STX

[KCScott]

Seagate Technology engages in the design, manufacture, and marketing of products for storage, retrieval, and management of data on computer and data communications systems. It offers rigid disc drives that are used as the primary medium for storing electronic information in systems ranging from desktop computers and consumer electronics to data centers delivering information over corporate networks and the Internet. The company's products include the Cheetah family for Internet and e-commerce servers, data mining and data warehousing, mainframes and supercomputers, department/enterprise servers and workstations, transaction processing, professional video and graphics, and medical imaging; U Series X and Barracuda for desktop applications, workstations, and low-end server applications; U-9 Series of rigid disc drives for use in personal video recorder, video game consoles, audio jukeboxes, home media centers, and home and industrial security systems; and Momentus family for notebook computer running popular office applications, as well as laptops for business, government, and education environments. Seagate sells its rigid disc drives primarily to original equipment manufacturers, distributors, dealers, system integrators, and retailers throughout the world. The company was founded in 1979.It was formerly known as Seagate Technology Holdings and changed its name to Seagate Technology in 2002. The company is headquartered in George Town, Cayman Islands


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I've traded this company previously and have first hand experience with their products (Several of our vendors use their Hard Drives in their Digital Video Recorders) - all indicate a favorable performance to that of Maxtor or Western Digital.

At this time, the stock looks under valued (trading at 16.43 as of this message)

From Monday's edition of Forbes on-line:

Piper Jaffray reiterated an "outperform" rating on Seagate Technology (nyse: STX - news - people ) but lowered estimates and the price target, citing reports that the company could possibly lose the 1-inch drive iPod mini business at Apple Computer (nasdaq: AAPL - news - people ).

Piper Jaffray noted that the reports suggest that Apple is in the process of completely transitioning from 1-inch hard drive to flash-memory-enabled iPod mini players.

The research firm said Seagate's recent weakness presented a buying opportunity. "Although we believe that increased flash memory encroachment could impact 1-inch drives in the near term, the sheer number of new applications incorporating 1-inch drives should more than offset such losses by mid-2006" Piper Jaffray said.

The firm added, "We continue to believe the stock offers a great buying opportunity with a current trading multiple of 8.9 times calendar 2006 earnings and 1.0 times calendar 2006 revenues (in addition to a dividend yield of 1.85%)."

Piper Jaffray lowered Seagate's fiscal 2006 estimate to earnings of $1.96 per share from $2.01, and lowered the fiscal 2007 estimate to earnings of $2.09 from $2.18. It cut the price target to $25 from $27.

The firm added that Seagate shares warrant a significant premium to competitors Western Digital (nyse: WDC - news - people ) and Maxtor (nyse: MXO - news - people ) since the company is the disk drive industry's largest with the widest range of products.


Would appreciate your opinions and T/A of this opportunity.

As Always, Thanks in advance and Best Regards,

KCS

[Melf Elf]

From Monday's edition of Forbes on-line:

Piper Jaffray reiterated an "outperform" rating on Seagate Technology (nyse: STX - news - people ) but lowered estimates and the price target, citing reports that the company could possibly lose the 1-inch drive iPod mini business at Apple Computer (nasdaq: AAPL - news - people ).

That upgrade sounds like a downgrade. 

Interesting that on Monday, STX had a gap down opening at 17.60, which I'd rate as a STRONG SELL.

[Michael]

Hi KCscott

Seagate are being punished due to Hutchinson's warning today. (Seagate is a Hutchinson customer - 5% of Hutchinson's revenue as fare as I remember).

Piper Jaffray comments

Seagate (STX) is down nearly 5% on the news and represents a stellar buying
opportunity trading at less than 9x forward earnings and offering nearly a 2%
dividend yield. We continue to believe that Seagate will not lose all of its 1-inch
drive business at Apple as some reports have suggested. Please see our note dated
08.29.2005 for more details. Reiterate Outperform and $25 price target (18-20x
P/E, 1.2-1.4x P/S). Risks include available-for-sale share overhang, share losses at a
significant customer and fall-off in PC demand.

