Hard Disk Stocks: Estimates Cut On Wall Street, Guidance Expected To Be Lower

In a report published Monday, Pacific Crest analyst Monika Garg previewed Hard Disk (HDD) vendors ahead of their earnings print, noting the group is expected to report in-line to slightly lower June quarter results. According to Garg, the HDD total addressable market (TAM) will total 113 million units, a figure that is slightly lower than the 120 million units

called for in its own guidance. The analyst also added that

's negative pre-announcement supports a 113 million unit estimate as the company reported weak demand across all its segments. Looking past the quarter, Garg estimated an HDD TAM of 118 million units for the September quarter. In addition, the vendors are likely to see their margins dip due to lower utilization and adjustment of factory output. However, Western Digital and Seagate will see their margins improve through fiscal 2016 due to a model shift towards enterprise drives. The analyst is also projecting a fiscal 2016 HDD TAM estimate of 465 million, which is 66 million lower than his fiscal 2015 estimate and is attributed towards PC demand weakness. As such, HDD companies are expected to "control" their operating expenses, which should help profitability. As an example, Seagate already lowered its spending guidance with the possibility for further cuts.

Joe Wittine of Longbow Research commented in a note on Tuesday and echoed a similar sentiment. Wittine is projecting a second quarter HDD TAM of 112.5 million with the largest decline coming from PC HDDs. The analyst also predicted a September quarter HDD TAM of 119.0 million which is a "conservative" estimate compared to forecasts from

that is estimating consumer licensing growth of five to 11 percent quarter over quarter. For the full year, the analyst is estimating a fiscal 2016 HDD TAM of 477 million versus a 530 million HDD TAM estimate for fiscal 2015. Looking forward to Western Digital's June quarterly results, the analyst is estimating the company to report total sales of $3.20 billion and a non-GAAP earnings per share of $1.32. The company has "levers" to return to sales growth including enterprise SSDs and enterprise capacity HDDs led by its 8TB and soon 10TB nearline drives. Wittine also noted that the MOFCOM timing remains "a question" for Western Digital but a favorable decision above 50/50 is expected. In addition, the latest HDD TAM "swoon" should provide more reasoning that China is preventing the company from dropping HDD prices, to the "detriment" of global consumers. On the other hand, the "weakening" investor sentiment in Seagate's PC is business is "playing-out" and absent a clear catalyst, Wittine is suggesting investors remain on the sidelines. The analyst also suggested that the ultimate growth and profitability of the company's systems business remains "murky." Wittine rates shares of Western Digital with a Buy rating and $95 price target while shares of Seagate are Neutral rated with no assigned price target.