KOMG

[la-onda]

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

[Michael]

KOMG reported Q1 earnings today 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:

Early 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:

based 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:

In 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

[la-onda]

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.

[usedcasting]

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

uc.

[berloga]

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.

[yukiii]

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.

[Michael]

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.

[Terliso]

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)?

[Michael]

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  )

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:

No 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!

[la-onda]

please check MACD, bounce back has started already IMO

[Michael]

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

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:

At 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.

[usedcasting]

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.

[la-onda]

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

[Michael]

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.

[Michael]

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