Merrill Lunch comments:

o Implications for Seagate: Although, Hutchinson's preannouncement is
negative for Seagate, some of our other research on the HDD component side is
more supportive Seagate's ability to make its numbers.

I would probably not buy before the dust has settled (but I have been wrong before!)

[KCScott]

Thanks for the TA Melf - Thanks for the insight Mike.

I'm sure today's drop will domino the stops and see more losses before a floor sets.

Question:

In your opinion, how do you determine support?

When I look at the STX chart, it appears to be at $16

(Another good question is how do you post charts on here? - The [img} tags don't seem to work on the stockcharts.com charts)

Back to STX - it looks like it touched 16 end of Feb and Mid April and came back both times.
But it also looks like a head and shoulders on the one year which is very Bear I believe.

Thanks again.

KCS

[Michael]

Hi KSCott,

I mave mailed you a short manual for posting images. I am not very satisfied with it so let me spare the rest of the forum but with a little trial and error the manual should do the trick!

It is normally easy to find support levels for stocks but STX is a real challenge.

I normally find this web site useful (for the lazy of us!): http://www.stockta.com/cgi-bin/analysis.pl?symb=STX&num1=15&cobrand=&mode=stock

The site does however only look at the tested support and resistance levels for the last 6 months and as STX is trading at  a 6 month low there are not much help in this case.

Another popular way to determine support is the moving averages like MA50 and MA 200 but again STX trades below both off these.

I also normally use Bollinger bands where the lower band would indicate support but again not in this case 

The final indicator I am using is RSI. A RSI value below 30 indicates that the stock is heading into oversold territory. As you can see on the 1 year chart below STX has reversed twice when RSI 30 is reached. This combined with the support around 16.45 which has been tested in December and April might give you good support now as well.

The chart also features a large gap up from 14.99 to 15.54. The low valuation of the company based on historical earnings should hopefully prevent this gap to be closed but it is cause for concern if there are further bad news on the sector or company.

Mike

[Michael]

Hi KCScott,

Don't know if you are still interested in this stock but I could see it bounce today. The support at 16.45 seems to hold and Hutchinson was actually up yesterday.

I think that Seagate is attractive here but it is not the only good pick in the sector. I prefer KOMG for fundamental reasons and I will try to buy that today.

[KCScott]

Still watching STX - Big volume and down another .43 as of Noon EDT.

Thanks Mike - Best of luck on your trade with KOMG

[Michael]

Technically is doesn't look good for STX. I wouldn't buy before there is a decisive move to the upside or it close the gap.

KOMG is also falling today even though less than STX. I have a buy order at 32.57. There is a solid support at 32.5.

[KCScott]

I'm just trying to figure where the floor will be for STX right now.

Actually, I expect to be a buyer pretty soon based purely on valuation.
This company is too strong and too financially sound to belly up for an extended period

One of the things in play through Friday is the holiday effect:

http://stockcharts.com/education/TradingStrategies/preHolidayEffect.html

a lot of selling going on before labor day that ends up being very profitable by year end

[Melf Elf]

I'm just trying to figure where the floor will be for STX right now.

KC,

So is everyone else!  SFE has broken through three support levels in the past five trading days.

Actually, I expect to be a buyer pretty soon based purely on valuation.
This company is too strong and too financially sound to belly up for an extended period

This is one of those "counter-intuitive" things, but let's walk through it:

Scroll down and look at the Inverse H&S breakout in November, 2004.  At that time, trailing twelve month earnings were $0.24, so at the point of the upside breakout, STX was trading at a P/E of 60 basis TTM. 

That's a very high P/E, and we might have been inclined to pass on the trade based on that.  However, if we remember that the market is a discounting mechanism, and that it looks forward about six months, we might have been inclined to play the breakout, and make a nice profit.

Six months from the November breakout (roughly) STX was up 100% off the August, 2004 low, and after the November, 2004 breakout, earnings improved as we went along.

