Hot Stocks: New Media Player Just One Reason to Like Seagate Technology

Disk drive makers are usually seen as the poor stepsisters of the consumer electronics world.

While their more glamorous cousins like Apple Inc. (Nasdaq: AAPL), and Sony Corp. (NYSE ADR: SNE) bask in the spotlight, storage providers like Seagate Technology (Nasdaq: STX), while equally important, draw little fanfare.

Few realize for instance that shares of Seagate, the largest disk maker in the world, have just about quadrupled in the past year.

Of course, the Seagate's Free Agent Theatre and HD Media Player will likely win the company even more attention. That's because the device is fast becoming the latest obsession of many technophobes.

Here's how it works: You transfer files from your computer to your Free Agent storage device, then dock the device in the Free Agent Theater via a USB connection. The little black box has the processing power to read a wide variety of file formats, including MPEG files with support for HD resolutions up to 1080i, including 3D. It also supports several audio formats including 5.1-channel surround sound and popular digital-audio formats including MP3 -- all of which can be navigated with an easy-to-use onscreen interface.

The Seagate media player can connect to Internet sites like YouTube and Netflix to access streaming video. Another feature allows users to display videos and pictures from cell phones and video cameras. Even though those devices themselves don't use disk drives, they get clogged with lots of video and still pictures, which in turn end up on the disk drives of the owners' PC.

Still, most customers are focused on playing the high-def and 3D formatted movies they have stored on their PCs. Until now, they have been restricted to viewing that type of media on their computer monitors, due to the memory-hogging nature of the video and audio files.

So far, the new media players have barely been noticed in the U.S. market, mainly because current customers tend to be gadget geeks who race to be first in line for state of the art electronics. But the bottom-line entry price of $130 - about as much as a DVD player - promises to speed the spread of media players to the masses in the near future.

"If you walk around big stores like FNAC in Europe, you see stacks and stacks of [media players]," Jonathan Huberman, chief executive of Iomega Corp, which is marketing its own $150 player, told Forbes.

But it's Seagate that has the built-in advantage of scale and an unparalleled distribution network that is about to roll out its Free Agent line in China and other parts of Asia.

Sales for the players are so small compared to Seagate's main disk manufacturing business - consumer products account for less than 10% of Seagate's sales - that analysts don't have estimates yet for the coming year. But the media player is set to play a complimentary role by creating markets that will drive the company's business down the road.

"Any time that people are moving video around it's good for disk drives," Seagate Chief Executive Officer Stephen J. Luczo told Forbes.

Computer Upgrade Cycle

Given the growing age of corporate computer systems Seagate is also likely to benefit from the beginning of an upgrade cycle. Standard & Poor's -- which has a "buy" rating on the stock -- projects a 10% increase in PC unit sales in 2010. S&P believes the company's results will be boosted by higher IT spending based on the growing need of businesses to modernize their data centers.

To meet that demand, Seagate just introduced its new Constellation disk drive, a 2 terabyte solid-state storage device aimed at the corporate server market, including network routers, video servers, and government and military workstations. Solid-state drives are viewed by many as the future of the disk drive industry as they are faster and have no moving parts, making them sturdier than standard hard disk drives.

On Jan. 21, Seagate confirmed it's on a roll, reporting quarterly results that blew away forecasts.

Net income was $533 million, or $1.03 a share, compared with a loss of $2.82 billion, or $5.80, a year earlier, Bloomberg News reported. Excluding some costs, profit was $1.05 a share, trouncing the 65 cents projected in a survey of analysts by Bloomberg. Seagate grew its revenue 13.7% sequentially, yet was able to grow its adjusted earnings 88%.

Despite its recent rise, the stock is still relatively cheap at around $20 a share, trading at a mere 5.9 times earnings versus 14.5 for its industry peers.

Seagate also said its annual forecast will be revised upwards to reflect better conditions, although it won't issue new guidance until after it reports first quarter results in April. The company had predicted sales in 2010 to reach $10.5 billion and profits of $1.90 a share, including restructuring expenses and other costs of 30 cents per share.

"Clearly the number will be significantly higher than that," Luczo said. "The strength for the products continues to be firm."

Luzco said the company benefited from increased spending by buyers in Brazil, China and other parts of Asia last year, and predicts that customers in the United States and Europe are recovering and will begin purchasing computer replacement gear later this year.

"It's my belief the two largest economies will turn on in the second half of 2010," Luczo said.

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