollar. The vote right now is that US is weak!

Now this is not only bad news. All companies reporting in US dollars but has another functional currency should be doing great. These are companies like CHID, AOB, TBYH and XING. The value of their assets and profits increase automatically. Then add that these companies are working in an economy that is booming and they seem attractive. That is why I am very bullish on Chinese stocks.

You could also consider gold as a hedge against the US economy. I like gold stocks here. A nice play could be NXG (this is both a gold and copper play).

Finally if you are comfortable with your exposure to the market you might consider some short term trading here. We will most likely see a lot of volatility and there will be money to be made on fundamentally strong stocks that are falling in sympathy with the market. But again make sure to buy stocks which you would be comfortable holding for a longer term!

Remember that in a market like this there is money to be made even on the long side you just have to be cautious  :)

Andrew Neff from Bear Sterns recently met with Komag's management and it seems he left the meeting excited about the prospects for KOMG:

QuoteKomag, Inc. (KOMG-$42.58) - Outperform

Meeting With Management: Adding Capacity At A Measured Pace; Well Positioned for Perpendicular, Notebook

Encouraging Meeting With Management. Following our meeting with CEO TH Tan and CFO Kathy Bayless, we came away reassured about favorable demand trends, KOMG's focus on minimizing the impact of the STX/MXO merger, while continuing to broaden the appeal of aluminum-based discs in wider markets (i.e., notebooks, perpendicular). The company did not provide any new financial outlook.

Adding Capacity In A Measured Pace. Highlighting the importance of capacity utilization on its margins, KOMG noted that it is adding capacity at a measured pace and is tracking competitors actions. To that end, KOMG noted that the minimum volume requirements from its volume purchase agreements from HDD vendors (STX, MXO, WDC, Hitachi) equates to full capacity planned for KOMG. Moreover, despite recent concerns about capacity addition at KOMG's competitors (e.g., Showa-Denko), KOMG highlighted that this incremental capacity is for glass media (i.e., more expensive than aluminum) and sees the overall aluminum-based media capacity being increased at a measured rate.

Inventory Build Due To Raw Material Tightness. Addressing the concerns about recent inventory build, KOMG noted that raw materials were the primary cause of the increase (finished goods actually declined in 1Q) and the build was necessary to address the tight availability of raw materials.

Maintaining Estimates. We are maintaining our post-option EPS for 2006 of $4.85 and for 2007 EPS of $5.30. For 2Q06, we maintaining our $1.17 in EPS on revs of $229mm (up 10% seq).

Maintaining Price Target Of $65. As for valuation, we are maintaining our CY06 target of $65 by applying a 12.3x P/E multiple on our post-option 2007 EPS (i.e., 12x on pre-option EPS). We continue to monitor industry capacity coming online and STX/MXO internalizing media production, but we believe KOMG can navigate through these risks and growth opportunities remain (mobile, PMR, higher volumes at WDC).

Encouraging Meeting With Management. Following our meeting with CEO TH Tan and CFO Kathy Bayless, we came away reassured about recent demand trends and KOMG's focus on minimizing the impact of the STX/MXO merger, while -- at the same time -- continuing to broaden the appeal of aluminum-based discs in wider markets (i.e., notebooks, perpendicular magnetic recording [PMR]). The company did not provide any new financial outlook. We highlight some of the key takeaways below:

• Adding Capacity In A Measured Pace. Highlighting the importance of capacity utilization on its margins, KOMG noted that it is adding capacity at a measured pace and is actively tracking competitors actions. To that end, KOMG noted that the minimum volume requirements from its volume purchase agreements from HDD vendors (STX, MXO, WDC, Hitachi) equates to full capacity planned for KOMG. Moreover, despite recent concerns about capacity addition at KOMG's competitors (e.g., Showa-Denko), KOMG highlighted that this incremental capacity is for glass media (i.e., more expensive than aluminum) and sees the overall aluminum-
based media capacity being increased at a measured rate.

• Expanding Into New Markets: Notebooks, PMR. Highlighting the price advantage of aluminum-based disk over glass-based disk (has about $0.50-$1.25 cost advantage), KOMG noted its efforts to drive incremental growth by expanding the use of aluminum in 2.5-inch drives, which has historically used glass media only. In addition, the company noted that it working to rollout media for PMR drives with minimal additional capital expenditures (i.e., 75%-80% of current equipment can produce PMR disks).

• Inventory Build Due To Raw Material Tightness. Addressing the concerns about recent inventory build, KOMG noted that raw materials were the primary cause of the increase (finished goods actually declined in 1Q) and the build was necessary to address the tight availability of raw materials.

Maintaining 2006 and 2007 Estimates. We are maintaining our pro forma post-options EPS estimate for 2006 of $4.85 (which includes the impact of stock-based compensation expense of $3.2 million) on revenues of $962 million, up 40% year/year. We are assuming finished disk units of 148 million, up 39% year/year, with ASP of $5.75, gross margin of 28.0%, and tax rate of 2.9%. For 2007, we are maintaining our post-options EPS of $5.30 (including the impact of stock-based compensation expense of $0.13) on revenues of $1.10 billion, up 15% year/year. We are assuming finished disk units of 169 million, up 14% year/year, with ASP assumption of $5.77, gross margin of 27.7%, and tax rate of 4.0% (no change)

• Maintaining 2Q06 (June) estimates. For 2Q06, we are at post-options EPS estimate of $1.17 (vs. $0.86 a year ago) on revenues of $229 million (up 32% year/year and 10% sequentially). Komag is forecasting revenues to grow 5%-10% sequentially from the March quarter's $209 million (or about $219-$229 million) and achieve a net margin about 17%, implying an EPS range of about $1.14-$1.19 (including options expense).

Valuation: 2006 Year-end Price Target Of $65. As for valuation, our 2006 price target is $65. We arrive at our price target by applying a 12.3x P/E multiple on our post-option 2007 EPS. While concerns remain regarding industry capacity coming online as well as the potential negative impact from Seagate/Maxtor internalizing more of its media production in 2007, we believe Komag can navigate through these risks and growth opportunities remain (mobile, perpendicular recording, more volumes at Western Digital).

Bear Sterns meeting with management supports the assumptions for our valuation when KOMG was picked to 3SOV so we will continue to hold the stock. 3SOF didn't have the best timing for this pick but I have a feeling that most members who subsequently bought the stock is sitting on a small profit by now  :D

It will be exciting to see if KOMG can continue its impressive run over the last 6 trading days. We had a BO under increasing volume on Friday but we might see some resistance from MA(50).

It seems like everything is lined up to a perfect storm today. First we had very bullish comments from Bear Sterns then yesterday we got coverage in the Wall Street Journal:

QuoteComputers & Office Equipment
Top Analyst: Mark S. Miller, Hoefer & Arnett
Notable Pick: Komag
By SUZANNE SATALINE
May 22, 2006

To pick the best computer hardware stocks last year, it helped to look inside the guts of some consumer electronics.

As shoppers scooped up personal digital recorders, TiVos and iPods, some analysts anticipated the growth market in disk drives that are used in products other than desktops and laptops. This year's Best on the Street analysts saw that potential and scored with companies in the storage and drive business.

Mark S. Miller, who worked last year at Hoefer & Arnett Inc. in San Francisco, rose to the top with Komag Inc., a leading producer of thin-film disks, the high-capacity storage medium for disk-drive makers. He has rated the stock a "buy" since May 2003, and investors who followed his call for all of last year would have reaped an 85% return.

The 54-year-old analyst, who moved to Brean Murray, Carret & Co. in March of this year, picked stocks sparingly last year. His only other "buy" rating in this sector was on a former employer, Seagate Technology, the world's largest disk-drive supplier. His recommendation in April yielded a 17% return through the end of the year.

A former optical-design engineer at the National Aeronautics and Space Administration, Mr. Miller also worked for 17 years in the disk-drive industry before becoming an analyst. He watched as Komag emerged from bankruptcy in 2002 and thought that, given the rapid growth in technology for consumer electronics, the company's stock would be an excellent buy.

"I come from a marketing perspective rather than an actuarial one," Mr. Miller says. "I tend to look...at the quality of the product in my analysis."

Mr. Miller says he expects consumer applications for disk drives to grow to 35% of the overall market by 2009, from 10% now. High-tech companies, he figures, will have to upgrade disk storage for the booming market in high-definition TVs. He's also watching the cellphone business as companies begin experimenting with disk drives that will help users shoot and send video clips.

A top pick for this year is Veeco Instruments Inc., a maker of microscopes and instruments for nanotechnology and a supplier of thin-film heads, which read disks. The stock is in the electronic and electrical equipment sector for this survey.

No. 2 in the computer and office equipment group, Kevin M. Hunt of Thomas Weisel Partners in Boston, put Komag (2) on his "buy" list in October 2003 and kept it there through all of last year. But his best pick was Rackable Systems (2) Inc., a maker of servers and storage products. His "buy" rating in July generated a 133% return through the end of the year.

Meanwhile, however, he missed out on a 123% return with a "hold" rating on Apple Computer (5) Inc. all year.

