Seagate Technology PLC (STX), Outerwall Inc (OUTR): Small-Cap Tech Names Cheap After Earnings

Finding value in technology stocks isn’t easy. The industry is known for high multiples and very little forward visibility, which is why so many value investing legends like Warren Buffett or Seth Klarman typically avoid technology names.

Sometimes Mr. Market delivers opportunity, however. These two small-cap tech stars deserve a bid, even after recent earnings disappointments.

Investors dump hard drives

In the fourth quarter, Seagate Technology PLC (NASDAQ:STX) beat on the top and bottom line, posting earnings of $1.20 per share, above analyst estimates of $1.19. Sales beat by $10 million, for $3.43 billion during the quarter.

That wasn’t good enough for investors, however, as shares dropped by more than 8% after earnings.

Seagate Technology PLC (NASDAQ:STX) suffered from what investors like to call a “tough lap” over last year. In the fourth quarter of 2012, Seagate Technology PLC (NASDAQ:STX) sent twice as much to its bottom line and posted sales 33% higher than in the current quarter.

We shouldn’t be surprised that Seagate Technology PLC (NASDAQ:STX) can’t keep up with earnings or sales from 2012. Last year’s top-line was buoyed by a shortage of hard disk drives after a flood in Thailand. Temporary flooding and a loss of supply gave the two major players, Seagate Technology PLC (NASDAQ:STX) and Western Digital, pricing power that allowed for margin expansion.

The economics of the hard disk manufacturing business are returning to normalcy.

As it turns out, normalcy isn’t all that bad. Seagate generated $394 million in operating cash flow, distributing $137 million to shareholders as dividends, and repurchasing nearly $42 million worth of stock. Going forward, the growth of the cloud should continue to drive hard disk sales as solid-state drives cost six times more than HDDs on a storage-per-dollar basis.

For the full year, Seagate earned $1.8 billion, which leaves Seagate Technology PLC (NASDAQ:STX) to trade for just 8 times fiscal 2013 earnings. Given the company’s big discount to the market, I still think it’s worth a bid by value-oriented investors who like the big dividend yield of 3.78%.

Money-making machines fall out

Outerwall Inc (NASDAQ:OUTR) made a business of coin counting and DVDs by kiosk, but investors aren’t happy with its latest earnings report. The company’s strongest segment, Redbox, posted its second decline in same store sales of 6.8%.