Citi Is Selling Seagate, Lowers Price Target To $18

Seagate Technology PLC STX reported “expectedly weak” results for F3Q16, while guiding to a revenue decline for F4Q.

Citi’s Stanley Kovler maintains a Sell rating on the company, while lowering the price target from $22 to $18.

Disappointing Guidance

Kovler mentioned the F4Q guidance of a 10 percent quarter-on-quarter and 20 percent year-on-year decline in revenues marks the sixth consecutive year-on-year revenue decline, below the previous estimate.

Management also guided to gross margin and opex similar to F3Q, which Kovler noted implies EPS of $0.21, below the estimate.

Related Link: Following 35% Drop, Brean Admits It Was Wrong On Seagate's Stock

“Seagate outlined its plans to lower its HDD capacity to a 35–40 million/quarter from 55–60 million/quarter,” which the analyst believes could lead to an improvement in gross margin from 23 percent to 27–28 percent by end-CY17, bringing the gross margin to the low end of the prior target of 27–32 percent.

“At this level of operating cash flow and despite capex down to “maintenance” levels, further cash restructuring charges beyond the announced $150 million we see a rising risk of the BoD and mgmt. rethinking its dividend payout,” Kovler pointed out.

Positive For Western Digital

The analyst believes that the results and guidance could prove slightly positive for Western Digital Corp WDC.

With the improving industry capacity structure, Seagate Technology’s willingness to increase prices and the company exiting Notebooks HDDs, Western Digital was likely to be able to gain market share, with upside to its gross profit.

“Meanwhile, assuming the SanDisk Corporation SNDK merger closes as expected, we expect WDC’s revenue and earnings to trend in the opposite direction of Seagate’s stagnating trends and relatively weak cash flow,” the analyst added.

The revenue and EPS estimates for Seagate Technology have also been lowered.