Mr. Hunt, 38 years old, was a mechanical-engineering major for two years at Duke University before he decided "I liked financial stuff better than thermodynamics" and transferred to economics. He says he accrued most of his hardware knowledge by researching private-equity deals in his early days at Thomas Weisel.

Christian Schwab, 36, of Craig-Hallum Capital Group LLC in Minneapolis, the third-ranked analyst, also scored with Komag (3). A "buy" rating through most of July yielded a 70% return. He got even better returns with his calls on Maxtor Corp., a storage-products maker. A "buy" rating through late July and again beginning in late November generated a return of 76%, compared with the stock's 31% return for the full year.

Mr. Schwab says he remains positive on the computer industry in 2006, as it further consolidates with Seagate's pending acquisition of Maxtor, announced in December.

And today Komag and Seagate Reaffirm Strategic Relationship:  (http://biz.yahoo.com/prnews/060522/sfm043.html?.v=48)

QuoteKomag is a key strategic media supplier to both Seagate and Maxtor," said Bill Watkins, Seagate's President and CEO. "We continue to have an excellent relationship with Komag and now that the acquisition of Maxtor has been completed, we look forward to a continuing relationship with Komag under the terms of the strategic supply agreements that are in place between both Seagate and Maxtor with Komag

Mix this with a very bullish chart and a huge short position that are deeply under water and you have an explosive cocktail  ;D

Good job, Good eye, excellent pick!

Michael , I salut You!

Hi Voova,

It seems we were a bit early to the party  :-[

The technical picture today is not pretty. Instead of showing a nice strong white candle, which I at least expected at the opening, we printed a bearish engulfing.

For short-term traders this would be a sales signal but we are prepared for a small set back on this trade. This was from the outset a pick based on the fundamentals and all news around Komag the last week have done nothing than confirmed the assumptions we made when KOMG was picked for 3SOF. Long-term KOMG is poised to go much higher. The concern about the supply/demand situation in 2007 will evaporate. The hard disk sector and therefore Komag is going to benefit from the strong demand for storage in years to come.

Michael

You remember nasdaq at 5000 points ?

Now it's only 2000. KOMG is only 43...   ;)

Sure I remember when Nasdaq was at 5000. I also remember when it was at 1300 in the end of 2003. Those who bought KOMG then are sitting on a 4000% profit  ;D

KOMG has had one of the most sustained up trends for the last 3 years that I am aware of and I am pretty sure that it will continue in the years to come. Even after a 4000% rise the PE is still around 10 so there is room for this incredible run to continue!

The trend is your friend and here you have the ultimate trend:

Volume on KOMG increased twofold in last 10 days!

Interesting, may be buyout comes due to industry consolidation ( seagate/maxtor ) ?

fyi:
KOMG: Short Interest UP 20.3% to 7.5M in May 2006
Wednesday, May 24, 2006 16:19 ET

According to new short interest data from NASDAQ, short interest for Komag Inc (NasdaqNM: KOMG) INCREASED 20.3% to 7,518,501 shares for the month ended mid-May, 2006.

SYMBOL         APRIL                 MAY          CHANGE       %CHANGE        DAYS/COVER
--------   -------------   -------------   -------------  ------------  ----------
KOMG           6,248,816       7,518,501      +1,269,685       +20.32%           6

Based on KOMG's 20-day average daily share volume of 1,495,055, it would require approximately 6 day(s) of buying to cover this short interest.

& lots of insider selling:
http://www.secform4.com/insider/showhistory.php?cik=komg

Hi la-onda

I understand that high S interest isn't good from on side and good from other side(short squeeze).

But the question is why big funds or"big boys" shorted it (amounts like those - from big players, imho)?  For manipulation or another reason?I don't understand exactly how it works? 

I can only say that at november 15 last year S interest was higher and KOMG was only climbing  :)

Best,
Vova

Hi Oliver and Vovaa

As Vovaa hinted to it is always very important to put short and insider activity into context. What is the volume and what is their track record

Lets start with the short activity:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=21775;image)

Most of the existing short position was established between middle July and November last year. In the same period the sentiment concerning the Hard Disk Drives industry changed from Extremely Bearish to very Bullish. Basically the short case fell apart for each upgrade the analyst issued and for every earnings report that HDD companies released. They therefore started covering between November and March. However at the end of November they had in their wisdom shorted approximately 30% of the total float and every attempt to cover basically was met with a sharp increase in the stock price. In the middle of March they probably realized that they had dogged themselves into a hole they couldn't get out off with out a little help. But help was on the way! A very little known research house, American Technology Research issued a sell recommendation with a target of 29 and the shorts promptly followed up shorting additional stocks.

So how is this working for them?

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=21774;image)

The chart above shows the shorting acitivity and I have highlighted certain days were I believe most of the shorting was done. As can be seen I believe most shares was sold short at a price between 25 and 35. Let's say the average is 30. In the middle of March the shorts had managed to cover 4 million shares at a significant loss. My feeling based on the chart is that most of the covering happened at prices around 37-50 lets say in average 42. If correct they had lost 48 million USD on the shares they managed to cover. They still held 5.8 million shares short, which they had an unrealized loss of 116 million USD on.

Recent activity

Here is what I think happened at the end of March. A couple of the big hedge funds set down together and discussed the problem they had with Komag. Basically they had lost 150 million USD and they couldn't get out of their position without increasing this loss even further. They decided to buy a research house to issue a negative biased report in the hope that the rest of the analysts would follow up. As their break-even point for covering without a loss was 30 they asked for a target price of 29. When the report was issued they followed up with shorting the stock on the same day to create momentum.

The strategy partly succeeded they managed to get the stock price down with a few points and some of the analysts promptly changed their recommendation. Unfortunately other analyst took the time to do their own analysis and reiterated their buy recommendations. So by the end of the day the stock went back to where it was before the short attack.

I was thinking about writing this when American Technology Research issued their sell recommendation and suspicious target but I know that some people don't believe in these kind of conspiracy theories so I refrained. For those who are in doubt that this is happening there are actually a few recent court cases where hedge funds are accused of paying for negative biased coverage, which you might want to read!

So how is the short community's track record on KOMG?

I guess miserable is the best word to describe it. There are two things I am absolutely sure about. They wish they had never shorted the stock in the first place and they would love to close their position at this level if they could!

KOMG is a very healthy company with a strong cash flow and it is difficult if not impossible for them to drive the price down so they can cover. This is probably best illustrated with the latest attempts. They are actually already sitting on a loss on those shares they shorted in April. Their situation today is probably worse than it was in March because they have now set a deadline, which is 2007. I strongly believe that KOMG will continue their profitable growth in 2007 and when this happens the shorts are dead meat.

To sum it up as Vovaa said short activity can sometimes be a blessing in disguise and in the case of KOMG I think that the huge short position is a real asset. They will have to continue to cover sooner or later and if they are smart they will start cover before the end of this year.

Concerning Insider selling, which often is used by the short community to argue that the stock is overvalued, it is again important to put it into perspective. The graph below shows the insider sells during the last year.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=21776;image)

As you can see there is no increase in insider selling. In fact insiders have been selling shares at this level since the stock was below 10. Their track record is as bad as the short community's. So why are they selling shares?

The answer is very simple. Their share options are part of their salary. They sell shares to pay for their mortgage, a new car etc. They have been doing this constantly for the last many years and historically there have been absolutely no connection between the development in the share price and the insider sales.

If your ability to pay your invoices depends on the performance of the stock you might work a bit harder to make sure the company is succeeding. So again no help for the short community here even though they will continue to bring it up every time an insider sell some of his shares!

Michael

Thank You for deep analysis and explanation . I'm realy enjoyed  :D

Some interesting stuff

http://www.digitaltvdesignline.com/news/174402937;jsessionid=JQGIGOJKHJ31AQSNDBECKICCJUMEKJVN

http://www.storagesearch.com/semico-art1.html

Very positive article about future growth of HDD.. and "PERPENDICULAR recording" !!!

http://money.cnn.com/2006/05/03/technology/hard_drives/index.htm

We have some more..

http://www.infoworld.com/article/06/01/13/73896_HNfujitsuharddisk_1.html

KOMG: FTN Midwest Res Starts @ Neutral
Tuesday , May 30, 2006 12:12 ET
Issuer: Komag Inc (NasdaqNM: KOMG)
Analyst Firm:  FTN Midwest Research
Ratings Action: INITIATE
Current Rating: Neutral
&

updated chart

updated June presentation:

http://www.komag.com/investors/presentations/KOMG1Q06_Jun06.pdf

June analyst presentation will be interested IMO

At first glance it is a bit strange that KOMG is rallying when the market is down but it is not the first time we have experienced that. As said previously the short have in all their brightness decided to short 30% of KOMG shares and they would love to get out at this level. If you needed to cover a few million shares when would you do it? Well I would do it when the market is weak.

That is the beauty about KOMG's huge short position. (There might of course also be some news we still don't know about but that just makes our investment case stronger ;))

Seagate's Maxtor Acquisition Pays Off
Mary Crane, 06.09.06, 3:57 PM ET

American Technology Research maintained a "buy" rating on shares of disk-drive maker Seagate Technology, citing the company's competitive position within the industry.

