Wednesday, 20 October 2010

$WDC earnings call

As the Raven has noted on the blog a few times, the sector will face margin pressure going forward. That's clear that this is happening from their current results. Yes sales hit estimates, net income was there, however that doesn't disguise what's happening with the MARGIN.
  • average selling price $46, -$3 lower than last year, -$1 q/q.
  • historical seasonality suggests this should be the best quarter for demand
  • gross margin adjusted for SGA was 15.8% last year 20.8%, unajusted 18.2% v 23.2%
  • margin decline driven by lower average selling prices, which is being driven by an excess of ~10mm units (Raven estimate), "6-8mm units need to get burnt off" ~ 5% capacity
  • management correctly say that Seagate's ownership structure won't matter to industry pricing
  • margin errosion is WITH them giving up market share to our ominous 3rd party
next quarter's guidance appeared to be 50-60c although the line was terrible and the accent heavy, so when the replays up it needs to be checked. Seasonally the coming quarters will be weak historically and there doesn't look like too much to get excited about buying this stock. Two interesting side points from the call; 1) company see increased demand for sea shipped product rather than by air, which can pull demand from back to school next year into the preceding quarter and 2) China's demand may change seasonality going forward, although hard to tell given economic volatility.

very roughly its got about $12 of cash, so its run rate p/e on next quarter is ~ 7.5, however;

The Raven wasn't so clear as to what effect the ipad is having for solid state devices, or just how much the company held back from shifting product to protect prices. The company is going to look at strategy and investment decisions and implied that some products didn't make sense at these prices...

Anyway its interesting and is definitely a better looking from the perch than Seagate, but if anything it and $STX are a short tomorrow and perhaps for the next few months depending on price action. Longer term though, enterprise does look a good bet, and of course it could be LBO'd. So its definitely a high risk position either way.

No comments:

Post a Comment