Despite prevalent investor sentiment that hard disk drive names represent high-beta, overly-reactive stocks, Deutsche Bank Securities Vice President and Senior Analyst Sherri Scribner says there is more than meets the eye upon first glance at these companies’ investment potential.
“I think there is a perception out there that they are not very good businesses, that they don’t make money and that they’re always in the middle of a price war. I think if you look at the past couple of years, especially since Maxtor was purchased by Seagate, and as I mentioned earlier with the price declines, the business has improved as we’ve seen industry consolidation,” Scribner said. “These companies have been able to improve their returns, and ASP declines have been more modest, so you haven’t seen the kind of aggressive pricing actions for extended periods of time that you used to see prior to the tech downturn.”
Scribner looks fondly upon the balance sheet of Western Digital (WDC), which she says has a good cash conversion cycle and positive returns.
“They’ve been building up their cash levels primarily because they’ve been doing so well in gaining share and generating cash,” Scribner explains of Western Digital‘s healthy cash position of almost $3 billion. “The company has prioritized their spending on cash as, first, to invest in the business, and that would include value-added acquisitions.”
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