Cash Cow Seagate (STX) Will Continue Strength as Industry Transforms - Barron's

April 16, 2012 2:38 PM EDT
Seagate Technologies (Nasdaq: STX) shares are sharply higher Monday following a bullish report from Barron's over the weekend.

Trading for just three times next year's earnings expectations, Barron's called Seagate one of the best tech play's outside of Apple (Nasdaq: AAPL).

Most of the positive sentiment surrounds Seagate's ability to generate tons of free cash. Seagate pays out 25 cents per quarter per share for an annual yield of about 3.7 percent. The dividend was just boosted 39 percent in January; some analysts expecting another increase within the next year.

In addition, the company keeps buying back shares to return more value to holders. The current program will cut the company's share count by 25 percent to 350 million in the current calendar year.

Already a leader in the market, Seagate will see upside from the continued tightness in the disk-drive market place following 2011's Thai flooding. Barron's noted the event caused about $45 billion in damages and also wreaked havoc on peer Western Digital's (NYSE: WDC) operations in the country.

Despite the increase in sentiment, the Street still is skeptical that momentum will be able to keep rolling in an industry with thin margins and fierce competition. In terms of competition, hard disk-drives (HDD), which tend to be a little bulky, are stepping aside for the up-and-coming solid-state drive (SSD) market. SSDs are used in portable devices like tablets and mobile phones. In addition, there's always the worry of lower PC unit sales.

Against the aforementioned arguments, one analyst -- who is bullish on Seagate -- believes explosion in PC-generated content will demand more memory, which HDDs will be able to meet. He even alluded to there being some scarcity in the memory market as supply lags. Part of the reasoning is price; most PC disk-drives go for under $100, setting themselves up as a reliable, cheap storage source.

With the industry in transition, Seagate's dividend and buyback efforts, coupled with a dominant market position and little need to make acquisitions, places the stock as a unique growth opportunity for the longer-term investor.

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