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Tuesday, March 31, 1998
HMT Technology Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMTT)") else Response.Write("(Nasdaq: HMTT)") end if %>
Phone: 510-490-3100
Website: http://www.hmtt.com
Price (3/30/98): $13 1/4
HOW DID IT FIND TROUBLE?
HMT Technology has driven a curious road to trouble. A major independent
manufacturer of thin-film media used in Iomega's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> Jaz drive
and other computer disk drives, the company has seen its stock plunge from
a mid-October high of $20 5/8. And that despite reporting a terrific December
quarter in-line with projections. Investors just seem convinced that the
industry's troubles will eventually hurt HMT.
First the good news. On January 14, HMT reported that its third quarter revenues
soared 61% versus the year-ago period to $98.6 million. That was also up
9% sequentially from the September quarter's $90.4 million in sales. Fully
diluted earnings drove ahead 33% to $0.40 per share, despite a 25% higher
share count.
True, net margins fell to 20.8% from 21.4% in the year-ago period as gross
margins sank to 37.6% versus 38.4% a year ago and 40.6% in the second quarter,
before the Asian crisis led to industry price-cutting. Still, considering
such cuts and an inventory glut in the high-end of the drive market that
has caused troubles for rival Komag <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %>, HMT's results
were remarkably strong and well within the long-term 33% to 38% target for
gross margins.
Smith Barney reiterated its "buy" rating in mid-February and Deutsche Morgan
Grenfell initiated coverage a month later with a "buy" rating. Still, HMT
has been pummeled and has remained flat partly due to its exposure to troubles
at Iomega, which is believed to have accounted for 30% of HMT's sales in
the third quarter.
HMT makes the media for Iomega's 1 gigabyte Jaz disks (and the new 2 gig
Jaz), which has come under competitive pressure of late from SyQuest's
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYQT)") else Response.Write("(Nasdaq: SYQT)") end if %> SparQ drive. TheStreet's Herb Greenberg recently reiterated
his argument from January that HMT shipped 8 million Jaz disks during the
first nine months of FY98, with about 3 million said to be piled up in Iomega's
inventories. Short term, that could pose a problem for HMT.
BUSINESS DESCRIPTION
HMT Technology is a leading independent designer and manufacturer of
high-performance thin-film disks used in high-capacity hard disk drives for
personal computers, network servers, removable hard drives, and workstations.
Most disks go into drives with 2 to 10 gigs of capacity (requiring 2 to 12
disks).
The company sells its media to a concentrated group of leading original equipment
manufacturers such as Maxtor, Samsung Electronics, Iomega, and Western Digital.
Sales by customer vary significantly from quarter to quarter. HMT's media
was recently qualified by Maxtor for its 11.5 gig magnetoresistive (MR) head
drive and was qualified last October for Western Digital's 9.1 gigabyte MR
drive.
The company doubled its potential manufacturing capacity last May with new
facilities in Fremont, California, and Eugene, Oregon. Competitors include
Komag and so-called captive media units at drive makers Western Digital and
Seagate. Insiders own 32% of the stock.
FINANCIAL FACTS
Income Statement
12-month sales: $329.3 million
12-month income: $71.1 million
12-month EPS: $1.41
Profit Margin: 21.6%
Market Cap: $730.1 million
Balance Sheet
Cash: $46.7 million
Current Assets: $121.7 million
Current Liabilities: $50.7 million
Long-term Debt: $230.7 million
Ratios
Price-to-earnings: 9.4
Price-to-sales: 2.2
HOW COULD YOU HAVE SEEN IT COMING?
Troubles in the drive industry began early last summer as Seagate started
seeing increased competition at the high-end. By late June, that had
spilled
over into major trouble at Komag, which was heavily dependent on Seagate
despite that drive maker's stated intention to significantly boost its own
media manufacturing capacity.
Komag decided to shift more manufacturing capacity to Malaysia in a process
to cut costs while doubling annual capacity to 115 million disks by the end
of 1998. Then came Fujitsu's price-cutting on drives and Western Digital's
early November
warning.
Overcapacity, excess inventories, and price cuts throughout the drive market
meant component vendors such as HMT would see price pressures if they hadn't
already.
WHERE TO FROM HERE?
Given its exposure to Iomega's troubles, HMT might indeed start experiencing
the difficulties shared by nearly every other industry player. If so, it
could still have a long way to fall. Komag now trades at an enterprise
value-to-book value ratio of 1.25. HMT trades at 4.75 times book.
Yet based on its exceedingly healthy margins and a growth rate far above
the industry's 18% target, HMT appears significantly undervalued if it can
sidestep the industry's main problems. First Call shows a current lowball
EPS estimate of $1.55 for FY99 ending next March, putting the stock at 8.5
times forward estimates.
HMT's secret is that proprietary improvements to its manufacturing equipment
and good quality control have insured higher yields, giving the firm a tremendous
cost advantage. Deutsche Morgan Grenfell's recent report suggests that HMT's
average cost per platter in the December quarter was just $6.69 versus $10.34
for Komag and $16.41 for Stormedia.
It's no wonder, then, that HMT can take a hit to its average selling
prices and still make good money. That advantage plus new capacity has allowed
HMT to boost its market share from 6.1% in 1996 to 7.4% in 1997, with DMG
projecting a 9.4% share this year.
So the media may not be the message. Komag's projected 50% year-over-year
decline in March quarter sales may not be so incongruous with the little
to no earnings growth (but still substantial sales growth due to dilution)
that analysts expect for HMT.
HMT may not come out of these hard times unscathed, but it has proven
to be one of the industry's most adept players. Investors scouting for bargains
in this depressed sector should take a closer look.
-- Louis Corrigan
([email protected])
Check out the Daily Trouble Message Board!
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