Thursday: Komag's Warning Shouldn't Have Surprised

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Publish date:

By Erle Norton

and

John J. Edwards III
Staff Reporters

Komag's

(KMAG)

revelation Wednesday afternoon that its earnings in the second quarter ending June 29 will fall below those of the first quarter came as a surprise to many of the company's followers.

It shouldn't have.

After all, Komag's major customer

Seagate

(SEG)

has already said twice that its results in the fourth quarter ending June 27 will be hampered by slack demand. So it stood to reason that Seagate's suppliers would feel the impact.

And observers did link Seagate's problems to at least one other supplier.

Smartflex Systems

(SFLX)

has seen its earnings estimates by analysts and stock price fall since Seagate began talking about its sluggish demand.

Seagate accounted for 31% of Komag's first-quarter sales but, according to Komag's Wednesday release, should only account for 15% of its second-quarter sales. Still, throughout, Komag's earnings estimates remained intact. Earnings estimates remained unchanged at 45 cents a share, according to data-tracker

Baseline

, though its stock has slumped this month, showing that at least some folks put the pieces of the puzzle together correctly. Today, it's been cut by roughly a third and is trading at just above 16.

To be sure, some of Komag's problems apparently were self-induced. The company, for instance, told analysts Wednesday that some of its deliveries to Seagate were late, said Brian Goodstadt, an analyst with

Standard & Poor's Equity Group

. And Seagate itself is making more of the thin-film media for computer hard disk drives that Komag supplies. But even that was pointed out deep in a

Wall Street Journal

story in February.

Cody Acree, an analyst at

Southwest Securities

who no longer follows Komag, says analysts were tripped up because they banked on Komag's strong track record despite Seagate's problems. "You have very solid management at Komag, very solid technology," Acree says. "It's by far the industry leader. You combine those positives and what you get is a benefit of doubt."

Thursday's markets were relatively quiet at lunchtime. The

Dow Jones Industrial Average

was down about 5 at 7685, while the

Nasdaq Composite Index

was off about 3 at 1443 and the

S&P 500

off just slightly at 888.