$STX call

Company said they couldn't give future guidance or comment on PE approach given legality, which made for a short (if late and bland) call.

Interestingly they didn't participate in the "13th week", which $WDC had said was at twice the average rate of the prceding 12weeks. They think that the 13th week was busier because of pulled forward demand because of China's golden week, and quarter end dates.

$0.31 EPS and missed revenue.
49.2mm units (backs out ASP of $55) they said approx 8% q/q price decline. gross margin of 20.4%
'competitors more tenacious than years past'

long discussion on SSD's and hybrids in relation to notebooks, netbooks and MacBook Air.



general thoughts;
STX had popped up on the Raven's LBO candidates screen just based on historical numbers, however he'd excluded it because of the margin pressure and "third competitor" issue. To him it doesn't make sense for a PE firm to take such a big punt on storage when there are so many issues which management of the firm really don't have so much control over. Its also not apparent that higher financial leverage is either appropriate or adds value to equity holders. As the stories appeared in the WSJ its not to be written off lightly, there's a pretty good chance that a bid does materialize, and the rumoured price range is anything from $15 to $25. Anything above the 52w should be heavily mentally discounted.

FT article on Hitatchi Global Storage

Hitatchi is looking to sell its storage business, interestinly its lower margins and agressive attempts to take market share aren't helping the supply-demand imbalance. Strategically wouldn't it make more sense to buy the lowest margin competitor, accept market share and work on the cost base? the $1bn price tag for ~ $2.5bn of sales would value $STX and $WDC at $4.32bn and $3.84bn, or $9.15 and $16.76+$8.7=$25.5

$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.

UK income distribution, FAIRNESS

We've heard much in the UK over the last few years about the inequality and unfairness in soceity. The Raven decided to look at some numbers because the political rhetoric as is often the case didn't match reality. Just looking at back of the envelope calculations some things didn't make sense. There has been much "taxpayer" outrage over bank bailouts (the fact that UKFI is actually breaking even on the bailouts is material for another post).

Wages; this is all earnt or income for a household, whether its derived from savings, self employment, salary, etc
Cash benefits; all cash payments directly from the government to the household
BIK; Benefits in kind; NHS, housing subsidy and travel subsidy
Other services; are the cost of the police force, army, government etc. The Raven's decided to allocate that evenly by household as its not obvious to him that any segment of soceity benefits more from it that one another, its clearly a cost so we must all be "enjoying" the benefit, even if it appears the ONS value this as zero.
Direct Taxes; VAT, fuel, etc
Vice Taxes; Tobacco, Alcohol and Gambling
Capital Taxes; Inheritence tax, Capital gains tax, dividend taxes, etc.

There are a few broad points to be made;
1) INEQUALITY, is nowhere near the levels thrown around by left wing commentators. They deliberatley exclude the value of services that soceity consumes and assume that these costs are magically absorbed by the tooth fairy. It seems contrived to be measuring income or household consumption to be only disposable income, when if one is even slightly unblinkered, it is very obious that households all enjoy police protection, the fire service the security of the army, etc. The Raven finds it outrageous that the ONS deliberately excludes these, but does include the NHS and housing benefits? by the ONS measure the lowest income household would have £18k and the highest income household £106k, whereas taking into account ALL services its £39k and £127k respectively. This is only half the story as obviously the government takes payments for these services so we should look at net income; in this case the numbers are £35k and £53k. How there is any uproar over inequality is amazing really. Especially when one cosiders the earned incomes were £5k and £101k.

2) As described before the majority of the population believes they are tax payers, and by this they believe net contributors, however looking at our numbers its pretty clear that only 25% of the population actually are net payers into the pot. The most disturbing indicator of the unsustainability of the system is looking at the middle of the distribution. A middle income house actually takes £15k more than it pays in tax, or to put that into budgetary numbers; £29bn. In fact subsidies of the middle half of the distribution total £117bn. A number not a million miles away from the current deficit of £150bn. To actually be a taxpaying household then one needs a household income of £48k.

It is very interesting that if one calculate the GINI index on earnings its 0.35, on ONS incomes 0.24, whereas taking into account services and actual tax paid its 0.05.