Early morning trade updates
Howdy y’all. Let’s jump right on top of this bull and ride.
First up is STX. The company absolutely crushed the quarter and the guidance for the rest of the year blew everybody’s mind. Here are a couple analyst notes on STX’s quarter:
We are reiterating our Buy rating and raising our price target to $44. We came away from the call with the following takeaways.
We believe structural change is occurring in the HDD industry. Seagate believes once the industry returns to more of a supply/demand equilibrium (at least a year from now), the industry will not revert back to the historically low margins of the past. Instead, management believes supply availability has become more important to customers and margins will reflect a greater willingness to pay for strategic availability.
Seagate is working with customers to minimize the near term negative impacts on pricing that have resulted because of the Thailand flooding. Seagate typically has an ASP of $10-$12 higher than Western Digital due to the company’s significant enterprise market share yet in the December quarter both companies had ASPs that were roughly equal (WD $69 and STX $68). As mission critical and near line capacity comes back on-line, we would expect Seagate’s ASP to increase through calendar 2012.
Management highlighted that 60% of the company’s capacity for calendar 2012 is under long term purchase agreements.
Seagate believes industry unit demand will exceed supply by as much as 150 million units in calendar 2012.
The company expects to exit calendar 2012 with a share count of 350 million, down from 465 million in the March quarter.
At 350 million shares in a structurally changed gross margin and pricing environment, we believe Seagate could support a materially higher dividend and believe a $2.00 annual dividend is not unlikely. In other words, with the stock trading at roughly $22 in the aftermarket Seagate could effectively have a dividend yield near 10%.
And this:
We expect shares of Neutral-rated Seagate to move higher in the near term. Elevated pricing conditions favor Seagate, as its manufacturing capacity has been impacted the least by the Thai flood. The company delivered strong results and guidance, and the magnitude of the beats for results and outlook are big. C2012 revenue was guided to $20 billion, vs. the Street consensus of $17.5 billion.
Even the bearish analyst had to admit that the company knocked the cover off the ball. And the strong skepticism that remains about STX’s future is very bullish in a contrarian kind of way, of course.
Amazon on the other hand is down today and we can hem and haw about why, but it doesn’t matter why now. This was a one off earnings trade and while I have been and remain a bull on Amazon, I’m not looking to add it as a formal position to the portfolio just yet. That said, I am going to hold onto the AMZN calls I’ve got right on through til they expire in April. I’m down about 75% on these overnight, but as we’ve seen with RIMM and others, sometimes the stocks can put in a bottom in the near-term post-earnings action and then rally on higher for weeks after. We’ll see.
As for the earnings season overall, as a couple of you pointed out, I focused on my misses yesterday but failed to mention my hits. We did get FFIV and RVBD earnings trades right, even if we blew the Sandisk and the Amazon. No excuses from me though — I’ll strive to do continually better for you.
Finally, lots of questions about our EKDKQ long. Recall that this is a wildly risky short-term trade on this company’s stock action after its bankruptcy filing. We’re up about 15% on this trade since we opened it and I expect that I’ll sell half of this position in the next few trading sessions and probably will be out of all of it by the end of next week.
