Greenlight Capital’s second quarter investor letter is out. David Einhorn built a medium size position in Seagate (STX). Einhorn already had $47 Million in STX at the end of the first quarter. He probably increased his position to the $200-$250 Million range. Eddie Lampert was the largest holder of STX among the 300+ hedge funds we track. Lampert had $114 Million in Seagate. Jonathan Jacobson’s Highfields Capital, Ken Griffin’s Citadel, Clint Carlson’s Carlson Capital, Larry Robbins’ Glenview, and Benjamin Slavet’s Ascend Capital are also among the other holders of STX.
Here is why David Einhorn is bullish about Seagate:
Seagate Technology (STX) is a manufacturer of hard disk drives. Hard disk drives are used in desktop and notebook PCs, external storage devices, enterprise storage, digital video recorders, and other consumer applications. The market is concerned that prospective hard drive unit demand will be weak due to macro weakness, substitution to flash (solid-state) storage, cannibalization of PC sales by tablets, and greater storage efficiency in the cloud. Though we don’t expect unit demand to fall anytime soon, the hard drive companies have flexibility in their business models and should be able to adjust their operations to protect profitability should unit demand decrease. Hard disk drive technology represents the cheapest, highest capacity storage solution in a world where data needs continue to grow exponentially.
STX is currently in the process of acquiring Samsung’s hard drive operations. Western Digital, its leading competitor, is currently in the process of acquiring Hitachi’s hard drive operations. Following these transactions the industry will have 3 rather than 5 major players, which should increase operating stability. STX management has a large equity interest in the company and appears to be focused on shareholder return. STX repurchased $710 million of stock (~10% of shares outstanding) in the last 2 quarters and has $1.6 billion of capacity remaining under the current repurchase authorization. In April, the company also initiated an $0.18 per share quarterly dividend, providing a 4.5% yield. The Partnerships established their position at $16.06 per share. We estimate that STX has at least $3 per share of earnings power. STX shares ended the quarter at $16.16 each.