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Seagate Technology PLC (STX): Two Minor Concerns to Monitor

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Seagate Technology PLC (NASDAQ:STX)Seagate Technology PLC (NASDAQ:STX) has been one of my favorite stocks for many years — in my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I described it as the quintessential example of a value investment. While I am still holding today, and don’t yet have plans to sell, there were two things that bothered me from the company’s market-moving quarter.

Earnings at a Glance

During the final two days of last week Seagate Technology PLC (NASDAQ:STX) had gains over 11% as the stock reached new all-time highs and crossed over $40. These gains came after the company crushed FQ3 earnings expectations. For the quarter, Seagate Technology PLC (NASDAQ:STX) posted revenue of $3.53 billion ($150 million better than the consensus) and an EPS of $1.26 ($0.11 better than expectations).

Seagate also bought back $102 million worth of shares and paid off $379 million in debt. By most accounts, it was a great quarter, one in which revenue declined 21% but was expected due to the weakness in PCs. When you consider the stock’s 4% yield and its price/sales of 0.90 and its forward P/E ratio of 7.50 then you realize that Seagate was priced accordingly to see fundamental declines, hence making it a good stock.

Two Minor Concerns to Monitor

Market Share

Seagate Technology PLC (NASDAQ:STX) saw a lot of its quarterly growth within segments of the cloud, however Seagate has been the number one company in the hard disk drive market for the last few years. Therefore, I did find its revised market share a bit worrisome. The company estimates that the hard-disk drive market saw 136 million shipments in FQ3 and that its market share was 41%. Not a bad piece of market share, although when compared with Western Digital Corp. (NASDAQ:WDC) it does create some concern.

Western Digital Corp. (NASDAQ:WDC) reported earnings on April 24 and also saw a solid quarterly beat. Western Digital operates in the same business as Seagate, in fact the two are virtually the same. With there being no industry numbers on actual shipments, the market size and demand is typically taken from the estimates of these two companies. For the last quarter, Western Digital estimates 135.4 million shipments, which is consistent with Seagate Technology PLC (NASDAQ:STX)’s 136 million estimate.

According to Seagate, its share was 41% and this was down from 43% in the previous quarter. On the other hand, Western Digital pegged its share at 44.4%, up from 43.6% in the previous quarter. Hence Seagate lost market share and Western Digital Corp. (NASDAQ:WDC) gained share. Back on April 23, I tweeted (@bnichols9883) to pay attention to Seagate’s market share, and possibly use it as a method to determine the company with the most upside. I found it worrisome that Western Digital saw such a large boost and was watching closely to see how Seagate performed. And while both companies still command almost 90% of the market (collectively) and are cheap relative to fundamentals, I would watch in future quarters to see if this trend continues.

Gross Margin

Unlike the SDD market used in tablets and smartphones, the HDD market commands high margins and is the reason that Seagate Technology PLC (NASDAQ:STX) is able to return large amounts of capital to its shareholders. In 2012 margins saw great improvements, and in 2013 one of the major concerns has been the performance of margins with the decline in PCs.

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