Western Digital Corp. got a downgrade earlier this month on fears that a price battle has begun in the disk drive industry.
But not all analysts saw it that way.
Earlier this month, Shebly Seyrafi, an analyst with Kaufman Brothers in New York, reduced his rating on Western Digital from “buy” to “sell.” He lowered his price target on the stock by $2 to $20.
Last week, Lake Forest-based Western Digital was trading at about $19 with a market value of $4 billion.
On the day of the downgrade, Western Digital’s stock fell about 8%. Shares of Scotts Valley-based Seagate Technology LLC, the industry leader, fell about 5%, as did Milpitas-based Maxtor Corp.
Seagate is buying Maxtor.
“Our channel checks suggest that starting in early February, a major price battle began,” Seyrafi wrote.
The fear is real for the drive industry. Drives long ago became a commodity where profits come down to manufacturing and distribution prowess.
Last week, Western Digital followed up the downgrade by reiterating its forecast for the current quarter. It said it expected sales of $1.02 billion to $1.07 billion, up about 17% from a year earlier.
Profits could be up about 20% at $79 million to $88 million.
Another analyst didn’t buy Seyrafi’s contention and wasn’t about to concede any ground.
“Over the past few days we have had numerous industry discussions that clearly reiterate our position that there is no ‘price war,’ or price ‘battle’ or even the feared price ‘police action’ or price ‘skirmish,'” wrote Richard Kugele, an analyst with Needham & Co. in New York in a note on March 10. “Regardless of what people want to call it, the best term remains seasonality.”
Seagate sent out a letter indicating that seasonal price cuts for the current quarter were about 5% but stopped there, Kugele said.
“Overall, we believe this is a positive development for the drive industry,” he said.
Seyrafi said prices have fallen as much as 12%.
“Our checks suggest” that after Western Digital saw some market share gains in early February, Seagate responded with a major price cut in late February, Seyrafi said.
Western Digital will have to at least match the price drop, he said.
Seagate can keep its prices lower with a faster move into next-generation 160-gigabyte drives, Seyrafi said. Seagate is selling the more profitable drives now. Western Digital probably won’t ship them until the second half of the year.
“We expect (Western Digital’s) gross margins to be squeezed in the March and June quarters,” Seyrafi wrote.
Western Digital makes no apologies for not being first with next-generation technology, unlike some competitors. That philosophy made it a latecomer with its re-entrance to the laptop drive market in 2004.
Kugele said he wasn’t concerned about the prospects for the industry, including Western Digital.
“Pricing has been aggressive on certain capacity points (such as 160-gigabyte drives), but overall blended (prices) are still expected to be down roughly 5%,” he wrote.
Interchange Falls
Shares of Interchange Corp. did poorly recently, even for Interchange.
Irvine-based Interchange, which operates paid Internet search engines such as Local.com, set fresh all-time lows of $3.65 last week. The company’s market value, which stood at $200 million in late 2004, now is around $30 million.
Interchange took a hit after the company posted sales of $3.4 million in the first quarter, down from $6 million a year ago. Analysts were looking for about $3.7 million in revenue.
The company posted a loss of $3 million, compared to a profit of $1.2 million a year earlier.
The company expects first quarter revenue to be $3 million to $3.2 million, down 6% to 13% compared to the fourth quarter.
The bright spot: Local search is expected to bring in $900,000 to $1 million in sales, up more than 50% from the fourth quarter.
In early March, Interchange hired investment banking firm Merriman Curhan Ford & Co. of San Francisco “to assist in reviewing strategic alternatives available to the company in connection with its national search business.”
Interchange said it could sell its business linking advertisers to national Web searches.
“The management and board of directors of Interchange believe that the launch of Local.com has been a success, with considerable gains in traffic, market share and revenue achieved thus far. Two primary goals are to become No. 1 in local search and to achieve profitability,” said Heath Clarke, chief executive of Interchange, in a statement.
Circuit Board Maker Rebounds
Anaheim-based DDi Corp. got some good news in its traditionally tough sector.
The company, which makes printed circuit boards, reported earlier this month its fourth-quarter loss narrowed to $5.6 million from $7.8 million a year earlier.
Net sales climbed about 10% to $48.2 million.
There are no reported estimates from analysts for DDi. The results suggest the company is heading in the right direction.
“We saw sequential growth of 9% in the (printed circuit board) business, resulting from a strengthening of demand, particularly in the communications and computer market segments,” said Mikel Williams, chief executive of DDi. “Further, we see the demand trends continuing into the first quarter of 2006, along with a slight increase in the quick turn mix of our overall sales order intake.”
DDi makes circuit boards in large volumes and on short notice, which it refers to as quick turn.
