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Will Weak Shipments Hurt Seagate's Earnings In Q1?

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Seagate Technology Plc STX is scheduled to release first-quarter fiscal 2018 results on Oct 23.

Last quarter, the company delivered negative earnings surprise of 34.3%. However, we note that Seagate has outperformed the Zacks Consensus Estimate for earnings in three out of trailing four quarters.

We believe that worldwide weak PC shipment will hurt earnings in the soon-to-be-reported quarter. Moreover, intense competition from Western Digital Corporation WDC and lack of significant presence in the flash market are other concerns.

However, improving ramp of nearline drives, renewal of existing partnership with Baidu Inc BIDU and stringent cost control are likely to offset the negative trends.

Seagate's stock has declined 10% year to date, substantially underperforming the 15% rally of the industry.

Weak PC Shipment Major Concern

Weak PC shipment in the third quarter as evident from Gartner and IDC's recently released data is a major concern for Seagate. Both agreed that shortage of key components, including DRAM, SSD and LCD panels, is escalating PC prices, thereby thwarting overall demand.

Seagate Technology PLC Price and EPS Surprise

Seagate Technology PLC Price and EPS Surprise | Seagate Technology PLC Quote

Seagate is a hard disk drive (HDD) manufacturer and is primarily dependent on PC sales.We note that a decline in PC shipment reflects weak demand, which doesn't bode well for the company.

In the last quarter, total HDD shipment was 62.2 exabytes (EB). More importantly, HDD enterprise revenues represented 37% of total revenue.

We believe that improving ramp of its 10 terabyte (TB) helium (nearline) drives is a positive. Seagate expects to ship approximately 1 million 10 TB units in the current quarter. Moreover, management has noted that the 12 TB product (shipped in June) has received excellent customer feedback.

Losing HDD market Share Dents Confidence

Seagate has been losing HDD market share amid significant competition from Western Digital Corporation. Despite a number of acquisitions, the company has no significant presence in the flash memory market.

These factors have hurt Seagate's top-line growth, which declined 9.3% in the previous quarter. Management anticipates revenues in the range of $2.5 billion to $2.6 billion for the first quarter of fiscal 2018.

The Zacks Consensus Estimate for revenues is currently pegged at $2.53 billion, reflecting a year-over-year decline of 9.5%.

Negative Earnings ESP

We believe Seagate is unlikely to deliver a positive earnings surprise in the first quarter due to an unfavorable combination of Zacks Rank #3 (Hold) and Earnings ESP of -6.43%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 to beat estimates.

We also don't recommend Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here is a stock you may consider as our proven model shows it has the right combination of elements to post an earnings beat this quarter:

NVIDIA Corporation NVDA has an Earnings ESP of +1.06% and boasts a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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