Western Digital’s anomalous results were a result of it being deeply affected by flooding in Thailand, where it has major manufacturing operations and numerous suppliers. Seagate, less concentrated in the flood zone, was able to use the situation to significantly goose earnings.
Indeed, the supply shortages of drives caused by the floods helped provide better pricing and gross margins for all players. Industry skeptics fear a normalization will crimp margins and, worse, a return to the industry’s dog days of heated, profit-killing price competition.
Bulls, however, say normalized pricing may nick margins, but the old days of brutal price wars are gone for good: Evercore Partners analyst Rob Cihra, who has “overweights” on both stocks, notes that, over the past decade, six hard-drive makers have been taken out of the market through acquisitions. (This includes Samsung’s drive division, which Seagate bought last year, and Hitachi’s drive division, which Western Digital bought in 2012’s first quarter.)
Industry consolidation leaves just three major players (Toshiba is the third) and means Seagate and Western Digital each now sell about 40 per cent of the world’s hard-disk drives, he says.
There is “limited competitive motivation for dramatic pricing actions, following big recent market consolidation.” (Mr. Cihra’s 12-month target prices of $38 for Seagate and $50 for Western Digital represent 25 per cent gains from current levels.)
As for a post-flood “return to normalcy” in supply and pricing, bulls argue that for many specific drive end-users – makers of notebooks and mission-critical enterprise servers – supply has already returned to normal and pricing has remained stable.
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