The 2013 Retirement Portfolio Candidates: Seagate

by Lawrence Meyers | February 7, 2013 7:00 am

With the new year underway, I decided to rebalance my retirement portfolio. This includes taking cash that was added to my retirement account and finding some worthy candidates to add to it. Today, I’m looking at Seagate (NASDAQ:STX[1]).

In some ways, this article could be titled, “Whatever happened to…” Seagate used to be a name that was on the lips computer geeks everywhere. It still does what it’s pretty much always done — make and sell hard disk drives.

But Seagate faces some tough challenges, as the modern PC is slowly giving way to all the wonderful handheld and mobile devices we enjoy. Fewer PCs — and increasingly popular cloud-based storage[2] — mean fewer hard drives to sell. Even worse, the company faces perpetual competition from Western Digital (NASDAQ:WDC[3]).

Still, Seagate fights on. It enjoys higher-end clients and is always coming out with new products to keep competitive. Sure, the PC business is dying out, but Seagate had the foresight to move into enterprise gear. As long as it keeps innovating, there’s plenty of market share to grab.

PCs may be a sunset industry, but there’s so much computing going on that storage needs are increasing. Think about how much content is being created. All that content has to be stored. It all needn’t be hard drives, either. Wireless can be used, and the cloud isn’t big enough (at least yet) to handle the massive amount of content that exists and continues to be generated.

In the most recent quarter’s results, released last week, Seagate offered both good and bad news. Revenue surged 14.7% to $3.67 billion. Gross profit ticked down just a tad to $9.92 million from $1.01 billion. Overall earnings showed little growth, up to $1.30 per share from $1.28.

Gross margins are what made a lot of people unhappy, though, because they got whacked down from 31.6% to 27%. This was due to cost and pricing issues, so it’s worth keeping an eye on, although these factors tend to be cyclical.

Seagate’s financial footing is what helps tilt the bar further toward the optimistic side. The company is loaded with cash — $1.87 billion — which is offset with $2.82 billion of reasonably priced debt.

Yet for this investor, Seagate’s cash flow is what’s impressive. The company pumped out $844 million in cash flow in the quarter, and on an annual basis, free cash flow has been increasing. Seagate has generated $3.6 billion in free cash flow in the trailing 12 months, and paid out only $600 million of it in dividends.

This is ultimately why I like Seagate for a retirement portfolio. It’s paying a 4.5% yield with room to grow. It’s barely trading at over 6x earnings. Some may say that even this is too expensive for company expected to shrink EPS by 8% annually over the next five years.

That may be true, but the cash flow is so strong that it’s worthy of consideration. I think enough questions exist for superconservative investors to look elsewhere, but as one of the two big names in storage, it’s probably a safe bet.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

  1. STX:
  2. increasingly popular cloud-based storage:
  3. WDC:

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