Now, on August 25, 2005, STX gapped down to 17.60, below a H&S top on very nice trailing twelve month earnings.  At 17.60, the P/E ratio was only 12.84 basis TTM.  Just as we might have been inclined to pass on buying the Inverse Head & Shoulders breakout in November, 2004 because of the high P/E ratio, we're now inclined to BUY the Inverse H&S breakdown because of the low P/E. 

Hmm-mm...now, what did we say about the market being a discounting mechanism? 

1. STX has broken the neckline of a H&S top.
2. STX has  broken June, 2005 support at 17.04
3. STX has broken April, 2005 suppot at 16.422

All in only five sessions.

Just my opinion, but when the chart isn't playing out what the fundamentals are indicating (they appeared to be bad in November, 2004...the appear to be good in August, 2005), I defer to the chart. It's damaged, technically.

Watching the price action in STX this week, BTW, I'm now pretty convinced that the "dubious" Piper Jaffray upgrade on Monday was an attempt to distribute some STX stock on the one day rally back to the broken neckline that their "upgrade" generated.

Maybe I've become too cynical.   

[KCScott]

This is one of those "counter-intuitive" things, but let's walk through it:

Scroll down and look at the Inverse H&S breakout in November, 2004.  At that time, trailing twelve month earnings were $0.24, so at the point of the upside breakout, STX was trading at a P/E of 60 basis TTM. 

That's a very high P/E, and we might have been inclined to pass on the trade based on that.  However, if we remember that the market is a discounting mechanism, and that it looks forward about six months, we might have been inclined to play the breakout, and make a nice profit.

Six months from the November breakout (roughly) STX was up 100% off the August, 2004 low, and after the November, 2004 breakout, earnings improved as we went along.

Now, on August 25, 2005, STX gapped down to 17.60, below a H&S top on very nice trailing twelve month earnings.  At 17.60, the P/E ratio was only 12.84 basis TTM.  Just as we might have been inclined to pass on buying the Inverse Head & Shoulders breakout in November, 2004 because of the high P/E ratio, we're now inclined to BUY the Inverse H&S breakdown because of the low P/E. 

Hmm-mm...now, what did we say about the market being a discounting mechanism? 

1. STX has broken the neckline of a H&S top.
2. STX has  broken June, 2005 support at 17.04
3. STX has broken April, 2005 suppot at 16.422

All in only five sessions.

Just my opinion, but when the chart isn't playing out what the fundamentals are indicating (they appeared to be bad in November, 2004...the appear to be good in August, 2005), I defer to the chart. It's damaged, technically.

Melf - Thanks for offering a totally different persepctive on this (applaud).

I'm used to looking at forward PE, Revenue Growth, Cash/Debt , etc. to form valuation.
I've never really understood TA - so this is indeed a learning experience.

Watching the price action in STX this week, BTW, I'm now pretty convinced that the "dubious" Piper Jaffray upgrade on Monday was an attempt to distribute some STX stock on thar one day rally back to the broken neckline that their "upgrade" generated.

Maybe I've become too cynical.   

I absolutely agree regarding manipulation by the Brokers and Market Makers.

I'm sure Piper Jaff, in some way was selling on the upgrade, just like they'll buy when they downgrade certain stocks.

I'm really glad to have found this site - It's great to hear the voice of reason or dissent with out someone insulting my Mother in the process (AKA Yahoo)

Good Trading to you Melf

[Michael]

Applauds from me as well - this is one of the best post I have seen on 3SOF.

Thanks for taking the time to put this together.

[Melf Elf]

Scott and Mike,

Thanks.  STX still is tanking.  It filled the November, 2004 gap yesterday which one would expect after the gap down from the H&S top, so it could bounce here, but I don't like the sector weakness on what appear to be good fundamentals.

KOMG now has taken out and closed below its early September low (31.29), when Merrill Lynch upgraded it to $42.  KOMG closed yesterday at 30.98.  Next horizontal support is 30.27.

[Michael]

Hi Melf Elf and KCScott

Hmmm... I am probably a day or two too early but I bought Seagate today. The gap from November 2004 is almost closed and I decided not to wait for the last couple of percentages.

Fundamentally Komag and Seagate are both extremely cheap at these levels with the forecasted growth for both companies.

