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Xyratex Readies For The Next Upturn
Xyratex Ltd. (Nasdaq:XRTX) is a key supplier to manufacturers of data storage drives and devices. It reported a decline in revenue and severe drop in profits during its fiscal third quarter, but didn't attribute it to "recent financial market volatility." Instead, its results are driven by demand trends in the data storage industry, which happen to be volatile on their own. Despite these ups and downs, the company is conservatively managed and the stock is favorably positioned for the next industry upturn.
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Third Quarter Recap
Sales of Xyratex's networked storage solutions, which accounted for 93% of total quarterly revenue, held up well and saw a sales increase of 6.1%, however, total revenue fell 16% to $361.8 million. This segment makes storage products that are used in final products sold by the likes of EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP). The storage infrastructure unit sells capital process equipment, such as test equipment, to the disk drive industry and saw sales plummet by 77.7% to $25.2 million, accounting for the difficult quarter. Customers in this group include Seagate (NYSE:STX) and Western Digital (NYSE:WDC) who are planning to merge their operations. The struggles were attributed to "significantly lower demand for disk drives, the uncertainty regarding the pending acquisitions by Seagate and Western Digital, and increased competition." (For related reading on acquisitions, see Biggest Merger And Acquisition Disasters.)
Operating income declined by nearly 65% to $12.4 million, as storage infrastructure gross profits plummeted to $2.4 million from $38.2 million in last year's third quarter. Net income fell a more severe 74%, as income tax expense was $3 million, up from an income tax benefit of $2.1 million last year. Share buybacks helped temper the per-share earnings decline slightly to 73.1%, as earnings fell to 32 cents per diluted share.
Outlook
Xyratex expects fourth quarter sales between $343 million and $383 million, and earnings in a range of 19 cents and 37 cents per diluted share. For the full year, analysts currently project a sales decline of more than 10%, total sales of $1.4 billion and earnings of 80 cents per share.
The Bottom Line
Xyratex's operations are highly cyclical and based off the uneven demand its customers experience in the data storage industry. Yet, despite the near-term hit to earnings so far this year, operating cash flow has almost doubled to nearly $100 million. The company also has zero long-term debt and cash-on-hand of more than $136 million. At a forward P/E below 11 and a share price that is bumping along its lows over the past year, the stock could easily move forward during the next upswing in the industry. (For related reading on cyclical industries, see Cyclical Versus Non-Cyclical Stocks.)
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Third Quarter Recap
Sales of Xyratex's networked storage solutions, which accounted for 93% of total quarterly revenue, held up well and saw a sales increase of 6.1%, however, total revenue fell 16% to $361.8 million. This segment makes storage products that are used in final products sold by the likes of EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP). The storage infrastructure unit sells capital process equipment, such as test equipment, to the disk drive industry and saw sales plummet by 77.7% to $25.2 million, accounting for the difficult quarter. Customers in this group include Seagate (NYSE:STX) and Western Digital (NYSE:WDC) who are planning to merge their operations. The struggles were attributed to "significantly lower demand for disk drives, the uncertainty regarding the pending acquisitions by Seagate and Western Digital, and increased competition." (For related reading on acquisitions, see Biggest Merger And Acquisition Disasters.)
Operating income declined by nearly 65% to $12.4 million, as storage infrastructure gross profits plummeted to $2.4 million from $38.2 million in last year's third quarter. Net income fell a more severe 74%, as income tax expense was $3 million, up from an income tax benefit of $2.1 million last year. Share buybacks helped temper the per-share earnings decline slightly to 73.1%, as earnings fell to 32 cents per diluted share.
Xyratex expects fourth quarter sales between $343 million and $383 million, and earnings in a range of 19 cents and 37 cents per diluted share. For the full year, analysts currently project a sales decline of more than 10%, total sales of $1.4 billion and earnings of 80 cents per share.
The Bottom Line
Xyratex's operations are highly cyclical and based off the uneven demand its customers experience in the data storage industry. Yet, despite the near-term hit to earnings so far this year, operating cash flow has almost doubled to nearly $100 million. The company also has zero long-term debt and cash-on-hand of more than $136 million. At a forward P/E below 11 and a share price that is bumping along its lows over the past year, the stock could easily move forward during the next upswing in the industry. (For related reading on cyclical industries, see Cyclical Versus Non-Cyclical Stocks.)
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by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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