With Dividend At Risk, JPMorgan Downgrades Seagate

Despite the negative pre-announcement, Seagate Technology PLC STX reported weak FQ3 results, while guiding to an “even worse” FQ4.

JPMorgan’s Rod Hall downgraded the rating on the company from Neutral to Underweight, while lowering the price target from $30 to $15.

Concerns

Hall believes that there could be “structural weakness in end-market demand as PCs continue to be weak and flash adoption accelerates at the expense of high performance HDDs.”

The analyst also expressed concerns regarding the current dividend being unsustainable given Seagate Technology’s earnings outlook.

“We believe Seagate’s current dividend of $0.63 per quarter is unsustainable in the medium term,” Hall mentioned, while pointing out that even if the company target CY17 EPS of $2.50, the implied payout would be more than 100 percent.

Related Link: Has Seagate Hit A Floor?

Mission Critical Declines

The company reported that its mission critical unit shipments in FQ3 of 3.2 million units represented a 14 percent quarter-on-quarter and 26 percent year-on-year decline, missing the guidance.

According to the JPMorgan report, “The company said that 15K drives represent ~25 percent of the volume, and flagged that they are more at risk of disruption by flash compared to 10K drives.”

Hall estimates mission critical drives represent 15 percent of Seagate Technology’s revenue, while 15K drives represent 5 percent of the company’s revenue.

“We believe GM on these drives is much higher than average leading to a significant proportion of earnings at risk if demand fails to stabilize,” the analyst stated.