The Wall Street Journal

May 16, 2007

Disk-Drive Makers Look
Outside (PC) Box to Grow

May 16, 2007; Page B3B

Seagate Technology and Western Digital Corp. are looking outside the computer to help ease the pressure the makers of hard-disk drives are feeling from aggressive pricing and slack demand in the industry.

While the market for hard-disk drives is notorious for tough competition, it has been particularly rough recently. This was accentuated last month when Seagate, of Scotts Valley, Calif., reported a 23% decline in fiscal third-quarter profit on weaker-than-expected gross margins. So far this year, shares of the companies have fallen by double-digit percentages.

While a rebound isn't expected during the seasonally slow summer months, analysts and investors think the stocks could move higher once back-to-school and holiday buying begins. Hard-disk drives, which store digital data, are found predominately in computers. But, the analysts and investors say, the companies should benefit as the market for hard-disk drives reaches beyond PCs.

"In a couple of years, 30% to 35% of all drives shipped won't be devoted to the PC," said Mark Miller, an analyst at Brean Murray Carret & Co. "The stocks are cheap right now." Hard-disk drives are finding their way into television equipment, cellphones, portable digital recorders and music players, and even cars.

While some think flash memory will ultimately replace hard-disk drives in many of the applications, some analysts aren't betting on it, given that large flash-memory capacity costs a lot of money. "Flash memory is significantly more expensive, even with it coming down in costs," Mr. Miller said.

Seagate and Western Digital, of Lake Forest, Calif., are the only major U.S. players in the hard-disk-drive industry. Seagate acquired competitor Maxtor Corp. in May 2006. More consolidation isn't expected because a tie-up between Western Digital and Seagate likely would draw significant regulatory scrutiny.

Longtime investors understand the highly competitive nature of the market, but that doesn't stop them from selling off the stocks when aggressive pricing rears its head. Shares of Western Digital are down 17% from the 52-week high of $21.70 set in May 2006, while Seagate's stock is 24% lower than its 52-week high of $28.35 set in January.

Both stocks, though, have seen an upturn in recent weeks, leaving some to wonder if the worst is behind them. Western Digital shares have risen 9.5% since April 10, while Seagate is up slightly since April 18.

"For the foreseeable future, storage demand will continue to grow, and that's based on disk drives only in computers," said Mark Mowrey, an analyst at Al Frank Asset Management, which owns shares of both Seagate and Western Digital.

Shebly Seyrafi, an analyst at Caris & Co., has a $24 price target on Seagate and a $21 price target on Western Digital. He said margin improvements should help the companies, even if it doesn't happen in the second half of the year.

"Demand should pick up with back-to-school and Christmas," said the analyst. Demand, though, is only one variable, Mr. Seyrafi said. "The wild card is if the competitor is aggressive on pricing," he said. And that is unpredictable because the companies don't know how aggressive the other will be. The only thing that is predictable is that there is sure to be more volatility with hard-disk-drive stocks.

Officials at Western Digital and Seagate weren't available to comment.

Write to Donna Fuscaldo at donna.fuscaldo@dowjones.com1

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