As said in the Komag threat I believe that the decrease in the price of HDD stock is due to a number of misunderstandings. Needham had an excellent write up:

Disk Drive Industry Update: Volume 27

The stocks in our HDD universe (along with broader technology companies) have been badly battered over the past several weeks/months. In our view, the rationale for the declines has been based at least in part on misconceptions, half-truths, and over-exaggerations. Over the years we have experienced numerous industry-wide declines that have triggered sell-offs in the stocks. Surprisingly, we believe this most recent destruction of capitalization is occurring in the absence of tangible data traditionally preceding a downturn (such as rising channel inventory, aggressive pricing declines, or weak end market demand). Some of the most frequent issues cited are described below.

Top 7 Myths About the Drive Industry Today

1. "Demise of the 1-inch HDD in the iPod Mini by flash is the Seventh Sign of the Apocalypse." Industry speculation about the arrival of larger capacity flash appearing in an iPod began earlier this year. In June, we wrote Volume 24, which outlined the potential impact to Seagate, as the second largest supplier to Apple for the 1-inch. Our conclusion, which has remained consistent to this day, was that the overall impact to Seagate was minimal and that the risk was more of the headline variety rather than financial. We had incorrectly assumed this was widely understood by the market. In fact, as recently as a few weeks ago, analysts were downgrading Seagate due to Apple's decision (despite making only minimal changes to the model). Apparently if data is old enough it can become new again. The bottom line is that the 1-inch space is a footnote compared to the broader drive market. Through 1H05, 1-inch shipments for the ENTIRE industry represented less than 5% of total drive volume. Recent forecast revisions from IDC following Apple's announcement reduced unit estimates by less than 3 million units for 2H05 (or less than 1% of total).

Not surprisingly, with gross margins only slightly better than mainstream desktop, the earnings impact is also less significant than the nearly $2.5 BILLION reduction in Seagate's market cap would suggest! Overall, while the 1-inch is interesting, the consumer opportunity is far more tied to the adoption of PVRs (high-capacity, high-cost, high-margin) than any other segment.

2. "With the drive industry in its fifth consecutive quarter of stability, it is due for a collapse." This investing approach also appears in other forms of daily life, such as standing before the roulette wheel and betting on red because black came up the last five times. Despite the recent declines in the stocks, the fundamentals do not support an impending downturn in the space. Wholesale build plan reductions, rising inventory levels, declining prices and margins...these are the signs of the end of a cycle. It is very difficult to have these conditions in the face of unmet demand, capacity constraints, historically low inventory (and falling), and comparatively benign pricing. Shouldn't the data drive the analysis? Overall, we believe that one should be a student of history, not a slave to it.

3. "The drive industry is on the verge of excess capacity." We strongly disagree with this view. In April 2005 we published the first research report to discuss the impending media shortage for the drive industry. Looking into 2006, we believe that even benign industry unit growth will continue to lead to supply tightness (if not continued shortages) throughout the year. So far, the industry has displayed great restraint with regard to capacity additions, taking more of an incremental approach. With media likely to remain a gating factor to drive shipments (and therefore the most critical capacity expansion spending to track) over the next 12-18 months, we do not see an opportunity for the traditional overbuilds that have plagued the industry historically.

4. "Perpendicular recording will crush component counts." We view this point more as a misunderstanding than anything else. Historically, the drive industry moved to new technologies in a wholesale way, usually in a compressed timeframe of sometimes just a couple of quarters. These new approaches enabled dramatically higher areal densities at a time when higher capacities were only achievable by utilizing higher component counts. So there is historical precedent for the view that perpendicular would increase capacities and lower components. However, the situation has changed somewhat. Perpendicular recording is likely to take longer and be more painful to implement than the street believes today. Therefore we believe that the industry is likely to deploy the technology first in select products where space constraints warrant a different density to increase capacities (namely the 1-inch, 2.5 inch mobile and enterprise). Desktop drives, still most popular at 80GB, are likely to be the last place to see the arrival of perpendicular (likely after 160GB which will be longitudinal) and not until late 2006/early 2007. Consequently, we expect platter counts, for example, to remain steady at 1.6-1.8 until that time.

