Stock Up on Storage

The buzz around EMC has almost entirely been around its IPO of VMWare (VMW - commentary - Cramer's Take), but that is far from all the company has to offer. Compared with the second quarter of 2006, EMC's systems revenue increased 18% year over year, led by strong revenue growth from the company's midrange information storage products.

EMC's systems revenue represented 43% of total second-quarter revenue. However, on the conference call, management said the pricing environment has always been competitive and that it doesn't "see any significant sea change here in the pricing environment."

Iomega saw 46% year-over-year revenue growth and an increase in gross margins from 16.7% last year to 20.5% this year. That would seem to support the pricing power hypothesis, but nobody seemed to notice much. Although the stock rallied ahead of that report, it has gone nowhere since.

Hutchinson is one of the disk-drive industry's top suppliers. It actually bucked tech industry norms and raised prices, stating in its third-quarter press release, "Overall average selling price in the fiscal 2007 third quarter was $0.80, compared with $0.79 in the preceding quarter and $0.84 in the fiscal 2006 third quarter."

"The increase in average selling price compared with the preceding quarter resulted from a higher percentage of newer products in the fiscal 2007 third-quarter sales mix. 'We expect our average selling price to be flat to slightly up over the next year as our sales mix continues to shift to a higher percentage of newer products,' said [CEO Wayne] Fortun." How's that for evidence supporting the PPI report? You wouldn't guess it from the way the stock has acted over the last year.

Quantum's GAAP gross margin rate was 31.8%, a significant increase over the 27.9% rate in the same quarter last year, and its best performance in three years. Seagate also beat estimates.

Western Digital raised guidance and gives credit to improved pricing power. "Western Digital also said its gross margin should hit 17.5%, rebounding from lows in previous quarters and above its prior estimate of 15.5%. The change reflects firmer pricing power after years of price wars with Seagate and Asian rivals like Hitachi," according to a company statement.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.