Western Digital Is Cheap, But Seagate Is In Trouble – Seeking Alpha
Analysis from Chris Lau at Seeking Alpha.
- Seagate’s quarterly results suggest more trouble ahead.
- Western Digital has challenges ahead with hard drive sales, but its strategic plans ahead are strong.
- Consider Western Digital over Seagate. (emphasis added)
Here is some of the analysis…
Buying Western Digital and selling or betting against Seagate Technologies may make the most sense.
Seagate managed to lower inventory sequentially by 11 percent in its third quarter. Gross margin stood at 23 percent, but the company faced troubling trends. Weak shipments of 39.2 million units hurt revenue, but Seagate offset the negative impact by raising prices. Falling shipments for PCs in the first quarter this year now makes it six consecutive quarters in a row.
Seagate has room to cut costs to sustain its generous 13.2 percent dividend yield. Income investors should learn from high yield investing in deep-water drilling and oil sectors. When prices fell sharply, companies could no longer sustain its dividend. Seagate has room to cut capex by nearly 30 percent to $535 million. Beyond this year, if demand does not improve and prices erode, expect a dividend cut.
Western Digital’s acquisition of SanDisk should give it an edge over Seagate. The higher debt level is manageable. It also sports a higher operating margin than Seagate: (graph at this point in the article – Ed)
Conclusion:
Both Seagate and Western Digital face headwinds in the hard disk market, but Seagate’s poor reliability, unsustainable dividend, and lack of a solid-state disk road map will continuing hurting its share price. Getting bullish on WDC and bearish on Seagate might be the move to make.
Closing stock prices:
- STX 19.25
- WDC 38.37
So today I’m hypothetically going short STX and long WDC with $20,000 in each stock.
Short: (1039)sh STX @ 19.25
Long: 521sh WDC @38.37
Due to rounding errors the initial value of the investment is:
-$20,000.75 + 19,090.77 = -$9.98
I’ll post weekly updates of how this hypothetical position unfolds. (this sentence edited on 5/28/16 to include the word “initial” – Ed)
