Seagate's Price Target Raised 20% By Morgan Stanley

Seagate Technology PLC STX reported preliminary Q3 revenue and EPS ahead of its prior guidance. Higher gross margin expansion was partially offset by higher variable comp expense, Morgan Stanley’s Katy L. Huberty said in a report. She maintained an Equal-weight on the company, while raising the price target from $30 to $36.

Cloud Drives Margin Beat

Seagate preannounced its quarterly revenue at $2.8 billion, marginally beating the MS estimate of $2.72 billion. Despite the marginal revenue beat, the company was able to exceed the gross margin and earnings expectations with its business shifting to higher ASP or higher margin cloud drives.

“Cloud drives require more heads/disks which, along with planned production capacity cuts, help improve manufacturing utilization,” analyst Huberty noted. Seagate preannounced gross margin of 29 percent, ahead if its original guidance of 27 percent, on the back of better mix and utilization.

Estimates Revised

Huberty expects the company to return to more normalized seasonality supported by:

• Improving cloud demand
• Stabilizing performance drive trends in the near-term
• Improving PC data points versus sharp declines last year

The EPS estimates for FY17, FY18 and FY19 have been raised from $3.00 to $3.63, from $2.96 to $3.38 and from $3.02 to $3.46, respectively.

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