Transcript Seagate Technology PLC Kyle Gesuelli Current Situation • Which securities fit with the portfolio’s strategy and make sense in the current market? • STX.

Seagate Technology PLC
Kyle Gesuelli
Current Situation
• Which securities fit with the portfolio’s strategy and
make sense in the current market?
• STX comprises largest loss in the Technology Sector.
• What action, if any, should be the management team
take? Buy, sell, or hold?
Corporate Overview
• World’s largest manufacturer of Hard Disk
Drives (HDDs).
• Products sold to various end-market
applications:
– Desktop (57%)
– Mobile Computing (23%)*
– Consumer Electronics (10%)
– Enterprise (10%)
Corporate Overview continued
•
2 acquisitions:
– Evault, Inc.
– Maxtor Corporation
• Customer Channels:
– Equipment Manufacturers (64%)
– Distributors (27%)
– Retail (9%)
• Geographic Breakdown:
– Asia (45%)
– North America (28%)
– Europe (27%)
Life to Date Performance
Purchased 300
shares @
$15.79 on
October 10,
2005
Hit high of
$28.60 on
October
29, 2007
Hit low of
$3.11 on
January 20,
2009
Closing price
$11.09 on
September
23, 2010
Competition
• Highly competitive sub-segment of mature industry.
• Major competitors:
- Western Digital
- Toshiba
- Fujitsu
- Micron
- Samsung
- SanDisk
• Lower manufacturing costs and larger R&D capacity for integrated
companies.
• Declining gross margin.
• Acquisitions forecasted to maintain market share.
Industry Profile
• Increasing amount of information exchanged
and stored electronically.
• HDD technology is reliable, has a large storage
capacity, and has a low-cost per gigabyte.
• Continue to be dominant means of storage for
consumer and enterprise.
Corporate Governance
• Nine out of eleven directors are independent.
• All directors must own at least 10,000 shares of STX stock and
receive their compensation primarily in company stock.
• Chairman/CEO has been with the company since 1992.
Financial Trends
As Reported Annual Income Statement
Report Date
07/02/2010
07/03/2009
06/27/2008
06/29/2007
06/30/2006
Revenue
11,395,000
9,805,000
12,708,000
11,360,000
9,206,000
Cost of revenue
8,191,000
8,395,000
9,503,000
9,175,000
7,069,000
Product development
877,000
953,000
1,028,000
904,000
805,000
Marketing & administrative
437,000
537,000
659,000
589,000
447,000
Amortization of intangibles
27,000
55,000
54,000
49,000
7,000
Restructuring, net
-
-
-
-
4,000
Restructuring & other operating expenses
66,000
210,000
88,000
29,000
-
Impairment of goodwill & other long-lived assets
57,000
2,290,000
-
-
-
Total operating expenses
9,655,000
12,440,000
11,332,000
10,746,000
8,322,000
Operating Income (Loss)
1,740,000
-2,635,000
1,376,000
614,000
874,000
Other Income (Expense), net
3,144,000
-5,562,000
2,816,000
1,298,000
2,030,000
Tax Adjustments
-120,000
933000
201000
-1056000
252000
Net income (Loss)
1,609,000
-3,086,000
1,262,000
913,000
840,000
Net income (Loss) per share - basic
3.28
-6.32
2.46
1.64
1.7
Key Financial Information
Valuation
• S&P performed DCF based on following
assumptions:
–
–
–
–
Revenue expected to decline .4% in FY 2010.
Higher unit shipments but lower price.
STX to lose market share.
Gross margin and operating profit expected to drop
6%.
– 2011 EPS estimate $1.53
• Valued at $16.20
– $5.11 over current price
– 49% undervalued
Industry Outlook
• Data storage needs will increase.
• Computer Storage and Peripherals sales to
grow 10% in next calendar year.
• 15-20% sales unit growth in 2011
• Declining prices but less than historical (35%)
• M&A will drive valuation.
Word on the Street
Buy
7
Buy/Hold
7
Hold
12
Weak Hold
1
Sell
0
No Opinion
0
Recommendation
• Hold
– Industry Justification:
•
•
•
•
Reliable and stable technology
Growth in demand
Cost pressure/declining gross margin
Backward integration
– Security Justification:
•
•
•
•
•
Possible acquisition
49% undervalued
Large market player
No incentive to take loss/pay brokerage fee
Minimal impact on portfolio
Questions?