Analyst Shaw Wu said that despite investor jitters over the recent acquisition of rival Maxtor for $1.9 billion, the deal should be accretive in the 2007 fiscal year and, with Maxtor eliminated as a competitor, there is less chance of oversupply and more rational pricing for the industry.

As a result, he raised his 2007 estimates to $2.30 per share on revenues of $12.1 billion, up from $2.20 per share on revenues of $9.7 billion.

Wu said that, for now, the company's June quarter looks on track and he maintained his $2.2 billion revenue forecast and earnings estimate of 44 cents per share, which falls in the higher end of management's earnings guidance of between 42 cents and 45 cents per share on revenues of $2.1 billion to $2.25 billion.

"We believe the company is best positioned in the hard-disk drive space with its strong technology and vertically integrated model," wrote Wu in a note to investors Friday.

Wu added that Seagate's decision to ramp its recording heads used to record data onto hard disks was a prudent long-term move.

While the focus on heads could mean more business for Seagate's competitor, Komag, in the near term, it will help Seagate realize its cost synergies quicker, the analyst forecasted, since it has a greater economic and technological advantage in heads than media.

Wu added that Seagate's price-to-earnings ratio will likely expand in coming years as the industry consolidates, leaving the market with only three enterprises, Seagate Technologies, Fujitsu and Hitachi, as well as four desktop vendors, Seagate, Western Digital, Hitachi and Samsung.

Remember American Technology Research?

They were the once who came out with a strong sell recommendation for Komag and a target of 29:

Quote from: Michael on April 25, 2006, 01:48:46 AM
Firm believes the Street is underestimating the high likelihood of customer attrition at two of KOMG's largest customers (Seagate and Hitachi) as they move more media capacity in-house to increase competitiveness and to lower costs.

They conveniently forget to mention that Seagate just hours after the announcement of the take over of Maxtor reconfirmed their long-term relationship with KOMG and that Hitachi just a few weeks ago signed a strategic supply agreement covering 2007. They also forget to mention WDC, which is the second largest customer and who other recognized analysts have said will most likely increase their purchases from KOMG.

The lower cost for in-house production is purely speculation from the analyst site. I am pretty sure that KOMG's cost base is significant lower than the HDD's in-house production but that is obviously impossible to confirm.

I have already said what I think about this so-called research:

Quote from: Michael on May 28, 2006, 04:08:38 AM
Here is what I think happened at the end of March. A couple of the big hedge funds set down together and discussed the problem they had with Komag. Basically they had lost 150 million USD and they couldn't get out of their position without increasing this loss even further. They decided to buy a research house to issue a negative biased report in the hope that the rest of the analysts would follow up. As their break-even point for covering without a loss was 30 they asked for a target price of 29. When the report was issued they followed up with shorting the stock on the same day to create momentum.

The strategy partly succeeded they managed to get the stock price down with a few points and some of analysts promptly changed their recommendation. Unfortunately other analyst took the time to do their own analysis and reiterated their buy recommendations. So by the end of the day the stock went back to where it was before the short attack.

I was thinking about writing this when American Technology Research issued their sell recommendation and suspicious target but I know that some people don't believe in these kind of conspiracy theories so I refrained. For those who are in doubt that this is happening there are actually a few recent court cases where hedge funds are accused of paying for negative biased coverage, which you might want to read!

So today when Oliver posted American Technology Research update on Seagate I was a bit surprised to read:

Quote from: la-onda on June 09, 2006, 05:07:57 PM
While the focus on heads could mean more business for Seagate's competitor, Komag, in the near term, it will help Seagate realize its cost synergies quicker, the analyst forecasted, since it has a greater economic and technological advantage in heads than media.

Don't really know how they have found out that Komag is a competitor to Seagate. Maybe Mr. Shaw Wu has absolutely no clue about the HDD market. Anyhow let's be fair here, based on the analysts surname English is probably not his first language.

So could American Technology Research really be a serious research house or was they forced to come with this hidden reiteration of their strong sell recommendation?

They answer is simple. They were forced to recognize the mistake in their initial report, which predicted that Komag would have overcapacity in 2007. Here is why:

• Hitachi has already confirmed their commitment to Komag in 2007 (actually shortly before American Technology Research issued their report!)
• Western Digital is increasing their purchases with Komag because they are gaining market share after the Seagate/Maxtor take over.

And Thursday Seagate once again (this is the seventh times since the Maxtor take over) reconfirmed their commitment to Komag. But that is not the must important. Seagate the world largest Hard Disk Drive supplier also released their forecast for aluminum media and substrates demand and supply:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22215;image)

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22214;image)

Seagate predicts shortages in the market when the line is red or said in another way Seagate predicts Media and Substrates shortages till at least Q2 2008 (please remember here that it is not in Seagates interest to predict shortages of essential parts of their product!)

So basically it shows that American Technology's research is deeply flawed. If they were a serious research house they would have raised their target and recommendation but American Technology Research is not serious - they are hired guns.

Komag is the world largest independent supplier of Aluminum Media and Substrates to the HDD industry and with continued shortages of both for the foreseeable future they are going to continue to grow revenue and earnings. Sooner or later the shorts will have to cover their position, which is 30% of all shares and when it happens it will be bloody! There is no way they can do it without driving the price of the stock up - they have already tried!

Komag has great fundamentals and they will sooner or later be reflected in the share price so we will continue to hold the stock   ;D

Michael

Cangratulations! We finally up, according to fundamentals it will go more higher,
I believe.

Well, may you touch some negative point about Komag  ???
I mean -- lack of diversity in their products (only alluminium disks).
Well meantime it's extremly high demand for it . But you know, big money
want 5 year perspective, if not more.

best,
Vova

Quote from: voova99 on June 10, 2006, 05:35:49 PM
Michael

Cangratulations! We finally up, according to fundamentals it will go more higher,
I believe.

Well, may you touch some negative point about Komag  ???
I mean -- lack of diversity in their products (only alluminium disks).
Well meantime it's extremly high demand for it . But you know, big money
want 5 year perspective, if not more.

best,
Vova

Well let me first comments on the big guys – the institutions.

From what I am seeing they love Komag. 231 institutions own Komag and they added more than 4 million shares last quarter.

In fact they love Komag so much that when there is no shares available in the market to buy they counterfeit their own KOMG shares. Institutions "owned" 45 million KOMG shares by the end of last quarter. That is 146% of the 31 million shares outstanding  ::)

Counterfeiting shares is in principle illegal but SEC accepts it everyday. The counterfeiting of KOMG share is however one of the largest I have seen for sometime and it really reflects the unsustainable short position in KOMG. (I was holding PLMD 4 years ago and as fare as I remember the counterfeiting was more widespread in this stock).

Here is how it works:

One institution gets a request from one of his large clients (typically a hedge fund) to borrow shares for shorting. If that Institution does not have enough shares to borrow to the client he borrows them from another institution. If that institution does not..... The chain for these borrowings can be very long for a fundamentally strong stock like KOMG and the implications are mind bubbling - but let me not waste your time on that! The most important thing to remember is that the last link in the chain has to cover the cost of borrowing the shares through out the whole chain and when the chain becomes too long that can be very expensive.

Sooner or later these chains break down and the result is normally quiet satisfying for the real owners of the stock (like it happened with PLMD). Forget about the theory and just look at it like this. If you hold KOMG it is very likely that at least two more investors claims to own the same stock.

There are many theories on how the company can fight the counterfeiting of their shares. From my experience the best thing the company can do is to ignore the scam and just continue to deliver results. The market will correct itself. One thing that does help is however when the company starts to pay dividend or buy back shares and KOMG have more than enough cash to do both. (more than $190 millions on their balance sheet growing with more than $100 million per year).

I will come back to your second question about negative points – that one takes some heavy DD  ;)

Quote from: voova99 on June 10, 2006, 05:35:49 PM
Well, may you touch some negative point about Komag  ???
I mean -- lack of diversity in their products (only alluminium disks).

I am really not concerned about their focus on one product. Many other companies are depending on one product for their future success. Even Microsoft would be in serious problem if a better OS system than Windows is launched tomorrow. Would that stop me from buying Microsoft. Hell no but it would stop me from putting all my money in Microsoft.

What Komag can offer is great earnings visibility, which is something institutions like and please remember that among the 231 institutions that own (or think they own) Komag most of them are invested because they like the stock at this level.

It is however a very good question because it was precisely speculations about the imminent death of the HDD industry that brought the shorts into trouble in the first place.

To understand Komag's strong fundamentals you have to look into the dynamics of the whole industry. There are three important drivers for the HDD industry:

• Sharp decrease in price per Gigabyte
• Explosive increase of need for storage
• Industry consolidation

Let's first have a look at the price per Gigabyte:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22228;image)

In the last 8 years the price have gone down from $50 per giga to less than $1. Due to this tremendous drop in price, Hard Drives are now taking market share from other storage media like Flash and tapes. (More about Flash later!)

