Seagate Stock Edges up Amid Chatter of Production Cutbacks

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Wall Street is atwitter with chatter that

Seagate

(SEG)

is reducing its production schedule from five days to four.

"If the rumor is true, I would see it as a very healthy move," says Joel Pitt, computer peripherals analyst with

Deutsche Morgan Grenfell

. "The bottom line is that Seagate's high performance drives have not been selling as much as anticipated. They encountered weaker demand and more competition and it has been impacting the bottom line. This move sounds like good business judgment."

Indeed, with the workplace cutback talk dominating many tech-oriented trading desks, the disc-drive maker's stock has moved higher. In afternoon trade, Seagate is up 3/4, or slightly more than 2%, from its Wednesday close of 36 7/8 on moderate trading. The stock is still well below its 52-week high of 56 1/4 reached in February. The stock hit its 52-week low of 25 3/8 back in early July, just after its less-than-stellar earnings results were announced.

Despite the market's positive perception of a cutback in production at Seagate, company officials responded defensively to inquiries.

"That's a broad sweeping statement

for people to make," says Julie Still, vice-president of corporate communications. "Production schedules will always vary over the course of a quarter and be adjusted to meet demand.

But the end result is that total unit volume over the quarter will be up."

Seagate, which dominates the high-performance drive sector, has seen its market share decrease from more than 60% to nearly 50% over the last year due to weakness in the high-end performance drives, lower profitability from desk top drives and stiffer competition from newcomers

Quantum

(QNTM)

and

Western Digital

(WDC) - Get Report

, as well as tried-and-true

IBM

(IBM) - Get Report

. Consequently its earnings have suffered. In the fiscal fourth quarter ended in June, Seagate earned 61 cents a share, well off the $1.10 a share analysts estimated at the beginning of the quarter, according to

First Call

.

For the current quarter, ending September 30, First Call consensus has already dropped three times from 65 cents a share (five weeks ago) to 49 cents two weeks ago to 44 cents last week. And, earlier this month, both a

Lehman Brothers

analyst and a

Morgan Stanley

analyst downgraded the stock from outperform to neutral.

"The company's been struggling, that's no secret, it would make sense for them take such action," says

PaineWebber

analyst Paul Weinstein, who recently downgraded the stock to neutral. "Cut backs are good for the industry, but bad for Seagate. It does show an indication that the company does not want to continue to overproduce."

Brian Goodstadt, an analyst with

Standard & Poor's Equity

, who holds a buy rating on the stock, agrees that this move is not particularly surprising, considering that the company has not been selling as much as they anticipated.

"This is very good news. They've been saying for several months how tough things have been. Its inventory has been building up and backing up. This should help to get them back on line," says Goodstadt, who estimates earnings for the current quarter to come in at 50 cents, and $3.20 for fiscal 1998. "I expect them to pick back up in the December quarter. I think its setback will only be short-term."

Adds Deutsche Morgan Grenfell's Pitt, who has a hold rating on the stock. "When players in the industry make good business decisions, its very positive for the sector," he says. "The thing you want to worry about is if a company that wasn't selling all their product went full steam ahead to produce more, which clearly is not the case here."

"At the moment, the disc-drive industry is going through a difficult time," Pitt adds. "So it's very important that the players within this sector run their businesses rationally. Making a decision like this

to cut back production is very important."