Seagate Gets Second Upgrade Of 2016 By Morgan Stanley

Although there are risks of flash cannibalizing the HDD market, Seagate Technology PLC (NASDAQ: STX) may achieve improving gross margins, given healthy inventory levels and newly announced manufacturing cuts, Morgan Stanley’s Katy L. Huberty said in a report. She upgraded the rating on the company from Underweight to Equal-weight, while raising the price target from $20 to $27.

This comes as the second upgrade for Seagate of 2016, with Benchmark raising their rating on the company from Sell to Hold, and the price target from $35 to $32.

Gross Margin Recovery

Seagate’s gross margin could recover from the low of 23 percent in March to the bottom-end of the 27- 32 percent target range in FY17, ending June 2017, with Morgan Stanley’s proprietary channel tracker pointing to a substantial decline in aged/end-of-life inventory and given a 16 percent reduction in manufacturing headcount. Analyst Katy Huberty raised the EPS estimate for FY17 from $2.50 to $3.

“While we continue to worry about demand shortfalls as NAND replaces disk drives in data centers and notebooks – a trend that cut consensus estimates by nearly half since our downgrade in July 2015 – the capacity reductions, consolidated competitive landscape, and reduced channel inventory should help improve pricing trends and margins in the near-to-medium term,” Huberty wrote.

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