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Disk Drive Sector

Stocks followed:

company ticker symbol
Hutchinson HTCH
Komag KMAG

Maxtor

MXTR
Quantum DSS DSS
Quantum HDD HDD
Read-Rite RDRT
Seagate SEG
Western Digital WDC

updated 9/30/00

Sector Rating

6 month outlook: 9/10
1 year outlook: 9/10

We have been positive on the disk drive sector for some time. We have covered Western Digital, Quantum DSS and Quantum HDD in the members section. We initiated coverage on Komag and Read-Rite in June in our Live! Commentary section. All 5 companies were initiated with favorable ratings. In particular, Komag, Read-Rite and Western Digital were candidates for a quick double (all three traded between $2-4).

The outlook for the disk drive group is still quite positive, despite the PC sales growth problems, as indicated by Intel and Apple. Disk drives today are not used just in PCs, but in network storage devices as well as new digital products that allow you to save TV programs onto a hard drive (e.g. TiVo). Read-Rite has completely sold out its inventory for the current quarter, giving it pricing power for the first time in recent memory. The company even expects a profit from its core business in the 4th quarter. Hutchinson also came out with an upbeat outlook last month, predicting a small profit for the current quarter.

Consolidation is also a major theme in this sector. An article in Business Week yesterday stated that Maxter could be bought out by another company for a price of nearly $2 billion, or $20 a share. The stock closed at around $8 yesterday. We think $2 billion for Maxtor is pretty high given that the disk drive business of Seagate is being bought out for just about $2 billion. However, any merger will still contain a significant premium for Maxtor shares. At its height in early 1999, Maxtor hit $16 15/16.

Thus we remain upbeat both in the short/long term on the disk drive sector. Our current favorite among the disk drive makers is Read-Rite, thanks in part to its fiber optics push.

 

 


 

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