At the same time the demand from all segments of the market has increased very significantly:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22220;image)

In the case of enterprises the increase is partly due to regulatory changes (companies now have to store data for much longer) and partly due to the fact that the amount of data is increasing. The increase in the Consumer and PC market is really part of a revolution in the way we as consumers generate, share and use content.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22223;image)

Consumers want to have digitalized content that they can share, personalize and access everywhere at the time they want. In the center of this revolution is the Hard Drive. Not only do we need the Hard Drive to store the content, but we also need it to back it up, to carry it around and to publish it so other people can access it. In many cases pictures, music and Video is not stored on one Hard Drive but rather 3 or 4.

The consumer equipment is extremely interesting I will bet that most of the members of 3SOF will own a mobile phone with a hard disk with in the next 5 to 6 years. You will probably also have a Video camera with a Hard Drive (and tell your grand children about the time when you recorded on tapes!). Your car will probably have a couple of Hard Drives in 10 years from now (and it will be a requirement from the insurance company that you provide a full video of your accident to get compensation!) I could come with endless examples but I hope you get the picture.

Here is how the household's usage of storage has increased over the last 5 years and this is only the start:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22224;image)

Compared to just a few years back we all now have digital consumer electronics we only dreamed about in the nineties. Not only that but we also all have a Broadband Internet connection and are sharing content with everybody out there. 3stockson fire is one example of that. One of our largest cost is the server to store all the excellent comments from 6.700 members who just love to show the charts of their favorite stock! (not complaining though!!!!)

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22218;image)

So what happened to Flash?

Well flash is doing OK. It will however not feature the same growth rates as Hard Disks. (contrary to what most peoples believe) and the reason is simple; they are only competitive for very small amounts of data and not for the rich content that people are getting used to. Yes sure you digital Camera have a Flash Disk. But what do you do with your pictures at the end of the day. Upload them to a hard disk?

Combine this with the fact that more and more handhold devices actually comes with a hard disk:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22221;image)

Flash Disk companies sells at a PE around 30, which I think is fair priced. HDD companies are however trading at a PE of around 10, which is unbelievable having in mind the growth rates they are producing.

The HDD companies are taking market share from Flash due to the price advantage, size and the smaller and smaller size of the HDD:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22221;image)

Why would you pay 8 times the price to store your video on your mobile phone with a flash drive if you can buy a model with a hard drive instead (that is if the Flash Disk actually could store a full video!)

So why is the HDD companies so cheap? Well back in 2000 all HDD companies including Komag went through a major crisis due to overcapacity and it seems like people have troubles forgetting that. I don't think that this will happen again (I am sure it will not happen in the next 2 years!). There are several reasons for that. The most important is that all the players have learned their lesson. They are not investing in capacity unless they know for certain the demand is there. In fact they are so afraid of overcapacity that it seems like they are all running very close to full capacity on more or less al components including media and aluminum substrates.

All companies are planning their capacity according to conservative demand forecasts. I have previously shown Komags demand forecast, which is based on IDC market research. The problem with this is that IDC and all other analyst (especially financial analysts – but then they probably don't have a clue about HDD's anyhow!) have consistently underestimated the demand. Even their latest forecast has already been overtaken by the real world.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22216;image)

The other reason why the HDD sector is a sweet spot to be in is that the whole sector has undergone a significant consolidation. There are simply much fewer players and the competitive pressure has eased:

This is most significant in the media space:

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22225;image)

8 players of Media have been reduced to 2 and out of those Komag is by fare the largest.

I own Seagate, Western Digital and Komag. I personally believe that Komag is the company with largest upside (that is why Komag was selected for 3SOV!). But if you want to diversify or prefer a stock with a smaller short position I would buy Seagate at this point in time. If you don't like the Hard Disk Sector? Well look around 3SOF. It is a supermarket for good stock picks and I am sure you will find something you like!

Michael

Thank You very very much. Great  analysis like always!  :o

I think that flash and HDD will co-exist, depend on applications and
people's life style.I agree we do want "to take the info with us to everywhere"  :)


Well..another one if you have time- HOM  ???
I think from fundamental point we have huge correction ,because of defamation
on some blog site .


Best,
Vova

Quote from: voova99 on June 12, 2006, 01:04:36 PM
Michael

Well..another one if you have time- HOM  ???
I think from fundamental point we have huge correction ,because of defamation
on some blog site .

Best,
Vova

Frankly speaking I don't like HOM here. The sector is fundamentally very weak and HOM is not cheap. The socalled defamation seems to have some truth in it.

If you want to buy a homebuilder I would rather go for some of the company's that are very cheap on a PE base like WCI who is buying a significant number of shares back at this level. But I would avoid the sector in general at this point in time.

This is just based on quick DD of both shares so if you are comfortable holding HOM at this level you probably know a lot more than me!

Thanks , Michael

I'll wait for more bright picture from HOM


Best,
Vova

could somebody translate this for me:

Komag (NasdaqNM:KOMG - News) had plenty of put buying relative to call buying. The stock closed at 43.39 and the July 45 puts (QKX SI) closed at 3.20 - 3.20. KOMG's Power Rating is 6.

http://biz.yahoo.com/tm/060615/14417.html?.v=1

cheers
Oliver

Hi Oliver,

To buy put options is a bearish bet that the company will be trading lower than the strike price when the option expire on July 22.

In a similar way those who have bought KOMG call options are betting that it will be trading higher than the strike price on July 22.

So lets look at the actual figures because that will tell us a bit more than a one-day snapshot

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=22439;image)

First of all there are more open interest in the Call than Put options meaning that more investors are expecting the stock to go up than down. That is in general bullish. Second most of the puts are in the money whereas there are significant buying interest in calls that still are not in the money. Again that is bullish (the buyer expects a signifcant increase).

This is however a very unsophisticated way to look at the Option chain. Many investors use options as a way to limit their risk and in the case of Komag I believe that most of the option trading is due to longs and shorts wanting to limit there risk.

This changes the picture a bit. Now most of the put options are longs that are holding the stock but want to limit the downside risk due to the large short position. On the other hand most of the Call options are shorts that wants to limit their risk if the stock should continue up.

I am not sure that this made it less confusing but in general the option trading in KOMG seems to be neutral to slightly bullish for the holders of the stock.

A good day for Komag.

We were selected for InfoTech 100: http://yahoo.businessweek.com/it100/2006/40.htm

and the shorts have started to cover again. Now they only need to cover 6.9 million shares  ;)

KOMG: Jumps +2.64%; Vol +89%; Last 90 Min of Trading
Thursday , June 29, 2006 16:22 ET

During the last 90 minutes of today's session, shares of Komag Inc (NasdaqNM: KOMG) demonstrated a strong UPWARD close relative to its 13:30 ET statistics. "Strong Closers" are determined by proprietary Knobias calculations performed during the last segment of each trading day.

sym: KOMG      @13:30 ET        @CLOSE      % CHANGE
----------   -----------   -----------  ------------
PRICE             $43.88        $45.04        +2.64%
VOLUME           432,700       818,800       +89.23%
#TRADES            1,420         2,851      +100.77%
DAY-HI            $44.29        $45.14       LATE-HI
DAY-LO            $42.95        $42.95           N/A

Komag finally broke out of the descending triangle pattern under good volume. It ended the day at the top of a beautiful white candle.

This will hopefully be the start to the long journey back to fair value  ;)

fyi:

Komag "accumulate"
Wednesday, June 28, 2006 6:09:14 AM ET
Brean Murray & Co

NEW YORK, June 28 (newratings.com) - In a research note published yesterday, analysts at Brean Murray maintain their "accumulate" rating on Komag Inc (KOMG.NAS).

http://www.newratings.com/analyst_news/article_1306872.html

part 2 ( 3months old):

Friday, April 28, 2006 1:24:06 PM ET
Bear Stearns

NEW YORK, April 28 (newratings.com) - In a research note published yesterday, analysts at Bear Stearns reiterate their "outperform" rating on Komag Inc (KOMG.NAS), while raising their estimates for the company.
link:
http://www.newratings.com/analyst_news/article_1262568.html


>:D >:D

KOMG definitely looks good but don't think the shorts have run for cover yet.

In fact I would expect another short attack before earnings. There are simply too much money on the table to give up without a fight.

So if you are still not in Komag you might want to wait for another suspicious reiteration of American Technology Research's strong sell with a target of 29. After all you normally pay for 3 reports and we have still only seen one and the next one would be the ideal entry point  ;)

I always end up talking about the short position on KOMG when I do the updates on Komag. That is really a shame because it takes the focus away from the company's stellar performance.

But unfortunately the short position has and will continue to influence the performance of Komag's stock in some time to go. As said before there are a huge amount of money on the line here. The increase in KOMG's share price the last 10 trading days has increased the shorts loss with 45 million dollars and they must consider what to do now. Based on the chart it seems like they are continuing to try to cover which is great news.

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=23149;image)

I believe the short position is a great asset for Komag but I know that many investors shy away from stocks that are heavily shorted. There are a perception that shorts have unlimited resources and knowledge that is not available for the normal investor.

To be honest I think this is partly true at least when we talk about stocks that are being shorted by institutional investors.

