"Binary Big Bang"

11/11/2005 12:00 am EST

Focus:

Ken Kam

CEO, Marketocracy, Inc.

"The binary ‘big bang’ continues to expand, creating growing demand for storage products," notes Ken Kam in his Stock Alert service. "And Seagate helps computers store these mysterious 1s and 0s." Here’s his review of this play on an "information-centric world".

"Founded in 1979, Seagate (STX NYSE) is the world’s largest manufacturer of disc drives. Every time you access the Internet, use an ATM, watch TV, listen to digital music, enjoy a movie with computer-generated special effects, or use a consumer electronics device, you access and share large amounts of digital information on disc drives the core of Seagate’s business.

"Seagate’s stock has fallen on tough times on concerns over Apple’s new Nano iPod that uses NAND flash memory instead of small one-inch hard drives from Seagate. While flash is a formidable competitor in the future mp3 world because of its light weight and lower energy profile, it does have its limitations in how data is stored that will not make hard drives obsolete in the consumer device market. In addition, consumer electronic devices only represent 10% to 15% of Seagate’s revenue and the company recently reaffirmed guidance for the third quarter.

"On a valuation basis, Seagate is currently trading at a forward p/e multiple of eight and at five times operating cash flow, which we consider absurdly low for a company that has a low debt to equity ratio of 0.29. Meanwhile, Seagate enjoys support from high quality institutions and it has low short interest. The company has a BB+/Stable credit rating from Standard and Poor’s and pays a 2.1% dividend.

"On a technical basis, STX chart isn’t pretty as it has declined from $21 to $14.50 over the past several months. However, the daily chart is showing signs of bottoming as some moving average technical indicators have turned up and the weekly chart just created one of the most reliable reversal candlestick patterns for bottoms; The Morning Star. Nevertheless, while the charts are showing signs of bottoming the stock needs time to gather strength.

"As for the long term fundamentals of the industry, Seagate’s future looks bright according to market researcher IDC. Even with flash memory competition, the firm sees the hard drive market growing from 380 million units in 2005 to 420 million units in 2006. While the short term stock price of STX could be negatively impacted by slightly lower guidance or a NASDAQ sell off, $15s are a solid entry point and any move to the $14s or $13s should be bought aggressively. STX is significantly undervalued and it is a market leader in a vital technological industry that will continue to grow as we produce more and more data."

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