Analysis: Adaptec

This is an ongoing series of posts looking at storage companies and their investment potential.

** DISCLAIMER: This and related blog entries are for fun only and do not represent investment advice. You should make your own opinions on investments or consult a financial adviser **

Background

Adaptec has a well known history for the manufacture of server and PC interface cards to connect SCSI hard drives and tape devices. More recently, the company has produced a range of NAS appliances under the brand name of SnapServer, athough it continues to produce SCSI, SAS and SATA adaptors.

Market Details

Adaptec is quoted on the the NASDAQ market with the code ADPT. Current price is $3.25.

Shares outstanding: 121,073,000
Market Capitalisation: $393,729,396
Earnings Per Share: -$0.13
P/E Ratio: n/a
Yield: n/a

* figures from http://www.nasdaq.com on 26 November 2007.

Adaptec is running at a loss. Looking at the company financials, net income for the last financial year was just under $31,000,000 on falling sales of $255,000,000. Sales have dropped steadily over the last 3 years. Net income over the last 3 quarters has also run at a loss. However in the announcement of results for the first quarter 2008. Adaptec signalled their intention to restructure and cut losses, reducing the workforce by 20%.

Competitors

The NAS market is a competitive one; there are huge number of NAS appliance manufacturers in the current market, from small scale to enterprise class. For HBAs, the parallel SCSI market has gradually reduced, with many manufacturers deploying integrated solutions within their server products.

Outlook

The outlook for Adaptec looks tough. This is clearly spelled out in the 1Q2008 announcement. SCSI and SAS adaptors have become commodity items, reducing the revenue from these products, despite the need for continuous investment. Adaptec lost out on an OEM deal and significantly affected their business. The NAS market will be tough and require innovative product features.

At this stage, I think Adaptec shares are not worth investing in. I would rate them as a SELL. To change this position, I would expect to see a significant uptake in the SnapServer products before they are a worthwhile purchase.

Analysis: Seagate

This is the first of a series of posts looking at storage companies and their investment potential.

** DISCLAIMER: This and related blog entries are for fun only and do not represent investment advice. You should make your own opinions on investments or consult a financial adviser **

Background

Seagate's main business is the manufacture and distribution of hard disk drives. The company was founded in 1979 by Al Shugart and Finis Conner. Shugart is regarded as the father of modern hard disks, being involved with the teams that invented both the first hard drive at IBM in the 1950's and with inventing the floppy disk. Today, Seagate offers products for business and consumer markets including the latest portable devices. These range from 8GB 3600RPM Compact Flash drives to the sixth generation of the Cheetah drive - a 15K RPM drive with 450GB capacity.

Market Details

Seagate is quoted on the NYSE with the code STX.

Shares outstanding: 528,788,000
Market Capitalisation: $14.55 billion
Earnings Per Share: 2.28c
P/E Ratio: 11.82
Yield: 1.45%

* figures from http://www.nyse.com/ on 29 October 2007.

These are lots of interesting numbers, but what do they mean? I've linked to Wikipedia entries which explain what most of the important terms are.

The P/E Ratio gives a good idea of how fairly valued the shares are. It is a ratio of the price of the shares compared to the earnings of the company, therefore the lower the number, the better. For comparison, here are a few more P/E ratios; Netapp - 28.79, EMC - 39.03, Google - 47.4, Brocade - 17.67. Seagate therefore seems low, but P/E can't be looked at in isolation. Higher P/E ratios may indicate a company with potentially higher future growth prospects. I would say that Seagate's business is purely incremental growth as they are not likely to be bringing a new product class to market or radically changing their business model.

Yield indicates how valuable the last dividend was as a percentage of the share price, so at 1.45%, the return on $100,000 of stock would be only $1450 per year. If dividends were the only reason for investing, it would take 69 years to return your investment! Obviously Seagate is declaring dividends, so value in the shares is being realised in both capital appreciation and dividend earnings.

Competitors

The hard drive industry is small. In fact Seagate recently acquired Maxtor (although the brand is still retained) and made the industry smaller. The major competitors in the hard drive market are Hitachi Global Storage Technologies (which is a combination of the Hitachi and old IBM storage businesses) and Western Digital. HGST and Seagate together own the market for 15K Enterprise (FC) drives.

Outlook

The hard drive market is continually challenged to increase capacity, improve performance and reduce the power and cooling demands of hard drives. All manufacturers are innovating to get ahead of the competition, however most advances seem to be small steps rather than giant leaps and so no one vendor in the market stands out as having a big competitive leap over the others. It is certainly true to say that the hard disk has become a commodity item.

As a technology leader and considering the future demand for storage (which shows no signs of diminishing), Seagate is set to continue to grow their business. At this stage whether Seagate will form part of my virtual portfolio, only time will tell, however I would say that one HDD vendor will be there.

Storage Stocks

Josh's recent posts have reminded me of a little piece of work I started but didn't finish a few weeks ago.

I've been compiling a list of storage companies which are publicly traded and trying to determine which I feel are value for money as an investment.

** DISCLAIMER ** This blog does not provide investment advice and all opinions on the values of stocks are mine entirely. You should not act upon these opinions but make your own judgements on the merits of investing in any company.

Phew, now that's done, let's get on with it. I guess the first question is why am I doing it? Well, of all the industries in which to invest, I would like to hope I understand the most about storage IT companies than any other. I say hope, as understanding what makes a company good as an investment will be not just their current figures, valuation etc, but rather there future potential for generating revenue and business. That's where things get difficult. There are the easy major players which are guaranteed to make revenue; just think of EMC, Cisco, IBM, Sun, Seagate, Netapp and so on. These companies have established businesses and make money. However not all pay dividends, so money has to be made on capital growth from some of the shares. There are also plenty of blips and gotchas to deal with. For example, Sun and Netapp - how has their current "misunderstanding" over patent rights affected shares?

Then there are the startups which then go IPO. Compellent recently floated. 3Par are planning to. How can these businesses be evaluated (other than by gut instinct) to see whether they are worthwhile?

So, for fun only (which is the main reason for doing this) I will be attempting to review one stock per day, which I will discuss and give my opinion on. I stress - *my opinion*. I could be (and probably will be!) wrong, however those I believe are worth investing in, I will start a "fantasy" investment portfolio just to see how things go!

If you have any opinions or comments, feel free to add them. The first company under review tomorrow will be Seagate.