Seagate Technology Public Limited Company

Transcription

1 January 28, 2015 Seagate Technology Public Limited Company (STX-NASDAQ) Current Recommendation Earnings Update: Seagate Reports Q2 Results SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 02/20/2014 Current Price (01/27/15) $57.06 Target Price $ Week High $ Week Low $49.03 One-Year Return (%) Beta 2.49 Average Daily Volume (sh) 3,153,715 Shares Outstanding (mil) 327 Market Capitalization ($mil) $18,674 Short Interest Ratio (days) 6.42 Institutional Ownership (%) 89 Insider Ownership (%) 1 Annual Cash Dividend $2.16 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 8.1 Earnings Per Share (%) 33.1 Dividend (%) 35.8 using TTM EPS 11.1 using 2015 Estimate 11.3 using 2016 Estimate 10.0 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Seagate posted lower-than-expected secondquarter fiscal 2015 results wherein the top and bottom lines both fell short of the Zacks Consensus Estimates. The quarter also witnessed margin contractions. Nonetheless, the company is gaining traction with its new products focused on surveillance and the analytics market as well as other hybrid drives. Also, Seagate is focusing on the enterprise side, which is a key growth area in the information technology sector. Furthermore, synergies from acquisitions and product innovations are the other growth catalysts. However, increased investment in new and innovative products, sluggish macroeconomic conditions and a flattish price environment, and competition from Western Digital and SanDisk remain the headwinds. Thus, we reiterate our Neutral recommendation on Seagate. Risk Level * Below Avg., Type of Stock Large-Growth Industry Comp-Storage Dv Zacks Industry Rank * 28 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) ,732 A 3,668 A 3,526 A 3,425 A 14,351 A ,489 A 3,528 A 3,406 A 3,301 A 13,724 A ,785 A 3,696 A 3,485 E 3,456 E 14,437 E ,742 E 3,807 E 14,602 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $1.45 A $1.38 A $1.26 A $1.20 A $5.31 A 2014 $1.29 A $1.32 A $1.34 A $1.10 A $5.04 A 2015 $1.34 A $1.35 A $1.18 E $1.17 E $5.07 E 2016 $1.37 E $1.47 E $5.68 E Projected EPS Growth - Next 5 Years % 9 (Note: Qtly. fig. may not add up to annual fig. due to rounding off.) 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Seagate Q2 Earnings, Revenues Fall Short of Estimates Jan 26, 2015 Seagate reported second-quarter fiscal 2015 non-gaap earnings per share (excluding the impact of tax benefits, amortization of intangibles, restructuring charges and other one-time items) of $1.35, which missed the Zacks Consensus Estimate by a penny. Quarter Details Seagate reported revenues of $3.70 billion, up 4.8% from the year-ago quarter primarily driven by higher demand for its cloud storage products. However, quarterly revenues fell short of the Zacks Consensus Estimate of $3.71 billion. Seagate s reported gross profit increased 4.1% from the year-ago quarter to $1.03 billion, primarily on a higher revenue base. However, gross margin contracted 20 basis points (bps) on a year-over-year basis to 27.8%. Operating margin (excluding the effect of gain on arbitration award) contracted 90 bps from the year-ago quarter to 11.7%, primarily due to a 90 bps year-over-year increase in operating expenses as a percentage of revenues. Seagate reported net income (excluding the impact of tax benefits, amortization of intangibles, restructuring charges, gain on arbitration award and other one-time items) of $452 million or $1.35 per share. Seagate exited the quarter with cash and cash equivalents of $3.3 billion. Long-term debt stood at $3.93 billion. Seagate generated $2.05 billion from operating activities in the first six months of fiscal 2015 compared with $1.54 billion in the same period of the previous fiscal. The company paid dividends worth $317 million and repurchased shares worth $201 million in the first half of fiscal Equity Research STX Page 2

