Originally Posted By: DrRoughneck
An earlier post I made on Data Center REITs raised quite some interest on the board, so I thought it's time to follow up.
At the time (early January) my previous post mentioned how all Consumer Electronics Show (CES) showcased gadgets relied extensively on Data Centers with seemingly unlimited resources. I then concluded it was a good time to invest in Data Center REITs. Lo and Behold, Data Center REIT Digital Realty (DLR) has risen 20% over the last 30 days.
My opinion of Data Center REITs has not changed, they are still set to grow tremendously over the next few years. There are however other players set to benefit from this growth: hard drive manufacturers.
There is currently a shortage of HDDs and SSDs of some capacities. Every single minute, 500 hours of new videos are uploaded to Youtube:
http://tubularinsights.com/hours-minute-uploaded-youtube/
Across the industry the rate of storage consumption is at an inflection point and picking up.
The catch is: there are only 2 major HDD manufacturers with a near market monopoly: Seagate (STX) and Western Digital (WDC).
So there you got it. I could go on about HDD vs SSD - both STX and WDC also manufacture and ditribute SSDs.
My point is they have cornered the market and for the last few quarters both have blown analyst expectations out of the water. Given last week's Intel CEO referring to a Data Center explosion happening, it seems STX and WDC are set to benefit hugely; STX with a slight edge as its lower price point HDDs are more appealing "freemium" cloud pricing models. Not only are Seagate (STX) products cheaper, Seagate has also a technical edge, having demonstrated a 60TB SSD.
I am by no means an authority on the matter and would very much like to hear what you think, as there are many smart people on this board whose writings I thoroughly enjoy.
Rating Action: Moody's rates Seagate's new senior notes Baa3; outlook negative
Global Credit Research - 31 Jan 2017
New York, January 31, 2017 -- Moody's Investors Service ("Moody's") assigned a Baa3 rating to Seagate HDD Cayman's ("Seagate") proposed senior unsecured notes offering, to be comprised of 5-year and 7-year tranches. The proceeds will be used for general corporate purposes, which may include repayment of the outstanding senior notes due 2018, and other outstanding debt, as well as capital expenditures. The rating outlook is negative.
RATINGS RATIONALE
The Baa3 senior unsecured rating reflects Seagate's position as one of two leading providers in the hard disk drive ("HDD") industry, a business that is threatened by product obsolescence and substitution from solid state drive ("SSD") deployments. Seagate faces particularly tough business challenges in its HDD business as SSD shipments begin to command higher dollar spend across data storage deployments. Seagate is in the midst of transitioning its product lines from serving traditional PC, notebook and large enterprise storage systems to hyperscale cloud storage infrastructures, which address high capacity storage needs.
Yet, despite the near-term dislocation of some of Seagate's legacy HDD products, Moody's expects the company to still command a significant share of data storage solutions, whether in hardware or data storage controllers. Based on the anticipated growth of digital content that will need to be stored, Moody's believes there will be demand for HDD technology over the foreseeable future, as there likely will not be enough raw SSD capacity generated to meet all the expected storage demand.
Moody's remains concerned about Seagate's challenging business environment and its ability to continue to reduce operating expenses without endangering its product roadmap. Unlike its industry peer, Western Digital Corporation, which has captive supply across all HDD and SSD end uses, Seagate remains more exposed to HDD sales. Revenue growth will only come if the company successfully transitions to shipping increasing quantities of the high capacity HDDs at higher price points to outweigh the declining sales of high volume lower-priced HDDs, and is able to to obtain NAND flash memory storage from its suppliers. Since Seagate relies on market access for NAND, it is at a relative cost disadvantage and risks product shortages when NAND supply is constrained.
Moody's recognizes that Seagate remains publicly committed to conservative financial policies, including its stated 1.5 times debt/EBITDA target. Although the company is unlikely to hit its leverage targets over the next year, if successful, the high operating leverage in its core business should provide a strong base to resume generating strong profits and free cash flow by fiscal year-end 2017. In Moody's view, Seagate has the capacity to address its business challenges within the Baa3 rating, although it still maintains high levels of shareholder remuneration relative to the expected cash generation over the next year.
Seagate had over $1.7 billion in cash at December 1, 2016, along with full access to its $700 million credit facility, maturing in January 2020. Over the past couple of years, the company devoted a significant portion of its generated cash to share buy backs and dividends. Moody's expects a greater allocation of Seagate's cash resources to be reinvested in its operations or to protect the stated conservative credit profile.
Seagate obtained covenant flexibility through fiscal year-end 2017 in its credit agreement to pursue its restructuring. The credit facility maturity date springs to August 2018 if the company does not maintain investment grade ratings from at least two rating agencies at that time, and does not have sufficient liquidity to repay the outstanding senior notes due 2018.
The negative outlook reflects the near term revenue and operating margin pressure, and the possibility for further weakening of its credit profile as it restructures its business and operations. The outlook may be stabilized if the company is tracking well in its plan to stem revenue and margin declines and shows growth prospects over the next 12 to 18 months.
A near-term upgrade of Seagate's ratings is unlikely. But Moody's could upgrade Seagate's ratings if the company successfully transitions its product lineup to regain revenue and cash flow growth from a more diversified business profile, and generates free cash flow to debt in the 30% range on a sustained basis. The company could also be considered for upgrade if it maintains adjusted operating margins of above 14% and demonstrates continual commitment to a conservative financial policy.
Issuer: Seagate HDD Cayman
Just wondering; you can find stocks in defined downtrends, ie under their moving averages, and wait for good entry setups.
