Seagate Technology plc (STX) delivered better than expected results for its fiscal 2012 first quarter on October 20. This prompted analysts to revise their estimates higher for both 2012 and 2013.
On November 3, the company provided bullish guidance for the next couple of quarters, and estimates continued to climb. It is a Zacks #2 Rank (Buy).
Based on current consensus estimates, analysts are projecting 60% EPS growth this year and 35% growth next year. On top of this, the company pays a dividend that yields a hefty 4.0%.
The valuation pictures looks attractive too, with shares trading at just 9.4x forward earnings.
Company Description
Seagate Technology manufactures hard disc drives, which are used as the primary medium for storing electronic data. It makes disk drives for a wide range of products, including computers, DVRs, and enterprise servers, mainframes and workstations.
The company was founded in 1979 and has a market cap of $7.5 billion.
First Quarter Results
Seagate delivered better than expected results for the first quarter of its fiscal 2012 on October 20. The company reported earnings per share of 34 cents, beating the Zacks Consensus Estimate of 31 cents.
Revenue rose 4% year-over-year to $2.811 billion, driven by an 8% increase in the Total Available Market (TAM) for hard disk drives. The company shipped 50.7 million units in the quarter, up 3% from the same quarter in 2011.
The gross margin declined, however, from 20.4% to 19.5% of revenue due to higher input costs.
Estimates Rising
Estimates rose following solid Q1 results and continued to rise after management provided a bullish outlook in a recent investor presentation. It is a Zacks #2 Rank (Buy).
The Zacks Consensus Estimate for 2012 is now $1.99, up from $1.53 just 30 days ago, and representing 60% growth over 2011 EPS. The 2012 consensus estimate is currently $2.69, up from $2.18, and corresponding with 35% EPS growth.
Seagate stands to benefit from tragic flooding in Thailand, where competitors like Western Digital (WDC) have a significant chunk of their production. This will create a shortage for the HDD market, which should raise prices and allow Seagate to take a big chunk of market share over the next several quarters.
Returning Value to Shareholders
Seagate has also been returning value to shareholders through stock buybacks and dividend hikes. In the first quarter alone, the company spent $128 million buying back its own stock and paid out $75 million in dividends.
It currently yields a juicy 4.0%. Seagate did slash and then suspend its dividend in 2009 before paying out its current quarterly dividend of 18 cents in April of 2011.
Reasonable Valuation
Although shares have nearly doubled since early October, the valuation picture still looks reasonable for Seagate. Shares trade at just 9.4x 12-month forward earnings, a discount to the industry average of 12.0x.
It sports a PEG ratio of 0.8 based on a very reasonable 5-year growth rate of 11.3%.
The Bottom Line
With surging earnings estimates, strong growth projections and a 4.0% dividend yield, Seagate looks very attractive at just 9.4x forward earnings.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
