Seagate Technologies (STX) bond 6.61% for 5 years:

Seagate Technologies designs, develops, markets and manufactures solutions for hard data storage. Their product line includes disc drives and hard drives for desktop and laptop computers, mobile computing, digital video recording (DVR), and gaming counsels. Their clientele includes a wide spectrum from private personal use to large corporate applications.

At Durig Capital, we have developed a process to review, select, purchase and monitor corporate bonds. Enclosed is our review, along with supporting documents, showing why we believe this corporate bond makes sense in clients’ portfolios. We reviewed thousands of separate corporate bond listings to find what, we believe, is currently the best corporate bond for investors. The following includes our selection criteria.

Step 1 – Assessing the yield curve

In recent months, we have seen many portfolios with large cash positions. Often these funds (cash and/or money markets) are yielding very little and these low interest rate environments may be frustrating. At the same time, people are concerned, as they should be, about the effects inflation may have on the real value of their fixed income holdings if they were to purchase long term issue. Upon reviewing Seagate’s earnings release, we reviewed this bond issue again and over a year later we see their underlying business if anything has improved.

Step 2 – We like companies that are profitable.

Seagate had 579 million in pretax profit or $ 1.09 per share fully diluted for the year ending July 1, 2011. With Steve Luczo CEO of Seagate claiming “Because hard disk drive storage is a fundamental technology for cloud service providers, data centers and all other network-based content providers, total industry demand grew almost 40% in fiscal year 2011…” Year over year their fourth quarter revenues we up over 7% but margins were lower.

Step 3- Interest Coverage Ratios

Seagate generated $511 million from earnings before interest tax and amortization or EBITA for the quarter recently ended. They owed $ 214 million in interest expense on the debt they have outstanding meaning they produced two times over their interest costs. This is a healthy ratio and we like seeing this kind of buffer should the business environment deteriorate.

Step 4 – We like companies with lower debt to cash ratio.

Seagate reported long term debt of $3.51 billion. Cash and short term investments grew to $3.15 billion. Long term debt, is slightly higher than cash on hand meaning they would almost be able to pay off their debt were a catastrophic unforeseen event to occur. Considering that this note matures in 10 1 2016, one realizes that Seagate has enough cash on hand to repay debt if needed.

Step 5 – We like companies that have flexible balance sheets

They currently have a market cap of about $4.9 billion while long term debt is slightly above $3 billion. A debt to equity ratio of just above .6 is higher than we would prefer to see, but think it to be still quite manageable, as banks have currently explained they prefer to loan at a .50 debt to equity ratio.

Step 6 – We like high yields.

This issue of Seagate currently has a 6.18% yield to maturity with the corresponding U.S. Treasury yielding 0.90%. Although the credit ratings are different, we believe there should not be this large of spread between the yields.

Step 7-Additional Risks

Seagate is the world largest producer of hard drives. Revenue have started growing again, but they still under margin are under margin pressure. The cloud computer cycle growth has helped them combat the constant erosion they have feeling for years from the migration for Personal Computer (that have hard drives) to the mobile device (that often don’t).

Summary

This is a good yield given consider the 5 year time frame. Even though it doesn’t have an investment grade rating, the large cash position, strong free cash flow, and profitability illustrates a growing business that survived the very tough economic period that occurred prior their providing top line growth from their increased cloud based business.

Additional Seagate Technology information such as financial ratios, Charts and News is available here.

Coupon 6.8%
Ratings Ba1/BB+
Maturity 10/01/2016
Price $100.8
Yield to Maturity 6.61 %
Yield to Call 6.61 %

Disclosure: Durig Capital currently does have a position in Seagate’s bonds.

To know more about this Investment call our specialist at 971-327-8847

On a scale of A+ to F

Reason for Durig A+ Rating

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