KOMG

[Michael]

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

Komag profile

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Fundamentals and News

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



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.

"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:





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 .


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 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



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.

[Michael]

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.

[fill_the_gap]

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.   

[SmartWrasse]

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

[calguy]

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.

[la-onda]

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 

[fill_the_gap]

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...

[calguy]

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.

[basonista]

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.

[la-onda]

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.


Oliver

[valueseeker]

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

[Michael]

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:

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.



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.



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.

[422fwhp]

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

[la-onda]

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 

[Michael]

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:

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.

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.