5. "Flash is coming to notebooks. Drives are dead." The drive industry received a black eye in the press following the Apple Nano announcement on flash displacing hard drives. We expected a 4GB flash product eventually, but not until next year even with the tremendous price declines in the flash space. Underlying our belief was that flash participants actually wanted to MAKE money. Silly us. Emboldened by their pyrrhic victory, certain flash players are talking again about their Frankenstein 16GB flash product for the laptop market. We find this interesting since the much touted 4GB for the Nano is still a 2GB stacked despite a 4GB announcement last year. In any event, while it would be foolish to completely discount the possibility of flash storage in certain mobile devices, the reality is that both technologies are on virtually the same areal density curve as both use some of the same semiconductor equipment. Therefore, we believe there will be a continued price/GB advantage for drives for the foreseeable future.

And more near-term...

6. "The September quarter started slow for the drives. Repent for the end is near." Following Hutchinson's press release suggesting demand was slow early in the quarter, some investors believe that the September quarter started slowly. Our checks (and recent 8-Ks) do not corroborate this.

Historically, the month of September alone can account for 40-50% of the September quarter. The channel can be even more back-end loaded (as it seems to be this year) than other quarters. In our view, Hutchinson was more impacted by at least two customers holding suspension inventory at the end of last quarter and burning it off in the first part of this quarter. Yield issues were compounded by extra capacity, but the slowness experienced by the company was more likely tied to the inventory issue. This explains why no other players cited this slowness.

7. "The Enterprise market is weak, the TAM (total available market) and pricing are falling". Seagate mentioned in their most recent 8-K that the enterprise TAM would likely be less than their original expectations of flat sequentially (or 6.9 million units). We always cringe when companies attempt to estimate the TAM at the beginning of the quarter, as you are nearly guaranteed to be wrong one way or the other. Our data suggests that September is always a difficult time for the enterprise due to European summer vacations, making the TAM typically down slightly. In this case, we believe there are some Seagate issues that need to be understood. Specifically, our checks suggest that EMC, likely Seagate's second largest customer, purchased extra drives at the end of last quarter to support its recent launch of a high-end DMX storage system (perhaps as much as 150K drives). As Seagate is the largest supplier of drives to EMC, they would feel a disproportionate effect as that inventory is burned off. Additionally, Hitachi appears to be slowly crawling itself out of a self-created pit. We estimate units could increase slightly sequentially, but a true recovery could be a year away. Fujitsu also appears to have been suffering some manufacturing glitches that are likely to reduce their shipments sequentially. Maxtor should be flat. The aggregate of these data points suggests an enterprise market that is seasonal, not weak. Finally, industry discussions indicate that pricing is typical, but not aggressive.

Conclusion

We believe the HDD sector is experiencing an investor turnover as momentum-type investors, whether believing the above myths or not, vacate the space. Value-oriented accounts, meanwhile, appear to be waiting for the group to "bottom". We expect that information coming out of the October conference calls may provide enough insight to provide longer-term accounts with the visibility required to see the industry's upside potential. Until that time, we believe the group will be range bound. Our top picks, based on fundamentals and valuation, remain Seagate and Komag, with Hutchinson already near trough valuations and a solid long-term play.

and here is the chart:

[Melf Elf]

Hmmm... I am probably a day or two too early but I bought Seagate today. The gap from November 2004 is almost closed and I decided not to wait for the last couple of percentages.

Hi, Mike,

Actually, the November, 2004 gap at 14.99 is filled, and STX looks to be trying to make a stand here for at least a short-term rally.

Yesterday, it put in a potentially bullish Doji Star Hammer.  The low was 14.81.  Near the open today, STX went down and made a low at 14.84, above yesterday's low, then it rallied to 15.15, above yesterday's high of 15.10, so we've got a "higher low and a higher high."  I like that.

I just bought it at 15.10.  Stop: a close or obvious late day tank below 14.81.  Risk: 1.9%.
Thanks for the information.