Will Western Digital's Deal with Komag Play Havoc with HMT?

Also, a noteworthy change in Bebe's SEC filing.
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Publish date:

Fried-Day:

HMT hotline:

The news just seems to get worse for

HMT Technology

(HMTT)

. Earnings have been missing estimates for several quarters, insiders have been selling big chunks of stock and now HMT's biggest competitor,

Komag

(KMAG)

, is entering an unusually cozy relationship with

Western Digital

(WDC) - Get Report

. Western Digital just happens to be one of HMT's largest and most prized customers.

First about the deal, announced late Wednesday: Komag is buying Western Digital's internal thin-film media business, which makes disks used inside its hard drives, in a stock swap valued at roughly $80 million. That'll make Western Digital a large Komag investor. Terms of the planned strategic relationship include a three-year volume purchase agreement, whereby Western Digital will buy "a substantial portion" of its media from Komag.

In other words, it'll be in Western Digital's best interests to see that Komag gets as much business as possible. Komag was already a Western Digital supplier.

Mark Specker, an analyst at

SoundView Technology

who covers Western Digital, told his sales force yesterday that he thought the deal would not be good for HMT. HMT execs couldn't be reached (they stopped returning my calls long, long ago), but a Western Digital spokesman was less gloomy. He said Western Digital is not "going to sole source to anybody." He added that HMT will continue "to have opportunities" to qualify for Western Digital biz. "We're by no means shutting the door on HMT as a supplier of media," he added.

Maybe not, but analysts had been counting on growth in supplying Western Digital's desktop PC biz to help restart HMT's growth. Given the volume purchase agreement, it doesn't bode well for you know who, especially when four customers, including Western Digital, each individually accounted for at least 10% of HMT's biz at the end of last year.

And from the timing-is-everything department: Jeff Vinik's

VGH Partners

, which often shows up as a large investor in heavily shorted stocks, filed this week that it owns 9.9% of HMT.

Bad news for Bebe?:

Bebe Stores

(BEBE)

has been on a tear (so to speak) since the California-based clothing chain went public last year. Comp-store sales surged ahead at a robust and impressive 27% in the last two quarters. But now the company is suggesting it may not be able to keep up that growth. In its 10-Q filed this week, Bebe added the warning: "While the company is experiencing comparable-store sales growth increases to date that are consistent with those experienced in the quarter ended December 31, 1998, the company believes that such increases may be lower in the future."

Sure, easy to say, "Duh!" And easy to call it boilerplate. But it wasn't there the prior quarter, and changes like that are always worth noting, especially for a company like Bebe, whose CEO owns around 88% of what is a thinly traded stock. That's doubly true when that thinly traded stock has been booming as the 90-unit Bebe's has. In the past year its stock has more than tripled, and at 33 times 2000 estimated earnings it now trades at a hefty premium to the likes of

Abercrombie & Fitch

(ANF) - Get Report

(22 times) and

American Eagle Outfitters

(AEOS)

(19).

"We've run nine quarters of double-digit comps," says CFO Blair Lambert. And while the company's stores tout impressive sales, on average, of $700 per square foot, "We want to make sure people don't get too runaway in the head with what the opportunity is ... it's a tempering," he says. He adds that over the long run most of Bebe's growth will come from opening new stores.

As for the stock: "Ultimately the market will value as the market will value," Lambert says.

Indeed it will.

Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.