S&P Raises Seagate (STX) to Investment Grade with Stable Outlook

Standard & Poor's Rating Services raised its corporate credit rating on Ireland-based Seagate Technology plc (Nasdaq: STX) to 'BBB-' from 'BB+', reflecting our expectation that the company is likely to stabilize its revenues and will continue to moderate shareholder returns and investment spending such that its leverage is contained to less than 2x. The outlook is stable.

We are also raising the issue-level ratings to 'BBB-' from 'BB+'. Because the ratings are going to investment grade from speculative grade, we are also withdrawing the '3' recovery ratings on the company's debt.

"The ratings on Seagate reflect its business concentration within the hard disk drive (HDD) sector, which is highly cyclical and threatened by a secular migration to SSD technology, resulting in our assessment of the company's business risk profile as 'fair,'" said Standard & Poor's credit analyst John Moore.

We believe HDD industry consolidation over the past two years, including Seagate's purchase of Samsung's HDD business in December 2011 and Western Digital's purchase of Hitachi's HDD business at about the same time, contributes to greater industry pricing stability. Seagate, with about $3.4 billion in revenues for the quarter ended June 28, 2013, currently has very strong unit market shares in PC and enterprise HDD markets, overall in the 40% area, which we expect will continue to support its competitive position.

The outlook is stable, based on our expectation for Seagate's profitability to remain ample over the coming two years, albeit with revenue and earnings moderation related to weak PC industry conditions and SSD substitution. Considering Seagate's business prospects and financial policies, we expect the company will continue to accommodate its share repurchases, dividends, and acquisition spending within a 2x leverage framework appropriate for the rating. Given the range of leverage that we anticipate over time, a lower rating would likely be the result of a more aggressive posture toward shareholder returns and acquisitions and an accelerated secular shift to SSD technology, resulting in leverage sustained over 2x. Business risks related to SSD substitution limit the possibility of a higher rating over the next two years.

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