Despite Turbulent Times, Disk & Storage Drives A Cheap Port O’ Call (WDC, STX)

This last weekend we began screening for technology stocks with extremely low P/E multiples which are still showing growth.  The two giant independent disk drive and hard drive data storage stocks of Western Digital Corp. (NYSE: WDC) and Seagate Technology (NYSE: STX) showed some almost shocking values today and ahead.  There are of course caveats as this has been a major growth sector and there are likely to be more analyst estimate cuts in the sector even after the slight cuts seen since last week.  There is fierce competition among the top players, and Wall Street has perpetually given these discounted valuations to the market for several reasons.

If and when PC sales growth declines and if and when media device salesgrowth slows (both of which seem to be a gathering storm or at risk),then the need to keep buying more and more storage devices will comedown.  Some think flash drives may attack their business more than theycan fend off as well.  But these stocks are trading at almostunbelievable valuations, even if you begin factoring earnings warningsin the group.

Western Digital Corp. (NYSE: WDC) is cheap after a 5% drop to $20.20today and has a stated trailing P/E of less than 6.  As a bettermeasuring stick, its fiscal June-2009 estimate of $3.67 EPS gives it aforward P/E of 5.50.  Its $4.5 billion market cap and forward June-2009revenues give Western Digital a forward multiple of 0.53-timesrevenues.  It also trades with a ratio of about 1.8-times tangible bookvalue and it has nearly $5.00 cash per share on the books.  Analystestimates have been coming down over the last 3 months and the lastweek and their average price target is still north of $32.00.  At$20.20, it is at the bottom of its $18.33 to $40.00 trading range ofthe last 52-weeks. We’d also like to note that we had this one labeledas a cheap stock in 2006 which could become a target of private equityback during the merger mania.  During that craze, it went up from theteens into the $30’s and was an incredible winner for our specialsituation readers before.

Seagate Technology (NYSE: STX) is cheap despite some recent analystestimate cuts with its shares down over 4% at $11.55.  It is largerthan Western Digital yet still fits many of the screens forunbelievably cheap tech stocks.  Its stated trailing current P/E iseven closer to 5 and its fiscal June-2009 estimate of $1.56 gives it aforward P/E of 7.40.  With a $5.65 Billion market cap is actuallytrades at less than 0.44-times expected fiscal June-2009 revenues.Seagate trades at about 2.6-times tangible book value and has roughly$2.33 per share of cash on the books.  Analyst estimates for the comingquarters and for the next two years have already come in sharply overlast 90 days and again since last week to reflect the slowingenvironment.  Seagate’s average analyst target price is still north of$16.00.  At $11.55, it is at the bottom of its $10.79 to $28.91 tradingrange of the last 52 weeks.

These were part of our technology value screen stocks over this lastweekend for our special situation newsletter readers.  We do expectthat analyst targets will continue to come down if the macroeconomicpicture continues on its current path.  But when screening for lowvaluation multiple stocks, we have tried to factor in which stocks willbe able to weather the storm.

Jon C. Ogg
October 1, 2008