There is often a story that is not known to the wider investor community when institutions decides to go short and often the shorting of stocks are spearheaded by hedge funds which has significant resources available to drive down a stock.

Sometimes the shorts do however get caught on the wrong leg and that is the stocks that I love to buy so let me present my 7 golden rules if you want to bet against the short community:

1) Check how large a short position is.

The larger the position the better! This gives you a good indication of the willingness of the shorts to continue to sell shares and also the potential support when they start to cover. A good indication of the depth of the shorts problem is the "days to cover". If the shorts needs more than 3-4 days to cover and the stock meets the rest of the rules you are on to something!

2) Check how old the position is

If the position is old the shorts are more likely looking to cover. Most shorts have a short investment horizon and don't like to be short for extended periods as they always run the risk that fundamentals might come out that changes the assumptions behind the short position. And old position is also often a sign that the short scenario has not panned out as planned

3) Is the short position decreasing?

This is probably the best sign that either the shorts believe the stock has reached bottom or their assumptions for going short were not correct.

4) Is the short position profitable?

This is important for several reasons. First off all it shows if there are investors with similar resources that are willing to bet against the short community. Second the short are investors like us. If they are sitting on a loss they are more likely to cover at the first opportunity providing a nice floor under the stock.

5) Understand why there is a large short position.

If you see a stock that is fundamentally attractive but has a large and increasing short position don't touch it unless you know why the stock is being shorted and you think the bad news is more than reflected in the price.

6) Make a thorough due diligence!

Never buy a stock that has a large short position unless you have done a thorough DD and are confident about the fundamentals of the stock. Shorts are normally very experienced traders and don't underestimate the amount of time they have used to investigate a stock before going short.

7) Is the stock on the naked short list?

Failure to deliver is normally a sign that the short attack are coming to an end or at least that it has become increasingly difficult and expensive to short the stock. This situation can go on for months so don't expect the stock to shoot up the day after it is added to the list.

If you find a stock that meet most if not all of these rules you might be looking at an excellent investment. From time to time the shorts have huge profits from stocks they rightly identify as overvalued but by the end of the day the hedge funds are not doing any better than the average market so they are also sometimes losing huge amounts of money when they make a bad bet and from my experience the rules above helps you identify those cases.

We will continue to hold KOMG according to the trading plan. Komag in my opinion meet 6 out of the 7 golden rules (it is not on the naked short list!) so we are quite confident about our bet against the short community  ;D

Komag Announces Second Quarter Fiscal 2006 Conference Call
Monday , July 10, 2006 16:01 ET

SAN JOSE, Calif., July 10, 2006 /PRNewswire-FirstCall via COMTEX/ -- Komag, Incorporated (Nasdaq: KOMG), a leading independent supplier of thin-film media for disk drives, today announced that the Company will release its second quarter fiscal 2006 financial results after the close of the U.S. stock market on July 26, 2006.

(Logo: http://www.newscom.com/cgi-bin/prnh/19990816/KOMGLOGO )

A conference call to discuss Komag's second quarter fiscal 2006 financial results has been scheduled as follows:

EVENT:              Komag Q2 FY06 Conference Call

WHEN:               Wednesday, July 26, 2006 at 2:00 p.m. PDT

DIAL-IN NUMBERS:    800-822-4794 (U.S.)
                         913-981-4912 (International)

CONFIRMATION CODE:  8114393

AUDIO WEBCAST: Please access http://www.komag.com to listen to the
                         live webcast.

TELEPHONE REPLAY: Available after 5:00 p.m. PDT on July 26, 2006
                         through 11:59 p.m. PDT on July 30, 2006.

                         Replay Numbers:
                         888-203-1112 (U.S.)
                         719-457-0820 (International)

                         Replay Passcode:  8114393

It seems we might have a volatile day today. Hutchinson reported Q3 earnings after the close yesterday and as usual they disappointed and as usual this will most likely mean that Komag will drop in sympathy.

http://biz.yahoo.com/bw/060720/20060720005897.html?.v=1

The market seems to draw parallels between the two companies as Hutchinson is the largest independent supplier of suspension assemblies to the HDD industry and Komag is the largest independent supplier of Drives to the same industry.

An investment in Komag when they get punished due to Hutchinsons non-performance has however been a good investment long term based on the historical charts:

Short update:
KOMG       $ 42.07
Komag Inc.    0.20
Shares Short    8,000,222
Days to Cover (Short Ratio)    9.3
Short % of Float    26.14 %
Shares Short - Prior    6,904,741
Short % Increase / Decrease    15.87 %
Squeeze Ranking™    73
% from 52-Wk HIGH ( 54.98 )    -30.69 %
% from 52-Wk LOW ( 24.49 )    41.79 %
% from 200-Day MA ( 45.13 )    -7.27 %
% from 50-Day MA ( 43.42 )      -3.21 %
Price % Change (52-Wk)    30.23 %
Trading Volume - Today    755,695
Trading Volume - Average    858,699
Trading Volume Vs. Avg.    88.00 %
Total Shares - Float    30,610,000
Total Shares - Outstanding    30,729,574
% Held by Insiders    31.37 %
% Held by Institutions    %
Market Cap    1,292,793,169
EPS    4.05
PE Ratio    10.30
Sector: Technology
Industry: Data Storage Devices
SI Record Date    2006-Jul

&

Zacks update:
Komag, Inc. (NASDAQ: KOMG) posted first quarter earnings per share of $1.09, which trounced the year-ago result of 59 cents, while topping the Wall Street consensus by almost 3%. Revenue improved to $208.5 million. The company said early indications for 2006 are that overall demand continues to be very strong and its factories are continuing to run at full manufacturing capacity. Komag will report its second quarter results on Jul 26.

Hard-drive shipments exceed expectations in 1Q, says iSuppli

Press release, July 20; Rodney Chan, DigiTimes.com [Thursday 20 July 2006]

Seagate Technology in the first quarter bolstered its lead in the hard-disk-drive (HDD) market, amid stronger-than-expected demand throughout the industry, according to iSuppli.

"Global HDD shipments amounted to 101.7 million units in the first quarter of 2006, up 16.5% from 87.3 million units during the same period of 2005," said Krishna Chander, senior storage analyst for iSuppli. The research firm said it had previously predicted growth of 15.4%.

"Shipments declined by 1.7% in first-quarter 2006, when compared to the 103.4 million units shipped in the fourth quarter of 2005. However, HDD sales typically decrease sequentially in the first quarter, following the peak holiday period of the fourth quarter. The stronger-than-expected HDD sales of the first quarter were driven by demand from the mobile-PC and consumer-electronics markets," Chander added.

all details:
http://digitimes.com/NewsShow/NewsSearch.asp?DocID=00000000000000000000000000005842&query=SEAGATE

Komag reported earnings after the close today and they were even better than expected. EPS came in at 1.21 6% above the consensus estimate of 1.14. This represents an increase of 31% over Q2 last year.

The outlook is also above my expectations:

Quote"Current expectations for 2006 are that overall demand for our products remains strong and our factories continue to run at full manufacturing capacity. Our capacity expansion plans remain on or slightly ahead of schedule and we expect to have 39 million finished disk capacity in the third quarter of 2006. Based on current demand and our capacity expansion plans, we expect total revenue in the third quarter of 2006 could increase approximately 5% from the record second quarter level. With continuing aggressive product development and production transition activities for multiple advanced products and customers, we currently expect net margin to be in the range of 16% to 17% in the third quarter. In addition, with Seagate's completion of the acquisition of Maxtor, we expect that unit shipments of finished media to Seagate in the third quarter of 2006 will increase from the combined unit shipment level to Seagate/Maxtor in the second quarter of 2006.

As we are already in Q3 Komag probably have a very good idea about how much media they are going to ship to Seagate so American Technology Research's prediction that Seagate would reduce their purchase from Komag seems a bit silly  ;)

The stock trades down in AH. This has obviosuly nothing to do with earnings but rather with damage control from the short side of the investment community. Komag is heavily manipulated by shorts but with this kind of fundamentals Komag will sooner or later prevail  ;D

Hmmmm... found this on Yahoo MB:

Quote15:50 KOMG Komag: Ahead of quarter, believe 2007 numbers must move lower - Amtech (41.85 -0.22)

AmTech remains confident on their Sell thesis on KOMG ahead of tonights earnings. Firm says their call is based on their strong belief that Y07 numbers must move substantially lower. Firm is not making a call on the quarter to be reported tonight, and have broadly heard from industry contacts as well as investors that expectations are for a very solid quarter and outlook. That said, WDC has recently reaffirmed its long term relationship with Showa Danka, which refutes the bullish argument that KOMG will take incremental share at WDC, and firm has seen HTCH disappoint investors due to pricing pressure and demand softness in desktop. While KOMG may have navigated this potential landmine so far, firm believes it is a matter of "when" and not "if" that the onslaught of new capacity will cause pricing to soften and estimates to plummet. Firm believes the risk of remaining a KOMG shareholder at current valuation is too great, and recommend investors to sell shares of KOMG and to utilize any strength that may materialize from the report later today to sell stock.

