Benchmark: Sell Seagate As Storm Clouds Gather

• Seagate Technology PLC STX shares have declined 27.64 percent, year to date.
• Benchmark’s Mark Miller has downgraded the rating on Seagate Technology to Sell, with a price target of $38.
• Miller believes that the company’s share buyback has masked the meaningful decline in its earnings and cash, as well as increase in its cash demand.

According to the Benchmark report, “For the past six years, Seagate has pursued an aggressive share repurchase program which has seen its outstanding share count decline from 514 million shares in FY10 to an estimated 293 million shares for FY16.”

On further analysis of these buybacks, it was found that they had masked the considerable decline in the company’s GAAP earnings since FY13.

In fact, excluding the share buybacks and the impact of the litigation settlement with Western Digital Corp. WDC, worth $620 million, Seagate Technology’s GAAP earnings would have declined 28 percent between Fy13 and FY15.

Also, the slowing growth in China continues to be a key concern for many investors, given that the Asia Pacific accounts for more than 50 percent of the company’s total revenue. The slowing growth in China, a country that is a significant market for Seagate Technology’s capacity enterprise drives, is expected to affect IT budgets in 2016.

“We believe the firm will be facing headwinds due to its late entry into the highly competitive SAS enterprise SSD space and its focus on developing its storage systems business, which could perturb its OEM customers,” Miller added.

The FY16 non-GAAP EPS estimate has been lowered.