Why Seagate May Be Shunned for Much Longer

Seagate Technology PLC (NASDAQ: STX) is back in the dog house. The good news is that the company’s valuation is dirt cheap again. The bad news is that selling a value story into horrible fundamentals is hard to do. And there are so many tech stocks that are on fire and hitting every metric that you have to worry about investors turning their back on Seagate for multiple quarters ahead.

The company said that it had $0.65 in earnings per share (EPS) and $2.41 billion in revenue. Consensus estimates from Thomson Reuters were $0.99 in EPS and $2.57 billion in revenue. Along with poor earnings and weak guidance wrecking the story, Seagate implemented additional restructuring efforts in a move that will cut another 600 jobs globally. And along with all that, Seagate’s chief executive was forced out. Seagate announced the replacement of long-time CEO Steve Luczo with Chief Operating Officer David Mosley.

Within the company’s announced reduction in HDD capacity, Seagate is now looking to generate a more efficient and higher-capacity mix. Unfortunately, its enterprise business that is in the center of the strategy missed badly.

Things are now bad enough at Seagate that even the credit rating was cut. S&P lowered Seagate’s ratings to BB+ from BBB-, and that means Seagate is no longer investment grade. At least its outlook was put at Stable.

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Here is how the analyst downgrade brigade looked on Wall Street this week:

• Benchmark downgraded Seagate to Hold from Buy.
• BMO Capital Markets has a Market Perform rating but cut its price target to $35 from $42.
• Citigroup has a Neutral rating but cut its target to $36 from $42.
• Cowen has an Outperform rating but cut its target from $45 to $36.
• Craig-Hallum downgraded it to Hold from Buy and cut its target price to $37 from $56.
• Maxim Group lowered its target price from $46 to $38.
• RBC Capital Markets has a Sector Perform rating and cut its target price to $35 from $45.
• UBS has a sub-price target now, cutting its target price to $28 from $34.

Argus has a Hold rating, and the independent research firm has a fair value calculation of $45. While Argus noted what would appear to signal an undervaluation situation, their exception to that “cheap” notion is that Seagate’s business is shrinking and margins are contracting at the same time when memory industry rivals are reporting soaring sales and are expanding their margins.

As far as Seagate’s valuation, the consensus analyst estimate for earnings was $3.70 per share, giving Seagate’s new $32.61 price a valuation of only 8.8 times earnings. And the new $9.5 billion market cap is only just under one times expected revenues of about $10 billion.

This is a bad time to be a troubled tech stock. There are so many good choices in the memory and devices space in technology to choose from that selling a value story is no simple task. Seagate just may have joined the ranks of 11 companies that have lost their narratives.

Ahead of the earnings move, Seagate was barely higher in 2017, and it was up 26% from a year ago. Seagate closed at $32.61 on Friday, down 18% from the $39.76 pre-earnings close. It has a trading range of $30.09 to $50.96 over the past 52 weeks.

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