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Easy Sledding for Storage Makers

An upgrade to Seagate (STX - Get Report) and a sweetened outlook for Western Digital (WDC - Get Report) cheered storage investors and led the sector to modest gains.

Goldman Sachs analyst Laura Conigliaro raised her rating on Seagate to in-line from underperform. In a note to clients published Tuesday, she said that better seasonal demand, slightly improved desktop pricing and continuing strong sales of hard drives for notebooks and consumer electronics devices, such as digital video recorders, should help the company hit or slightly beat current-quarter estimates and "enter the seasonally softer March quarter with low inventories."

The same conditions bode well for rivals Western Digital and Maxtor (MXO) and should lead those companies to issue "incrementally more positive comments" in the next few days, Conigliaro wrote. Indeed, Western Digital raised its guidance late Monday (likely after Conigliaro wrote her report, but before it was published).

However, Conigliaro doesn't anticipate an immediate run-up in shares of Seagate. "Since STX has already run up from its low of $14, we expect any additional near-term gains to be fairly minor," she said. Goldman Sachs has an investment-banking relationship with Seagate.

Western Digital, which is occasionally viewed as a proxy for digital hardware at the consumer level, expects to earn 36 cents to 39 cents a share on revenue of $1.04 billion to $1.075 billion. Its old guidance was for earnings of 33 cents to 36 cents a share on sales of $1.025 billion to $1.075 billion.

In recent trading, shares of Seagate were up 75 cents, or 4.1%, to $18.26.

Seagate, which jumped to an early lead in sales of hard drives for use in consumer electronics devices, saw sales of 1-inch drives drop by about 50% to somewhat more than 1 million in the last quarter. Pushed by competition by flash memory, which is replacing hard drives in some consumer products, including Apple's (AAPL - Get Report) iPod nano and shuffle, sales of the small drives will likely be flat in its current quarter, the company predicted on its last earnings call.

Of the 1 million 1-inch drives sold in the quarter, about half went to products outside the digital-music market, including GPS devices and a new photo printer sold by Hewlett-Packard (HPQ - Get Report) that includes a hard drive.

In recent trading, Western Digital had gained 23 cents, or 1.6%, to $14.73; Maxtor added 8 cents, or nearly 2%, to $4.11.

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