Two Tech Stocks Actually Priced to Reflect Risk, But Minting Money For Now
With the rise in smartphones and tablets just killing PC maker stocks, one might expect investors in hard disk drive makers Seagate Technology (STX) and Western Digital (WDC) to suffer the same depressing fates. But these guys are making out like bandits. In fact, after adding in dividends, Seagate shareholders are up 71% in the past 12 months, and Western Digital investors have marked 27% gains, as seen in a stock chart.
Seagate and Western Digital together sell about 85% of the world’s hard disk drives, splitting that market almost evenly. (Japan’s Toshiba makes most of the others.) That makes them two of the most important players in a massive but declining market (PC sales). But it also puts them smack in the middle of a boom in demand for data storage, which involves technology both companies make. Cloud services used to support mobile devices need hard disk drives, so both companies can benefit from increasing use of smartphones and tablets. Whether these drives have a long-term future in the mobile world – or enough of one to more than offset the PC’s iffy prospects – is really the million dollar question here.
Meanwhile, both Seagate and Western Digital balance sheets are strong, and their dividend yields at 4.1% and 2.1% are enticing. The shares still sit in the portfolios of several major hedge funds, although there has been some selling lately. Both shares trade at PE ratio of less than 6, making them cheaper than actual PC maker Dell (DELL). Hewlett-Packard (HPQ) has no earnings to compare to price.
Industry forecasts for their two key markets – PCs and broader data storage -- have not proven to be particularly reliable. Last year’s launch of new ultrabooks and Microsoft’s (MSFT) Window’s 8 was supposed to produce a small gain in PC sales, but worldwide shipments declined 3.2% instead, according to research company IDC. On the flip side, newer storage technology like flash and solid state drives hasn’t come close to replacing hard disk drives as once predicted. Seagate and Western Digital’s products so far remain necessary as very efficient and cost effective options for large capacity storage.
So shareholders are understandably trigger-happy. The PC industry that buys most of Seagate’s and Western Digital’s products may or may not be in permanent decline. The storage industry that buys the rest may need a lot more of their products in the future (because demand for storage is skyrocketing), or a lot less because they’ll use alternative technologies. That ambiguity helps explain why only a handful of analysts recommend buying these shares. They are outnumbered more than three-to-one by holds and a few sell recommendation. And why Seagate’s recently announced as-expected earnings and mildly weak current quarter forecast sent both companies sliding.
For now, these companies have cash and earnings enough to be good to their shareholders, and they promise to do so. Western Digital recently promised to return half of its substantial free cash flow to shareholders via dividends and stock repurchases. It initiated a quarterly dividend in September, and Seagate has raised its dividend three times since late 2011. Their cash also helps them make acquisitions to diversify their product lines.
Valuations suggest that there’s been a lot of fear about these companies’ futures for quite awhile now. Apparently, some investors know how to capitalize on that.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.