Investors willing to make bets in the early recovery of PC industry have made great with Seagate Technology and Western Digital Corp. – two manufacturers of hard drives, which have seen their market values more than tripled so far this year.
When the year began, there was reason to believe that some of Seagate and Western Digital would be better than they were in 2008.
Many technology companies saw their business and stock prices take a beating last year, and the two hard-disk manufacturers were among the hardest hit sector. The decline in corporate spending on high-end technology equipment, including storage products, was largely to blame for the collapse that dragged shares of Western Digital in more than 61 percent, while shares of Seagate dropped by 83 percent.
Things became so bad for Seagate, which in early January, the company went so far to strengthen its executive ranks by replacing Bill Watkins, executive director with President Stephen Luczo.
But since then, both hard disk manufacturers have seen their fortunes turn. When Western Digital has introduced its fourth fiscal quarter in July, net income was $ 173 million, or 76 cents per share – blowing away Wall Street estimates for earnings of 28 cents per share for the period. The company of $ 1.9 billion in revenue also easily surpassed the $ 1.6 billion expected by analysts.
And though still in red, Seagate managed to reduce its fourth-quarter loss of U.S. $ 81 million, or 16 cents per share, on sales of 2.35 billion – well above Wall Street estimates for the period .
In addition, Seagate announced Tuesday that, due to stronger than expected demand, shipments of hard-and income will be above earlier expectations for the current quarter.
The results – along with forecasts for a recovery in the PC sector later this year – have increased confidence about the actions of companies. From the first day of the year, Seagate shares have risen by 241 per cent, while Western Digital has earned a 206 percent comparable. The Nasdaq, by contrast, is up 36 percent for the year.
Analysts who follow the market hard drive say there were several factors that have contributed to the change of Seagate and Western Digital, and must continue to support both companies for the rest of the year and into 2010.
According to Mark Moskowitz, of JPMorgan, the reasons for the sense of optimism about the industry include planned improvements to seasonal demand and the anticipation of the planned October release of Microsoft Corp. ‘s Windows 7 operating system.
In addition, Moskowitz said the price hard drive and inventory levels are becoming more favorable due to increases in demand for the unit and reducing the capacity of the production industry.
“The better than expected demand for both desktop and portable units is a key factor,” Moskowitz wrote in a report last week, adding that participation upgrades servers running on Intel Corp. ‘s chips Nehalem “are leading to some stabilization in the company [hard – disk drives].”
Moskowitz recently increased its hard disk drive shipment forecast to 146.1 million units for the business district in September and 154.5 million for the three months ending in December. It is also estimated that sales of 607.4 million hard disk drives in 2010, up from its previous forecast of shipments of 525.7 million units.
At UBS, analyst Arun Sharma, recently began coverage on both Seagate and Western Digital to buy indexes. Western Digital Santiago called the “best in class in a volatile environment” and said Seagate was “a set of response” with a new management team focused on expanding the company’s margins.
Santiago cited “Western Digital’s history of execution” as a positive factor for the company’s current position.
“The company is not immune to the slump in the demand for hard drives in late 2008 and early 2009,” said Sharma. [But] we believe Western Digital is the most efficient provider in the industry to adjust its cost structure and restructuring its business to reflect the current demand environment. ”
James also was upbeat about what he called Western Digital’s leadership in the markets for laptop and external hard disk storage disk.
With respect to Seagate, Sharma said the company would have a greater risk and potential reward than Western Digital. Santiago said Seagate leader in desktop and enterprise markets hard drive give you some momentum to build on its recent gains, and long term objectives that the company’s gross margin between 18 and 24 percent could end up being conservative.
However, Sharma said Seagate response plans are based on the Company’s ability to execute. He said that recent changes in management, and more focus on the notebook market suggest Seagate is taking some right steps to exploit the trust that has helped improve their growth stocks this year.
Keith Bachman of BMO Capital Markets favors Western Digital over Seagate, based on exposure to market first company, which is seeing gains in demand for servers and storage.
“According to our [earlier] letter, we believe that the fundamental unit of the industry remains healthy, with strong demand and lean inventory levels,” Bachman wrote in a report of 18 September, which raised the price Seagate target to $ 18 from $ 13 and Western Digital for $ 40 from $ 36.
Both stocks are currently trading near their average price targets. Seagate closed Tuesday at $ 15.68. Goals in the range of prices ranging from $ 10 to $ 20, with the median $ 17.25, according to Thomson Reuters.
Western Digital last closed at $ 36.25, near its average target of $ 38. Current price targets range from $ 21 to $ 44.