Stock Pick of the Week: Buy Seagate Technology (STX) – Very Attractive Rating

Seagate Technology (STX) is my Stock Pick of the Week as well as one of September’s Most Attrac­tive Stocks.

Like all of our Most Attrac­tive Stocks the com­pany has (1) high and ris­ing eco­nomic prof­its (as dis­tinct from account­ing prof­its**) and (2) a cheap val­u­a­tion. As shown in our report on STX, the company’s ROIC is in the Top Quin­tile of all the com­pa­nies we cover and its eco­nomic earn­ings are grow­ing. At the same time, the stock’s val­u­a­tion implies that STX’s prof­its will decline by 80% (EIGHTY PERCENT)and never grow again. In other words, the stock mar­ket is pre­dict­ing a per­ma­nent decline of 80% in STX’s prof­its. I’d say those are some low expectations.

HIDDEN GEM: Our dis­counted cash flow analy­sis shows that STX’s cur­rent val­u­a­tion (stock price of $11.24) implies that the company’s prof­its will decline by 80% and never grow again. Our eco­nomic earn­ings mod­els shows prof­its are grow­ing, not declin­ing, which makes the Risk/Reward for STX Very Attractive.

For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our report on STX. See Appen­dix 4 to learn how STX increased NOPAT by cut­ting costs and increased its NOPAT Mar­gin from -1.0% to 16.2%. See Appen­dix 5 for details on how STX grew Invested Cap­i­tal slower than rev­enue and drove Invested Cap­i­tal Turns higher. Appen­dix 7 (in the Return on Invested Cap­i­tal sec­tion) shows how the improved NOPAT Mar­gin and ris­ing Invested Cap­i­tal Turns result in an increase in ROIC (from -1.6% to 29.7%) and Eco­nomic Profit, which rose by $1,925mm.

As per and , STX fits the pro­file of a great stock to buy.

**See and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.

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