STX is up 37% for the year. Will it keep going?

June 21, 2018

STX is up 37% for the year. Will it keep going?

Investing in the year 2018 has been markedly different than it was in 2017. Where it seemed like last year you practically couldn’t miss the mark – everything was going up – this year has seen a lot of uncertainty bring volatility back into the marketplace. A lot of well-known stocks have been fortunate to tread water, and if the last week is any indication there could be more pain ahead.

Seagate Technology PLC (STX) has been one of the rare exceptions, a star performer that is hovering just a few dollars below multi-year highs. After hitting a low point in October of last year around $30 per share, the stock has rallied to just below $59 as of this writing, peaking in April around $62 before sliding back to its current price. Perhaps that 60%-plus performance since that low point is fitting, given that the stock endured some pretty wide swings in price during 2017 to finish the year at a modest net gain of about 8%.

Even as trade war fears roil the markets and spook investors, technology has generally remained one of the most in-favor sectors of the market this year. That has certainly played into STX’s favor, and of course that momentum could continue into the foreseeable future, especially as investors gravitate towards stocks with limited perceived exposure to tariff-exposed regions of the world. That could lead investors to keep buying STX, which is headquartered in California despite being incorporated in Ireland. There is some risk, however, since the last quarterly report indicates that only 29% of the company’s revenues come from U.S. sales. There is pretty big exposure to Asia, with 54% of revenues coming from that region (a deeper breakdown by country isn’t provided) and 17% from Europe. All told, approximately 71% of the company’s total revenues have come from regions that are being directly targeted by U.S. tariffs. I think there is far more downside risk than upside potential for STX right now, which I’ll outline below.

Fundamental and Value Profile

Seagate Technology public limited company is a provider of electronic data storage technology and solutions. The Company’s principal products are hard disk drives (HDDs). In addition to HDDs, it produces a range of electronic data storage products, including solid state hybrid drives, solid state drives, peripheral component interconnect express (PCIe) cards and serial advanced technology architecture (SATA) controllers. Its storage technology portfolio also includes storage subsystems and high performance computing solutions. Its products are designed for applications in enterprise servers and storage systems, client compute applications and client non-compute applications. It designs, fabricates and assembles various components found in its disk drives, including read/write heads and recording media. Its design and manufacturing operations are based on technology platforms that are used to produce various disk drive products that serve multiple data storage applications and markets. STX has a current market cap of $16.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 33% while sales grew only modestly, at about 5%. It’s hard to grow earnings faster than sales, and in the long term isn’t really sustainable; even so, I generally take this as a positive sign that management is effective at maximizing their business operations.

Free Cash Flow: STX has generally healthy free cash flow of a little over $1.5 billion over the last twelve months. This number has increased from a little under $1 billion in the last quarter of 2016.

Debt to Equity: the company’s debt to equity ratio is 3.17, a high number despite its decrease from a little over 4 in the quarter previous. The company’s balance sheet indicates their operating profits are more than sufficient to service their conservative debt levels, with healthy cash and liquid assets available as well.

Dividend: STX pays an annual dividend of $2.52 per share, which translates to an annual yield of 4.3% at the stock’s current price. Not only is that remarkable for a tech company, most of which don’t pay any dividend at all, but this is also well above the industry average.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for STX is $4.75 per share. At the stock’s current price, that translates to a Price/Book Ratio of 12.32. This is as clear a sign to me as any other of the stock’s overpriced status, since the stock’s historical average is only 6.0, and the industry average is only 4.5. The implication here is that the stock is priced more than twice as high as it should be under normal market conditions. Very few value-based investors would be willing to consider buying this stock at a price of more than $28 to $30 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.


Current Price Action/Trends and Pivots: The diagonal green line traces the stock’s upward trend since October of last year. That trend has been providing solid support for the stock for the past month; however since March the stock has held within a range at the top of the trend. Support is in the $55 range, with resistance around $60. The stock is currently sitting approximately the middle of that range right now.

Near-term Keys: The stock’s all-time high was reached late in 2014 at around $66.50 per share, which implies that even if the stocks breaks above its current range, its near-term upside is very limited. On the other hand, a break below $60 would probably not find immediate support until somewhere between $50 and $52 per share. Beyond that point, the stock’s 52-week low around $30 is not out of the question – especially if the company’s revenues and profits are negatively affected by extended trade tensions between the U.S. and its trade partners.

By Thomas Moore Investiv Daily Technology Share: