Zacks_Analysts' Blog : Seagate Shares Climb on Upbeat View - Analyst Blog

Seagate Technologies plc’s (STX) shares are trading higher these days on better-than-expected revenue guidance for both the December and March quarters. Recently, the hard disk drive (HDD) manufacturer provided a financial update, indicating that shipments for December would be around 43 million units (versus the most recent guidance of 40–50 million) and revenue of roughly $2.80 billion.

The revenue guidance is far better than the Street expectation of $2.69 billion. The gross margin is expected to be roughly 15–20% higher than the company’s long-term goal of as much as 26.0%.

Seagate noted that while its own Thai facilities were not affected by the flooding, it may face challenges in making hard drives because of difficulties in getting parts. Hence, assuming some impact, the HDD manufacturer has narrowed its expectation for unit shipments. On the other hand, Seagate provided an upbeat guidance for revenue and margins. This could be due to demand for HDDs surpassing supply.

The floodwaters that have engulfed much of the industrial regions in Thailand have spared both Seagate factories. But the majority of production facilities (roughly 60% of the world’s HDD production is in Thailand) have been stalled, leaving the HDD supply disruption inevitable.

The situation is extremely beneficial for Seagate. Its nearest rival Western Digital Corp. (WDC) has been tremendously affected by the flood, with the commoditized nature of the market opening up an opportunity for Seagate to build market share and raise unit prices.

Moreover, with the pending Samsung acquisition, management believes the company's capacity will be approximately 70 million units in the March quarter of 2012. All these factors make the company’s outlook appear achievable to us.

For the March quarter, Seagate expects revenue of at least $3.75 billion and gross margin of at least 29%. This guidance includes a full contribution from Samsung and assumes fairly stable pricing moving forward. Overall, Seagate expects its component suppliers to ship enough parts for the hard-disk drive companies to normalize the supply chain next year.

Seagate’s position in the HDD vertical looks impressive, though we think that the uncertain PC market situation will not allow easy growth. The growth of tablets is cannibalizing the usage of HDDs, while increasing usage of SSDs (solid state drives).

We believe that Seagate’s strong foothold in the Enterprise SSD market will help it to generate healthy revenue growth in fiscal 2012 and beyond, which in turn will improve margins.

Currently, Seagate has a Zacks #2 Rank, implying a short-term Buy rating.