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No. of Recommendations: 2

Not much activity on this board, I see. I bought STX at 16.16 a year ago (don't ask why) so after a long wait I'm finally in the black again. Sell or hold? Here's what I see:

THE GOOD

* Seagate has all segments covered (desktop, mobile, enterprise, consumer electronics); all interfaces covered (SCSI, ATA, SATA, FC); broadest product line in the market.

* Dell and Apple buy Seagate. (Exclusively?)

* DVRs, MP3 players, digital cameras and eventually cell phones will contain storage. Seagate already has a 5GB CF2 storage device in the market.

* Seagate has the largest share of the growing SATA market.

* Seagate has R&D of its own, and does all of its own manufacturing (many other companies rely on Komag).

* The market is transitioning from longitudinal recording to perpendicular recording for higher densities, and Seagate is apparently leading the pack.

* Dividends put a floor under the stock price.

* Last six analyst recommendations have been upgrades.

THE BAD

* Hard drives are a commodity market. Margins are thin.

THE NUMBERS

* Q2 FY05: $144M income on $1847M revenue, for 7.8% margin. Not as bad as I thought. Depreciation $233M.

* $646M cash, $738M debt, $2040M shareholder equity. Will not go bankrupt this year. Cash is up from previous year.

* 24M units shipped total, of which 16M desktop, 3.3M enterprise, 1.2M mobile and 3.4M consumer electronics. Consumer electronics is the fastest growing segment, up from 1.0M last year and 2.9M last quarter. ASPs at $76, up from last quarter's $72 but lower than last year's $81.

* Inventory situation is improving: 16.2 inventory turns, up from 13.5 and 13.6 last year and last quarter respectively. Weeks on hand channel inventory is down to 3.5 weeks from 7.6 and 4.5 last year and last quarter respectively. Raw materials going up, finished goods going down 23% and 10% from last year and last quarter respectively.

CONCLUSION

The consumer electronics market, which is currently one seventh of units shipped, is a possible growth area. But nothing stops the competition from growing into this area as well. Perpendicular recording will give Seagate higher densities but only for a while before others catch up. SATA-2 and NCQ drives will arrive in 2005 but that's only a marginal improvement over existing technology. I am inclined to take my profits in this stock while the story is still good (after the anniversary of my purchase) and move on.

FoolIyer
(who has patiently held STX for almost a year)
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