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Disk Drive Stocks Could Thrive

Three that have potential in a market in which value is hard to find.

This column was originally published on RealMoney on Oct. 30 at 12:11 p.m. EST. It's being republished as a bonus for readers.

It isn't too often you can say this (every few years, at best): It feels like the disk drive stocks have considerable near-term upside potential.

Everyone is hoping that



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Vista operating system will drive demand for new PCs; one potential caveat is how much this has already been priced into the group.

The Amex Disk Drive Index is up about 8.7% year-to-date, having bottomed out in August.

Seagate Technology

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posted solid results last week for its first quarter, which ended in September. Its May acquisition of Maxtor has been weighting on margins and profit, and there is little pricing power in the industry.

Seagate is also the most expensive stock in the group at 13.5 times expected full-year earnings. That said, the company pays a roughly 2% dividend yield, management is set to buy back $2.5 billion worth of shares and Seagate's earnings are expected to grow 51% in fiscal 2008 (ending in June). That support may be enough to drive shares from $22.50 today to the mid $20s over the coming months.



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, the smallest player in the group, was also upgraded by Deutsche Bank this morning. The broker thinks the company's desktop outlook has stabilized and that it could gain share in the competitive notebook market. Even up about $2 today, at $38.40, Komag trades at just 8.5 times expected 2006 earnings.

Western Digital

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, in the middle valuation-wise at 10.2 times expected full-year earnings, has options dating issues. The company found 19 instances in which grants were mispriced, which will lead to a $21 million total restatement, though it determined that no wrongdoing was committed by the current management team.

Western Digital is scheduled to post its September quarter results Thursday evening. The company has the lowest costs in the industry, which allows it to be aggressive with pricing to capture market share. If the options issue is truly resolved and the company posts a good number, the stock could rally from about $18 into the low $20s by the end of the calendar year.

On the whole, all three of these companies have something going for them in a market where I'm otherwise hard-pressed to find value.

David Peltier is a research associate at 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. Peltier appreciates your feedback;

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