3 VALUATION Seagate s shares are currently trading at 11.1X TTM earnings, a discount to the industry average of 22.6X and the S&P 500 average of 18.9X. We believe that growing demand for storage products and the company s exposure in the high-end corporate desktop and enterprise server markets looks promising for Seagate. Moreover, the company s product innovations are expected to remain a tailwind. However, flattish price environment, stiff completion and margin contraction remain the headwinds for the company. Thus, we reiterate our Neutral recommendation on Seagate and set a target price of $60.00 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Seagate Technology Public Limited Company (STX) Industry Average S&P Western Digital Corporation (WDC) EMC Corporation (EMC) NetApp, Inc. (NTAP) Teradata Corporation (TDC) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Seagate Technology Public Limited Company (STX) Industry Average S&P N/A 2.0 N/A Equity Research STX Page 3

4 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET Equity Research STX Page 4

5 OVERVIEW Headquartered at Dublin, Ireland, Seagate Technology plc (STX) is one of the largest manufacturers of hard disk drives (HDDs). HDDs 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 HDDs address desktop, notebook PC, game console, PVR/DVR, and enterprise storage markets, among other HDD sub-segments. The company operates in an industry-leading vertically-integrated model with internal control over the majority of its key component suppliers. Seagate also develops other electronic data storage products such as SSD (solid state drive) and solid state hybrid drives (SSHD). The company offers its products under three heads Enterprise Storage, Client Compute and Client non-compute. The company enhanced its position in SSDs with the acquisition of Samsung s HDD operations and the French drive maker, LaCie. Seagate primarily sells to original equipment manufacturers (OEMs) but supplements this with sales through distributors and retailers. Major OEM customers include Dell, EMC, Hewlett-Packard, IBM and Sun Microsystems (acquired by Oracle Corp). In fiscal 2014, revenues from OEMs made up 68% of total revenue; distributors generated 20% and retail accounted for the remaining 12% of the revenues Revenue by Channel 2014 Revenue by Geography 20% 12% 27% 68% 54% 19% OEM Distributors Retail Americas EMEA Asia Pacific In fiscal 2014, the company generated 54% of revenues from the Asia Pacific, 27% from America and the remaining 19% from Europe Middle East Africa (EMEA). The disk drive market is highly competitive and witnesses frequent pricing pressure. Companies operating in this market compete to acquire a limited number of prime customers. Alternative kinds of storage, such as flash memory, tape, optical and SSDs further pressurize the key players, Seagate, Western Digital Corporation and Toshiba Corporation. Equity Research STX Page 5