This is the second report from American Technology Research. One to go unless they get paid for additional three reports  ;)

What a joke - They gave their "report" after  excellent earnings from the company.
If they so bearish on a stock why not do it before?

Sorry , a bit before the PR.. But it doesn't matter , I think.  :)

please check carefully the update Q2/06 investor presentation (esepcially slides 20-30) and my last posting, this AMTECH report is complete bullshit IMO:
http://www.komag.com/investors/presentations/KOMG2Q06_Jul06.pdf

cheers
Oliver

Quote from: voova99 on July 27, 2006, 01:18:12 AM
Sorry , a bit before the PR.. But it doesn't matter , I think.  :)

Hi Voova

I think it does matter. To reiterate their strong sell recommendation 10 minutes before earnings tells me that this has nothing to do with serious research. An analyst that is interested in issuing an unbiased report would obviously wait the additional 10 minutes and get the latest figures from the company.

As said before American Technology Research motives are highly questionable. The timing of the release and the immediate heavy selling in the AH lets me believe that this is yet another well orchestrated attempt by the short hedge funds to drive the stock price down. It might work short term but I think it will create a unique buying opportunity for long term value investors.

The short case is based on concerns about the supply/demand balance going forward. We already know that HDD shipments in Q1 were above the analysts forecasts, which is a good omen for future demand.

This is confirmed by Seagate who has forecasted very tight media supply/demand for 2007 so have some of the recognized industry experts and now Komag announced in their CC that media is expected to be very tight in 2007 and beyond.

Of course American Technology Research could actually believe in their own research but I honestly believe that this is paid research.

Komag, Inc. (KOMG-$41.57-Outperform)
Another Strong Quarter And Outlook Reflecting Healthy Trends; Unfounded Weakness Presents Buying Opportunity; Raising Ests
• ANOTHER STRONG UPSIDE. Reflecting a continued strong demand backdrop, capacity additions and new program ramps (mobile), Komag delivered its 8th consecutive upside. We're raising our Street-high ests and would use the stock's weakness as a buying opportunity.
• DEBUNKING STOCK'S WEAKNESS. We believe the stock was weak aftermarket on 3 main issues: 1) inventories, 2) ASP trends, and 3) margin guidance.
• 1) While inventories rose by 4% seq (on 12% rev growth), days inventory declined to 41 from 44 days, and concerns are overdone given the need to increase raw materials due to shortages, longer lead times and strong demand.
• 2) ASP was flat seq and slightly below ests given lower enterprise units (despite increase in high-cap drives), however ASP has shown remarkable stability and we expect it to remain roughly flattish over time given support from P.
• 3) While GM was weaker due to some inefficiencies as new equipment came online & programs ramped, and net margin guidance of 16-17% was more cautious, Komag has been conservative historically and some issues impacting margin should unwind in '07 (no expense from accelerated vesting).
• SOLID 2Q. KOMG reported 2Q06 EPS of $1.21, above our $1.17 est. (Street at $1.14), driven by stronger revs of $233.6mm (above guidance for $219-$229mm). ASP of $5.74 was lower than expected given less enterprise mix, while GM of 27.8% was below our 28.2% est.
• RAISING ESTS. We're raising post-option EPS for `06 from $4.85 to $4.90 and for `07 from $5.30 to $5.35. For 3Q06, we're lowering EPS from $1.25 to $1.24 on revs of $246mm (up 5% seq), at high end of guidance for 5% seq rev growth and EPS of $1.17-$1.24.
• MAINTAINING TARGET. We're maintaining our CY06 target of $65 using a 12x PIE on post-option `07 EPS. While investor tone on the call was fairly negative given aforementioned issues, we believe the concerns are overblown and growth opportunities remain (mobile, PMR, increases at WDC/Hitachi).
Another Strong Quarter And Outlook Reflecting Healthy Trends; Unfounded Weakness Presents Buying Opportunity. Reflecting a continued strong media demand environment, capacity additions, and new program ramps (2.5-inch/mobile), Komag delivered its 8th consecutive revenue/EPS upside. Despite the strong result and more favorable guidance relative to Street consensus (leading us to raise our Street-high estimates again), we believe the stock was weak in aftermarket trading owing to three potential issues: 1) further inventory increases (albeit slight), 2) ASP trends, and 3) margin guidance.
• Inventories: While continued growth of inventories by 4% sequentially (after 32% growth last quarter) may have been a point of contention, days inventory declined to 41 days from 44 days in the March quarter given 12% sequential revenue growth. Further, we believe that concerns on inventory growth are overdone given Komag's need to increase its raw material supply due to shortages, longer lead times, and the anticipation of continued strong customer demand in second-half 2006.
• ASP trends: ASP was flat sequentially and slightly below expectations, despite a large increase in higher-capacity drives at 120GB+, given a lower mix of enterprise units as Seagate ramps down Maxtor's acquired server business. However ASP has historically shown remarkable stability (which we expect to continue), and we expect it to remain roughly flattish over time given support from the ramp of higher-ASP perpendicular recording drives in 2007.
• Margin performance and outlook: Gross margin was weaker due to some unexpected factory inefficiencies as new equipment came online, new programs ramped and Komag saw some extra cost on the cross-qualification of products from the Seagate/Maxtor combination. While net margin guidance of 16%-17% for 3Q06 was viewed as more cautious, Komag has been conservative historically and some of the issues impacting margin should unwind in 2007, as Komag should begin to recoup factory efficiencies as new equipment is stalled and programs become ramped, and it no longer is faced with roughly $2 million per quarter in expenses related to accelerated stock options vesting.
Despite some investor anxiety on the HDD industry, Komag continues to benefit from a supply constrained environment (which is expected to continue into 2007) and remains a strong capacity expansion story. Further, we're encouraged about growth drivers from new ventures, including 2.5" aluminum-based notebooks (Komag already shipped a meaningful number to its first customer in 2Q06 and expects incremental volumes from a second customer by the end of 3Q06) as well as PMR for enterprise (volumes later in 2006). Moreover, Komag appears proactive in addressing the Seagate/Maxtor integration risk by offsetting with higher volumes to Western Digital and Hitachi.
• Collateral Impact: While Western Digital increased as a percentage of Komag's sales to 38% (from 35% in 1 Q06), implying some desktop share gain, Hitachi grew from 21% to 26% of sales, which suggests that it may have been the biggest beneficiary of the Seagate/Maxtor integration.
2Q06 EPS/Revenues Tops Expectations. Komag reported 2Q06 post-options EPS of $1.21 (vs. $0.86 a year ago), excluding a $21,000 gain from an asset disposal (which was immaterial to EPS) but including $1 million (or $0.03 per share) from options expense and $2.1 million from accelerated vesting expenses, which exceeded our $1.17 estimate, First Call of $1.14, and Komag's guidance of $1.14-$1.19 (reflecting a net margin of about 17%). Stronger-than-expected EPS was driven by revenue upside as well as lower-than-expected tax rate (added about $0.01), partially offset by lower gross margin.
• Revenues Above Guidance/Expectations. Revenues of $233.6 million (up 12% sequentially and 35% year/year) exceeded our estimate of $228.6 million, First Call consensus of $223.3 million and above Komag's guidance of a 5%-10% sequential increase (or about $219-$229 million).
• Upside In Finished Disk Revenues On Higher Units, Offset By Lower ASP Due To Mix. Finished disk revenues of $210.0 million were up 38% year/year and 15% sequentially and were ahead of our estimate of $201.9 million owing to better-than-expected shipments, somewhat offset by lower ASP. Finished disk units of 36.6 million were above our 34.9 million estimate, with capacity utilization again at 100%+.
• ASP Below Expectation On Mix Shift. Despite the increase in mix of 120+ GB/platter shipments, increased to 44% (or 16 million) from 24% of shipments (or 7.7 million units) during the prior quarter, ASP was about flat at $5.74, which was below our $5.78 estimate. Lower-than-expected ASP was due to decline
in much higher-ASP disks for enterprise drives owing to STX/MXO merger, which declined from 7% of shipments (or 2.2 million units) to 5% (or 1.7 million) sequentially, somewhat offset by increased shipments of higher capacity platters.
• Other Disk Revenue: Other disk revenues of $23.6 million were below our $26.8 million estimate and comprised 10% of sales.
• WDC/Hitachi Up, Seagate Down Sequentially. Owing to the completion of STX/MXO merger and the subsequent rationalization of MXO product line, shares of combined STX/MXO declined by 9% sequentially (or 19% year/year) from 39% of total revenues to 32%, or $74 million in revenues (or about 13 million units). KOMG noted that it expects STX/MXO share to increase sequentially in 3Q06 with MXO product rationalization behind it combined with STX/MXO volume commitments. On the other hand, sales to Western Digital rose 21% (or 169% year/year) sequentially to $88 million on estimated 13 million units, or 38% of sales, up from 35% during the prior quarter. In addition, Komag saw sales increasing to Hitachi by 37% sequentially (or 38% year/year) to $60 million (or estimated 8.5 million units).
• Lower Gross Margin On Lower Efficiencies. Despite full capacity utilization, gross margin of 27.8% was 39 basis points below our estimate of 28.2% and declined by 53 basis points sequentially (but about flat year/year) owing to some unexpected factory inefficiencies as new equipment came online, new programs ramped and Komag saw some extra cost on the cross-qualification of products from the STX/MXO combination..
• In-Line Operating Expenses. Total operating expenses of $25.2 million (including $1 million in stock-based compensation and $2.1 million in accelerated vesting of stock options and restricted stock related to previously announced CEO transition) were about in line with our estimate of $25.5 million. The company expects stock¬compensation-related expenses to remain at the current level of about $1 million and about $2 million associated with accelerated vesting of options (or $3.0 million in aggregate).
• Lower Tax Rate From Tax Holiday. Tax rate of 2.3% was below our 3.0% estimate, which added about $0.01 to EPS. The company reiterated its outlook for 2006 tax rate of 3.0% owing to the tax holidays in Malaysia, which do not expire until 2016.
• Balance Sheet Remains Strong, Days Inventory Improved. Total cash of $190 million was about flat sequentially, translating to cash per share of about $6.24 (net cash per share of $3.60 excluding convertible debt). While total inventory of $75 million grew about $3 million sequentially (or 4%), days inventory declined from 44 days to 41 days sequentially. Moreover, finished goods inventory of $7 million was up about $1 million sequentially and is about 1 week of sales. Majority of the inventory was raw materials, which increased by about $2 million, given the need to mitigate materials shortage concerns and to support production levels to meet continuing strong customer demand. DSO of 50 days decreased from last quarter's 52 days owing to higher revenues and the timing of customer payments.
Raising 2006 Estimates. Reflecting 2Q06 upside, coupled with continued media supply constraints and potential for growth from new applications (e.g., mobile), we are raising our estimates for 2006 and 2007. We are increasing our pro forma post-options EPS estimate for 2006 from $4.85 to $4.90 (which includes the impact of stock-based compensation expense of $3.7 million). Following assumptions were used to arrive at our EPS estimate:
• Revenues of $957 million, up 39% year/year but lowered from our previous estimate of $962 million due to
assumption of lower ASP from mix shift and lower revenues from substrates
• Finished disk units of 150 million, up 41% year/year and raised from our prior 148 million assumption
• ASP assumption of $5.71, lowered from our prior assumption of $5.75 due to mix shift
• Gross margin of 27.8%, lowered from 28.0% due to lower 2Q06
• Tax rate of 2.8%, lowered from our prior assumption of 2.9%
Lowering 3Q06 (September) Estimates. For 3Q06 (September), we are lowering our post-options EPS estimate from $1.25 to $1.24 (vs. $0.96 a year ago) on revenues of $246 million (up 37% year/year and 5% sequentially) on 39 million units (up 42% year/year and increased from our prior 38.8 million assumption), ASP of $5.70 (lowered from our prior $5.76 assumption) and gross margin of 27.6% (compared to our prior 27.9% assumption). Komag is forecasting revenues to grow 5% sequentially from the June quarter's $234 million (or about $245 million) and achieve a net margin about 16%-17%, implying an EPS range of about $1.17-$1.24 (including options expense).
Raising 2007 Estimates. For 2007, we are raising our post-options EPS from $5.30 to $5.35 (including the impact of stock-based compensation expense of $0.12) primarily on lower tax rate assumption. We assumed:
• Revenues of $1.08 billion, up 13% year/year and lowered from our previous estimate of $1.10 billion
• Finished disk units of 173 million, up 15% year/year and raised from our prior 169 million assumption
• ASP assumption of $5.67, lowered from our prior assumption of $5.77
• Gross margin of 27.4%, from 27.7%
• Tax rate of 3.0%, lowered from our prior 4.0% estimate
Valuation: Maintaining 2006 Year-end Price Target of $65. We are maintaining our 2006 price target from $62 to $65 by applying a 12x P/E multiple (slightly lowered from prior 12.3x target multiple to reflect the concerns about declining margins) on our post-option 2007 EPS. While investor tone on the call was fairly negative given concerns about increases in inventory, declining ASP, and lower margins, we believe Komag can navigate through these risks and growth opportunities remain (mobile, perpendicular recording, more volumes at Western Digital/Hitachi).
Raising 2006 Estimates. Reflecting 2Q06 upside, coupled with continued media supply constraints and potential for growth from new applications (e.g., mobile), we are raising our estimates for 2006 and 2007. We are increasing our pro forma post-options EPS estimate for 2006 from $4.85 to $4.90 (which includes the impact of stock-based compensation expense of $3.7 million). Following assumptions were used to arrive at our EPS estimate:
• Revenues of $957 million, up 39% year/year but lowered from our previous estimate of $962 million due to
assumption of lower ASP from mix shift and lower revenues from substrates
• Finished disk units of 150 million, up 41% year/year and raised from our prior 148 million assumption
• ASP assumption of $5.71, lowered from our prior assumption of $5.75 due to mix shift
• Gross margin of 27.8%, lowered from 28.0% due to lower 2Q06
• Tax rate of 2.8%, lowered from our prior assumption of 2.9%
Lowering 3Q06 (September) Estimates. For 3Q06 (September), we are lowering our post-options EPS estimate from $1.25 to $1.24 (vs. $0.96 a year ago) on revenues of $246 million (up 37% year/year and 5% sequentially) on 39 million units (up 42% year/year and increased from our prior 38.8 million assumption), ASP of $5.70 (lowered from our prior $5.76 assumption) and gross margin of 27.6% (compared to our prior 27.9% assumption). Komag is forecasting revenues to grow 5% sequentially from the June quarter's $234 million (or about $245 million) and achieve a net margin about 16%-17%, implying an EPS range of about $1.17-$1.24 (including options expense).
Raising 2007 Estimates. For 2007, we are raising our post-options EPS from $5.30 to $5.35 (including the impact of stock-based compensation expense of $0.12) primarily on lower tax rate assumption. We assumed:
• Revenues of $1.08 billion, up 13% year/year and lowered from our previous estimate of $1.10 billion
• Finished disk units of 173 million, up 15% year/year and raised from our prior 169 million assumption
• ASP assumption of $5.67, lowered from our prior assumption of $5.77
• Gross margin of 27.4%, from 27.7%
• Tax rate of 3.0%, lowered from our prior 4.0% estimate
Valuation: Maintaining 2006 Year-end Price Target of $65. We are maintaining our 2006 price target from $62 to $65 by applying a 12x P/E multiple (slightly lowered from prior 12.3x target multiple to reflect the concerns about declining margins) on our post-option 2007 EPS. While investor tone on the call was fairly negative given concerns about increases in inventory, declining ASP, and lower margins, we believe Komag can navigate through these risks and growth opportunities remain (mobile, perpendicular recording, more volumes at Western Digital/Hitachi).

