Fast-Growing Tech Is a Screaming Value

05/03/2012 8:30 am EST


Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

This company has weathered just about every economic storm to hit tech stocks over the past few decades, and has always come back strong—and this time is no exception, writes Glenn Rogers of Internet Wealth Builder.

Seagate (STX) is a fast-growing company with high margins run by an investor-friendly management group.

You could make the case that this is not a super sexy business, but we all store thousands of songs, videos, and photographs either on our own drives or through cloud services. The demand for storage continues to grow exponentially.

Seagate reported earnings for the third quarter of fiscal 2012 on April 17, and absolutely crushed their numbers. Gross margins for the three months to March 30 were 37%, up from 32% in the previous quarter and 19% a year ago.

The company sold 61 million drives in the quarter, for a total of $4.4 billion (figures in US dollars), which is right in line with analysts' targets. That represents a 65% year-over-year revenue gain, which generated $2.48 per share in earnings. That easily beat the Street's estimates, which were $2.11 per share.

For the first nine months of the fiscal year, Seagate earned $4.16 a share. Even if it did not add another penny in the fourth quarter, the P/E multiple would only be seven! Talk about a cheap tech stock!

If you are concerned about the ongoing demand for traditional hard drives versus the solid-state drives that populate tablet computers, it should be noted that Seagate also entered that business back in 2009. They've been developing solid-state hybrid drives that combine the speed and stability of solid-state with the added storage capabilities of traditional systems.

The stock is trading at an extremely inexpensive P/E  ratio. The stock is trading at about four times projected 2012 earnings. It also pays a significant dividend, currently $1 per share annually, to yield 3.4%.

It has also been repurchasing its own stock aggressively and plans to reduce outstanding shares by 25% over the next year. That's a good recipe for high returns. Buy Seagate at current levels with a target price of $35.

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