Deutsche Bank Cuts Seagate (STX) Price Target to $35; Keeps 'Buy' Rating

Deutsche Bank analyst, Sherri Scribner, cut her PT on Seagate Technology (NASDAQ: STX) on the potential for weak future demand and a lower multiple going forward.

Results beat expectations on solid cost management, as STX works to realign its cost structure to the current demand environment. Guidance was lower than Consensus, but not as bad as feared. Growth may be limited for the HDD market but the underlying mix shift in the HDD industry is a positive for sales and GMs over the longer term. Management is committed to solid cash flow generation and capital returns, making the current valuation compelling.

STX F2Q-16 sales and EPS of $3.0B/$0.82 beat the Street at $2.9B/$0.71. GM came in at 25.6%, in line with Consensus, and mgmt expects GMs to get back in the 27%-32% target range in F4Q-16. Guidance for F3Q-16 was for sales of $2.7B and flat GM Q/Q, both modestly below Consensus. STX was a bit less cautious on March Q HDD industry shipments (TAM), outlining expectations for units to decline within normal seasonal ranges of down 5-10% Q/Q, a bit better than WDC’s view of down 13% Q/Q.

STX is doing a good job of recovering from recent GM hiccups, with GMs benefiting from cost controls and improved market share in the 8TB segment. STX’s enterprise units were up 4% Q/Q in a market that was likely flat Q/Q, with Exabyte growth up 21% Q/Q, highlighting a key improvement in the highest capacity segment. From here, STX needs to deliver on goals to return to GM targets of 27-32% in F4Q-16, show continued OpEx discipline, continue to grow non-HDD revenue, and return to Y/Y Exabyte growth. We believe these goals should be attainable.

The analyst trimmed her PT to $35 from $40 on a lower multiple, but views STX's 8% dividend yield as very attractive in the current environment and maintained the Buy rating. No change to Buy rating.

For an analyst ratings summary and ratings history on Seagate Technology click here. For more ratings news on Seagate Technology click here.

Shares of Seagate Technology closed at $29.05 yesterday.

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