I give a shit on the AMTECH Report, this is a more realistic analysis (from STX Yahoo board)
cheers
Oliver

Quote from: Michael on July 27, 2006, 04:15:04 AM


Of course American Technology Research could actually believe in their own research but I honestly believe that this is paid research.

Fully agreed.
Amtech does many other false "sell recomendations" , check FLSH for example.

holy moly, unbelievable  ::) ???

time to buy more ?

I jumped in small at 39.85 this am thinking that the worst was done.  Went to lunch and had a CC for about an hour and a half.

JIMINEEE...what happened?  Maybe we've get a nice long shadow instead of an UUUGLY red candle.

Kent

I thought we had put the stop low enough to avoid this kind of panic selling but I was wrong. 3SOV is out of KOMG.

This is one of the costs of having a 100% transparent trading plan. I believe we sold right at the bottom and that this is perfect time to buy KOMG.

We all knew that the shorts would have a final stand and I hope that some of our members have used this opportunity to add to their position. (I certainly did!)

MArket is brutally selling off any company after earnings almost with no regard for reality and content of said earns. Can't quite see why KOMG got hit so hard, but it did. I am assuming it is just the nature of the market right now.
It crashed through 200 ema/sma support which is super negative, for me that puts $25 zone definately on the radar being the 2005 pre rally low.
I wouldn't buy now purely because the selloff could just keep on going, Bit like NTRI everyone thought that was way over done at $60.

Good TRading

back from holiday, just an summarized analyst update & chart (nice MACD action today) :
1)
Komag "accumulate," target price raised
Friday, July 28, 2006 2:38:04 AM ET
Brean Murray, Carret & Co

NEW YORK, July 28 (newratings.com) - Analyst Mark Miller of Brean Murray maintains his "accumulate" rating on Komag Inc (KOMG.NAS), while raising his estimates for the company. The target price has been raised from $54 to $57. In a research note published yesterday, the analyst mentions that the company has reported its 2Q06 revenues and diluted EPS ahead of the estimates and the consensus. Komag's combined media shipments to Seagate increased during the quarter, the analyst says. The EPS estimates for 2006 and 2007 have been raised from $4.73 to $4.82 and from $4.86 to $5.51, respectively.


2)
Komag "neutral"
Friday, August 04, 2006 5:52:32 AM ET
Research Capital
NEW YORK, August 4 (newratings.com) - Analysts at Robert W Baird maintain their "neutral" rating on Komag Incorporated (KOMG.NAS). The target price is set to $50.

