Why Higher Guidance From Seagate Is Bad for the Shares

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Seagate Technology PLC (NASDAQ: STX) has great headlines out on Tuesday. Unfortunately, headlines do not always tell the whole story. This also matters for rival Western Digital Corp. (NASDAQ: WDC) was well. 24/7 Wall St. has included Seagate’s news first, followed by analyst commentary on Seagate and Western Digital after.

Seagate has raised guidance and cited stronger demand than expected for the high-capacity enterprise hard disk drives (HDD). They now see margins and revenues above their prior forecast.

The company shipped record exabyte capacity, with average capacity per drive up 46% year over year. Shipments were projected to be roughly 67 exabytes, reflecting unit shipments of approximately 39 million and average capacity per drive of 1.7 terabytes. The company ended the quarter with approximately $1.5 billion in cash and cash equivalents.

For the fiscal first quarter, Seagate sees revenues of roughly $2.8 billion. It also forecast for an adjusted gross margin of 29%. Seagate’s initial guidance had been for sales of $2.7 billion and margins to be 27% or more. Thomson Reuters was already a tad higher at $2.74 billion in revenue.

One further note made by Seagate was that its cost cuts were progressing as planned. Where things seem to be off is that operating expenses were expected to be higher than in the prior quarter. GAAP and non-GAAP operating expenses for the September quarter are now expected to be about $580 million and $470 million, respectively. This increase from the June quarter was said to be tied to higher variable compensation related to better financial performance.

Investors need to keep in mind that Seagate will not report its formal first-quarter fiscal 2017 financial results until Wednesday, October 19, 2016, before the market opens.

Seagate shares were down 4.6% at $36.17 on Tuesday morning. Its 52-week trading range is $18.42 to $49.43, and its consensus analyst price target is $34.10.

Western Digital shares were down 2.5% at $57.79. Its consensus price target is $63.01, within the 52-week range of $34.99 to $86.39.

Jefferies keyed in on Seagate and Western Digital. The firm is now more bullish on NAND in the short-term and medium-term, driven by recent investor discussions. Jefferies also raised its NAND revenue and margin estimates for Western Digital. The firm said:

We’re also raising our revenue estimates for HDDs for both Western Digital and Seagate as we believe both are also benefiting from improving HDD industry dynamics. We’re reiterating our Buy ratings and raising our price targets on both Western Digital and Seagate.

The Jefferies targets are now $44 for Seagate and $70 for Western Digital.

JPMorgan raised Seagate’s rating to Neutral from Underweight and assigned a $38 price target, while Western Digital is rated Neutral with a higher target of $59 (versus a $53.00 prior close).