3SOF

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
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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:





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  

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:



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:



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.



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:



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!!!!)



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:



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:



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.



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:



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! 

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



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