3SOF

Bear, Stearns & Co. Inc. Andrew Neff on KOMG
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   

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

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 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.