3)
Komag upgraded to "strong buy"
Friday, August 04, 2006 10:47:21 AM ET
Brean Murray, Carret & Co
NEW YORK, August 4 (newratings.com) - Analyst Mark S Miller of Brean Murray upgrades Komag Inc (KOMG.NAS) from "accumulate" to "strong buy." The target price is set to $57.

4)
Komag upgraded to "buy"
Thursday, August 10, 2006 4:52:24 PM ET
Maxim Group
NEW YORK, August 10 (newratings.com) - Analysts at Maxim Group upgrade Komag Inc (KOMG.NAS) from "hold" to "buy." The target price is set to $46.

link:
http://www.newratings.com/companies/Komag_US5004532041.html

still holding this baby   >:D

time for reentering (please check MelfElf analysis!) ?

Lower lows keep on coming. Long term chart shows now broken ascending support (blue line). Strong resistance now above in the $37 to $40 range.

I wouldn't buy yet as KOMG has not shown it is ready to put in a bottom, in fact if it breaks this area of support the $25 area is still on radar. Maybe a short sell even >:D

hi aussie,
isn´t it strange?

please check the August presentation and latest analysts comments:

http://www.komag.com/investors/presentations/KOMG2Q06_Aug06.pdf

1)
Komag "neutral"
Friday, August 04, 2006 5:52:32 AM ET
Research Capital
NEW YORK, August 4 (newratings.com) - Analysts at Robert W Baird maintain their "neutral" rating on Komag Incorporated (KOMG.NAS). The target price is set to $50.
2)
Komag upgraded to "strong buy"
Friday, August 04, 2006 10:47:21 AM ET
Brean Murray, Carret & Co
NEW YORK, August 4 (newratings.com) - Analyst Mark S Miller of Brean Murray upgrades Komag Inc (KOMG.NAS) from "accumulate" to "strong buy." The target price is set to $57.
3)
Komag upgraded to "buy"
Thursday, August 10, 2006 4:52:24 PM ET
Maxim Group
NEW YORK, August 10 (newratings.com) - Analysts at Maxim Group upgrade Komag Inc (KOMG.NAS) from "hold" to "buy." The target price is set to $46.
4)
23-Aug-06:   Caris & Company   (Initiated) = Average
16-Aug-06:      Deutsche Securities (Initiated) = Hold

Sometimes stocks are on fire with no fundamentals to back them up at all

Sometimes fundamentally strong stocks, in growth markets decline pretty much without reason also.

In 2002 KOMG was $2.50, it hit a high in 2006 $54.98 >:D In that period it has had  significant peak to base corrections as follows -  1) $24.57 down to $9.00 ish 2) $40.50 down to $24.49 3)$54.98 down to ????

KOMG remains on my radar.

Good Trading

Komag upgraded to "outperform"

Friday, September 01, 2006 5:57:35 AM ET
Robert W. Baird

NEW YORK, September 1 (newratings.com) - Analysts at Robert W Baird upgrade Komag Incorporated (KOMG.NAS) from "neutral" to "outperform." The target price is set to $50.

In a research note published this morning, the analysts mention that the upgrade in the rating is on account of a more optimistic 2H06 outlook. Komag has healthy prospects for gross margin improvement and revenues in 2007, with improved fixed cost absorption from new capital equipment, rising volumes and newer products, the analysts say. Robert W Baird believes that sustained high utilization and scheduled capacity expansion is likely to result in robust earnings going forward.

http://www.newratings.com/analyst_news/article_1358803.html

time for reentering???

shorts are still attacking KOMG, down in premarket again

reason:
NEW YORK, Sept 6 (Reuters) - Komag Inc (KOMG.O: Quote, Profile, Research), a maker of computer disk drive components, said on Wednesday its revenue and net margins could be smaller than its earlier estimates due to "slower than normal" demand so far in the third quarter.

Based on the current demand pattern Komag said its revenue could be flat to up 3 percent from the second quarter of 2006 compared with its previous guidance for revenue to be up approximately 5 percent.

It said its net margin could be in a range of 14 percent to 16 percent, including stock compensation expense. Its earlier expectation was for a margin in the range of 16 percent to 17 percent.
??? ::)

todays investor conference presentation:
http://www.komag.com/investors/presentations/KOMG2Q06_Sep06.pdf


Michael, any input from your side?


cheers
Oliver

down 10 % so far  :-\

14% now...more blood in the water.  I see $27 in play.  Volume is huge, folks are running for the door. I'm so glad I exited around $37, I lost about 9%.  This high volume sell off is scary.

Quote from: la-onda on September 07, 2006, 04:15:42 AM
stopped out with 10% loss   :P :-\

Komag Drops On Weak Demand Outlook
Mary Crane, 09.06.06, 3:56 PM ET

Shares Komag were down more than 13% Wednesday after the disk-drive technology company lowered its third-quarter guidance on slower-than-expected demand and easing supply constraints.

In an 8-K filing with the U.S. Securities and Exchange Commission, Komag said it expects sequential revenue growth of 3% and net margins to be around 14% to 16%.

Komag had previously said it expects 5% growth and margins in the range of 16% to 17%.

"Current quarter-to-date demand has been slower than the normal seasonal pattern," Komag management said. "As a result, total shipments and financial results for the third quarter will be dependent upon the remainder of the quarter."

The announcement warranted a rating change from Bear Stearns to "peer perform" from "outperform." Analyst Andrew J. Neff said Komag's filing signaled a "worrisome change in tone" at the company and could be interpreted as a negative sign for hard-disk drive vendors like Seagate Technology or Western Digital, which are sensitive to capacity trends.

Caris & Co. analyst Shebly Seyrafi said increased competitive pressures, increasing capital expenditures, and declining capacity utilization will further erode Komag's margins.

The analyst lowered the price target on Komag to $35 from $40 and advised investors to avoid buying the stock.

Will KOMG be again part of the 3SoF Value Portfolio?

Will this thread be merged with the other one ?

Any comments on Q3 revenue?

[/b]
http://www.komag.com/investors/presentations/KOMG3Q06_Oct06.pdf

cheers
O.

KOMG has fallen on good earnings, but weak outlook.

But the fundamentals  is still very strong.

FYI

http://www.thestreet.com/_yahoo/newsanalysis/investing/10334805.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

fyi:
Komag initiated with "neutral"
Monday, January 22, 2007 1:50:44 AM ET
Banc of America

NEW YORK, January 22 (newratings.com) - Analysts at Banc of America Securities initiate coverage of Komag Inc (KOMG.NAS) with a "neutral" rating. The target price is set to $40.

In a research note published on January 19, the analysts mention that the company is likely to report its latest quarter results in-line with expectations. Komag is not well positioned for the shift from desktop PCs to notebooks, the analysts say. The company is expected to generate its 4Q06 and 2007 revenues and EPS broadly in-line with the consensus, Banc of America Securities adds.

Hi Michael,
whats up with KOMG?

please check March presentation:
http://www.komag.com/investors/presentations/KOMG4Q06_Mar07.pdf

Analyst update:
1)
Komag "neutral," target price reduced
Thursday, February 08, 2007 3:26:10 AM ET
Goldman Sachs
NEW YORK, February 8 (newratings.com) - In a research note published yesterday, analysts at Goldman Sachs reiterate their "neutral" rating on Komag Inc (KOMG.NAS). The target price has been reduced from $37 to $31.

2)
Komag upgraded to "neutral"
Thursday, March 01, 2007 3:50:12 AM ET
American Technology Research
NEW YORK, March 1 (newratings.com) - Analysts at American Technology Research upgrade Komag Inc (KOMG.NAS) from "sell" to "neutral."

3)
Komag "average," target price reduced
Wednesday, March 21, 2007 1:49:48 AM ET
Caris & Company
NEW YORK, March 21 (newratings.com) - In a research note published yesterday, analysts at Caris & Company reiterate their "average" rating on Komag Inc (KOMG.NAS). The target price has been reduced from $35 to $31.

4)
Komag "outperform"
Friday, March 23, 2007 1:00:15 PM ET
Robert W. Baird
NEW YORK, March 23 (newratings.com) - In a research note published yesterday, analysts at Robert W Baird maintain their "outperform" rating on Komag Incorporated (KOMG.NAS). The target price is set to $44.

cheers from SG
O.

KOMG update:

Komag "outperform," target price reduced
Wednesday, April 18, 2007 11:37:53 AM ET
Robert W. Baird
NEW YORK, April 18 (newratings.com) - Analysts at Robert W Baird maintain their "outperform" rating on Komag Incorporated (KOMG.NAS), while reducing their estimates for the company. The target price has been reduced from $44 to $39.
In a research note published this morning, the analysts mention that given the high elasticity of demand for hard drives, the company might benefit in 2007 from an aggressive OEM pricing scenario. The current rating reflects Komag's robust industry position, several growth drivers and the prospects for significantly improved results in 2H, the analysts say. The EPS estimate for 2007 has been reduced from $4.00 to $3.90 to reflect the modest unit softness in desktop.