Company Review: Seagate Technology (STX)

Earning season is marching on and I am knee deep in research and reports. However I fine some more enjoyable then others to review and Seagate is one of my favorites because I love reading about companies throwing money at shareholders. Their goal is 70% of operating cash flow returned to shareholders through dividens or share buybacks. This quarter alone they bought back 10% of their existing common shares. They are on track with their goal of reducing the company by 40% in 3 years.

SEAGATE (STX)

Last Updated: Q3-2013

(Fiscal Q1-2014)

Description: Seagate Technology plc (Seagate) is the provider of electronic data storage products. The Company’s principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. The Company produces a range of disk drive products addressing enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client computer applications, desktop and notebook computers, and client non-compute applications, for a range of end user devices, such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems.

How do they make money: STX manufactures and sells a range of data storage devices.

Key Brands: Seagate, Samsung hard drives (Samsung sold their HDD division to Seagate. Other Samsung products are still made by Samsung).

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Company Organization

No specific organization described by the company. They don't give specific department numbers and are tight lipped even when asked in Q&A section of con calls.

Plans and Strategy

Focus on shifting to SSD drives and cloud storage.

60% of storage will be in the cloud by year 2020 (Q3-2013)

Shareholder value: 70% of operating cash flow to shareholders in share repurchase or dividends.

Not free cash flow, operating.

Started aggressive share repurchase program when stock was at $19.

Will look for most effective return. (hint @ repurchases slowing down at some point)

Back in Q2 2012 they announced their plans for share repurchases and their share count by end of each year.

2012: 425 million

2013: 350 million (they are currently at 320 million)

2014: 250 million

40% of the company bought back.

Risks

HDD technology is becoming outdated and inefficient: HDD technology is becoming outdated and replaced by faster and smaller memory types, primarily flash technology. This will hurt STX which is predominantly HDD.

Mitigation: STX isn’t run by idiots. They see the trend from HDD PCs to flash memory storage cellphones and tablets. STX is working on different types and buying flash memory companies.

Consumer shift from PC to mobile devices means shift to cloud storage: PC sales and thusly the HDD sales will drop as more users go to mobile devices away from PCs.

Mitigation: Non-issue. Data has to be stored somewhere. The cloud does not magically remove storage needs. When a person takes a photo and then shares it with their friends its stored on their camera (1) backed by Apple and Google with cloud storage (2) stored on Instagram (3) posted to your wall on Facebook (4) then everyone who sees it has it locally stored in the cache of the device that views it (5-100+). Thats for 1 photo. Flash memory is still expensive and cloud server farms will need massive amounts of storage. Sales will be to server cloud companies instead of individuals but the need is still there.

Section 382 limitations: Companies can only buy back shares so quickly before fines, penalties, and other problems come up. While this may seem like a benefit vs risk, I want to know if the company cares and what their plan is.

Mitigation: The 10% ownership Samsung shares bought back are not subject to 382 limitations.

Also, IRS has recently relaxed and amended this rule so its no longer an issue.

This issue is brought up each and every con call as a question. STX is aware and on top of it.

Company going private: There are fears that STX is buying back shares so much because they will go private and cash out existing shareholders.
Mitgation: Upper management and directors are selling shares. CEO and Chairman Steve Luczo sold $16 million worth in November 2013. If there were plans to take the company private he would not be selling but holding to get a cash out deal later.
Even if it was true that they took the company private, the increase in share price along the way gives great reaturn. STX is +167% since 2012 when they started this program vs +42% for the S&P.

Competitors

Western Digital Corp (WDC)

Toshiba Corp (6502. Listed on the Tokyo Stock Exchange)

Hitachi (6501. Listed on the Tokyo Stock Exchange)

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Company Fundamentals

Fastgraph Review
Even with a +60% share price rise for 2013, STX is still grossly undervalued.

Company Stats	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013e	5y Avg	10y Avg
Share Price	$17.27	$19.99	$26.50	$25.50	$4.43	$18.19	$15.03	$16.40	$30.42	$50.00	$26.01	$22.37
EPS	1.06	1.41	1.6	1.56	2.36	0	3.14	1.09	6.49	4.81	3.106	2.352
EPS Growth	-	33.02%	13.48%	-2.50%	51.28%	-	-	-65.29%	495.41%	-25.89%	134.75%	71.36%
P/E	16.29	14.18	16.56	16.35	1.88	-	4.79	15.05	4.69	10.40	8.73	11.13
P/B	3.9	3.1	3.5	2.7	1.2	3.9	2.5	2.2	3.7	4.2	3.3	3.09

2012 EPS was inflated due to Thailand flooding that impacted Western Digital but not Seagate. I do not see the drop in EPS the following year as a negative sign on management. Even with how erratic it is, the company is growing nicely.

2009 had 0 EPS primarily due to re-organization costs. STX shifted from business unit structure to a functional organization structure. 33% of executive level positions were cut as well as other layoffs and pay reduction. Most companies were doing this in the wake of the Finance and Housing crisis of 2008.

We can see now in 2013 that they were successful.

Dividend Stats	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013e	5y Avg	10y Avg
Dividend	$0.20	$0.26	$0.32	$0.38	$0.42	$0.27	$0.00	$0.18	$0.86	$1.40	$0.54	$0.43
Dividend Yield	1.16%	1.30%	1.21%	1.49%	9.48%	1.48%	0.00%	1.10%	2.83%	2.80%	1.64%	2.28%
Share buyback %	-	-0.80%	-4.20%	-10.73%	9.11%	10.25%	-5.06%	10.06%	5.90%	15.45%	7.32%	3.33%
Div Growth	-	-	23.08%	18.75%	10.53%	-35.71%	-100.00%	-	377.78%	62.79%	76.21%	51.03%
EPS Payout Ratio	18.87%	18.44%	20.00%	24.36%	17.80%	-	0.00%	16.51%	13.25%	29.11%	14.72%	17.59%

The dividend was cut twice in the past 10 years. Normally I see that as a sign that management isn't commited to shareholders. However their EPS went to 0 in 2009 and they couldn't cover it. They then returned to a dividend they could afford.

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Earning Report Notes

Q3-2013

EPS: $1.29

$100 million in SSD sales.

$2.5 billion in cash on hand.

Goal of 70% of operating cash flow to shareholders

Bought 32.7 million shares (10%) from Samsung @ $46.87

Raised dividend 13% to $0.43/quarter

Product Margin: 28.5% (27% - 32% target)

Operating Expenses: within the 10% - 14% of revenue.

Foresee 60% of data stored in the cloud by 2020.

Estimate Q4-2013 will be about the same to slightly less revenue.

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Company and Industry specific commonly used acronyms and terms

ASP: Average Sellig Price

HDD: Hard Disk Drive. Standard magnetic platter storage device common in PCs and laptops.

Hybrids: Drives that have both HDD and SSD components.

SMR: Shingled Magnetic Recording technology. Improved HDD technology

SSD: Solid state drive. Flash memory. The common storage for mobile phones.

TAM: Total Addressable Market. The estimated amount of storage space needs over a given time.

Resources

Company Website: http://www.seagate.com/

Investor Relations: http://www.seagate.com/au/en/about/investors/

Morningstar: http://quotes.morningstar.com/stock/s?t=stx

Transcripts: http://seekingalpha.com/symbol/stx

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.