6 REASONS TO BUY Seagate is the second largest manufacturer of HDDs in the U.S. The company commands approximately 39% share in the HDD market while its main competitor, Western Digital, owns approximately 46%. The company shipped 220 million units in fiscal Moreover, the company expects its total addressable market (TAM) to remain in the range of 140 to 145 million for the second half of 2014, due to a rebound in the mission critical Nearline segment. We believe the stabilization in PC market will result in modest TAM growth, going forward. IT research firm Gartner expects worldwide HDD shipments to grow at a 2.9% compound annual growth rate from 2013 (552 units) to 2018 (635.1 units). Furthermore, IDC forecasts that by ZB data will be needed to be stored out of the 44 ZB of data created. Storing this huge amount of data presents traditional storage companies such as Seagate and Western Digital a significant opportunity to expand their market share. Moreover, with an enriched product portfolio and higher mix of OEM business, Seagate will be well positioned to capitalize on the opportunity. Also, for the near term, buoyed by the strength in notebooks, enterprise and gaming, Seagate expects its revenues to be $100 million higher than the earlier forecast of $3.55 billion. The demand for Seagate s solid-state hybrid hard drives (SSHD) is on the rise as it announced that the shipment of the same has reached 10 million. SSHD blends the SSD speeds and HDD-class capacity in a more effective manner. An added advantage of SSHD is that they are less costly than SSDs. For these reasons, SSHDs are in high demand among PC manufactures. Seagate expects its hybrid drive shipment to reach 3 million in the September quarter up from the previous forecast of 2.5 million. Seagate has expanded its SSD portfolio and has made investments in the fast evolving PCIe (Peripheral Component Interconnect Express) storage market. The company has also introduced thin hybrid drives to cater to the increasing demand of the mobile market. Recently, Seagate acquired the Accelerated Solutions Division (ASD) and Flash Components Division (FCD) from Avago Technologies. The acquisition will not only boost Seagate s enterprise-class PCIe flash offerings but also provide SSD controller capabilities. Seagate is poised to gain from the current acquisition as PCIe-based SSDs are in demand from enterprises dealing in online transaction processing and data warehousing. We believe that the secular growth of digital data, modest growth in the TAM and higher demand for storage will remain the growth catalysts, going forward. As per technology research firm Gartner, the total SSD market is poised for considerable growth with revenues projected to more than double to $19.4 billion in 2014 from $9.2 billion in Moreover, per market research firm IHS isuppli, demand for SSDs is expected to grow at 40% in 2014 and 2015 each. Buoyed by these factors, Seagate expects to garner $150 million in revenues from enterprise SSDs in fiscal The company expects the SSD segment to make a positive contribution to operating margins from 2016 and thus, bodes well for Seagate s future prospects. Seagate is focusing more on the enterprise side, which is the key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. Seagate also believes that higher demand for cloud storage will lead to improved pricing for enterprise-class drives, mainly due to supply constraints. The company expects cloud-based solutions to drive revenue growth in the near term. Seagate s expectations from the cloud stems from the fact that IDC expects 60% of the 13 ZB data produced are to be stored in the cloud. As a matter of fact, Seagate forecasts its Cloud Systems and Solutions segment to generate $650 $700 million in revenues in FY15 and forecasted revenues in excess of $1 billion by FY16. Apart from this, the focus shift toward enterprise would reduce Seagate s dependence on the PC market. Equity Research STX Page 6

7 Seagate focuses on returning shareholders value and returned approximately 98% of operating cash flow through dividends and share repurchases in fiscal The company paid dividends worth $557 million and repurchased shares for $1.91 billion during fiscal For fiscal 2015, Seagate expects to declare dividends worth $550 million plus a 10% increase in dividend payments. The company expects to continue its share repurchase activity depending on the stock price. These investor-friendly initiatives not only boost earnings but also instill investors confidence and loyalty. REASONS TO SELL Seagate faces stiff competition from Western Digital, Hitachi, Samsung and Intel in the storage market and from SSD pureplays such as SanDisk and Micron. According to Trendfocus preliminary update for the second quarter of 2014, Seagate is expected to have a market share of 38.4% to 38.5% compared with Western Digital s 45.7% to 45.9%. PCs remain the greatest users of HDDs and Seagate still derives the bulk of its revenues from these devices. Therefore, the cannibalization of PCs by mobile devices will affect Seagate s results. According to IDC s latest report, global PC shipments (303.5 million) are expected to decline 3.7% in 2014, a marked improvement from its earlier forecast of a 6% decline. PC shipments in emerging markets (162.7 million) are however expected to be down 10.5% in On the other hand, the research firm stated that the PC market in developed markets such as the U.S. appeared to be stabilizing, with tablet cannibalization tapering off. Nonetheless, IDC predicted that PC shipment growth is expected to remain negative in the near term. Customer concentration is a major risk for Seagate. During fiscal 2014, Hewlett-Packard and Dell accounted for 13% each of Seagate s total revenue. We believe that there is lesser chance of a shift in preference for the two tech giants as there are not too many options in the HDD market. H-P is undoubtedly one of the largest PC companies by volume. However, weak PC segment sales remain the concern for Seagate as well. H-P has been facing tough competition from Lenovo especially in developing markets. If H-P loses its grip in these regions, it would affect Seagate in turn. The disk drive market is highly competitive and has experienced drastic pricing pressure due to supply/demand volatility. In the near future, hard disk companies might be exposed to pressures as customers, such as tablet PC makers choose flash cards for storage purposes over the customary hard disks. The situation may compel companies to slash hard disk prices, in turn hurting margins. Equity Research STX Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of STX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform %, Neutral %, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research STX Page 8