A New Addition to the Portfolio

PC upgrades and a stronger retail market should put this company back in the driver's seat.
By Stocks Under Ten Staff ,

This alert was sent to subscribers of TheStreet.com Stocks Under $10 at 9:31 a.m. EST on Thursday, Feb. 10.

We are going to add 700 shares of Maxtor (MXO:NYSE) to the model portfolio with the stock trading at $5.34.

Maxtor makes hard-disk drives for personal computers and supplies industry leaders like Dell and IBM. In addition, the company sells its storage devices directly into the retail channel. In 2004, end-user sales at retail stores accounted for 7.7% of sales, up about 50% from 2003 levels.

This Inflection Point play is a low-dollar way to benefit from a strong personal computer upgrade cycle and a strengthening retail business as products like digital cameras and MP3 players that offer better quality and more functionality require increased storage. The stock is trading close to the bottom of its historical price-to-sales range of about 0.2 to 0.8 times sales at its current 0.35 times sales here, and we believe the industry tail winds will drive double-digit percentage upside to the stock.

In its most recent quarter, reported last week, Maxtor lost 13 cents a share on sales of $1.03 billion. The top-line number came in ahead of the company's guided range of $960 million to $1.01 billion and topped Street forecasts of $990 million. And gross margins, which are a key measure of where the disk-drive makers are in the demand cycle, expanded from about 6.6% to 8.1%, an increase of 26%, in the quarter, signaling a good opportunity to get into the stock early enough to particpate in a rally.

In addition, management highlighted initiatives designed to lower costs and drive profitability in the second half of 2005 and end a three-quarter money-losing streak because of weak enterprise demand and pricing pressure in some storage products.

For one, Maxtor said it plans on trimming its headcount by 200. Additionally, the company plans on manufacturing an increased portion of its products in China this year where the costs of production are generally lower.

At its current quote, Maxtor is trading significantly below its 52-week high of $10.68 a share, and we believe the stock is poised to rise in the coming months as demand for personal computers and increased operating efficiencies drive financial upside. As the company delivers better results, we expect to see some of the 16 analysts with sell or neutral ratings on the stock revise their views higher.

William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. They welcome your feedback and invite you to send your comments to

stocksunderten@thestreet.com.

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