Xyratex Lends Insight Into Storage Industry Trends

By Ryan C. Fuhrmann | July 09, 2012 AAA

Xyratex (Nasdaq:XRTX) is a key supplier to manufacturers of data storage drives and devices. Its hard drive products and solutions are used in the final products of the leading players in the storage industry. In fact, 91% of its sales are to only six customers, and they are the largest in the industry. As such, Xyratex serves as a bellwether for overall industry trends.

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Quarterly Details
Xyratex reported second quarter results on Thursday, July 5. Total revenues fell 4.9% to $322.1 million but net income came in at $7 million, or 24 cents per diluted share following a loss of $4.6 million, or 15 cents per diluted share in last year's first quarter. Its storage solutions, which go into making hard drives, accounted for 86% of the top line but experienced negative sales growth of 7.5%. Its HDD Capital equipment segment made up the remaining 14% of sales but jumped 16.8%. This unit helps clients process, inspect and test drive equipment.

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Industry Insight
NetApp (Nasdaq:NTAP), Dell (Nasdaq:DELL), Seagate (which is now part of Western Digital (Nasdaq:WDC)), IBM (NYSE:IBM) and two other customers make up more than 90% of Xyratex's sales. Its sales therefore lend insight into the sales trends of the largest industry players. During the earnings conference call, analysts asked a number of questions regarding industry data. Xyratex spoke of some softening trends and that NetApp has spoken of slower volumes and revenues, which it has also mentioned publicly on its own. However, Xyratex did increase its own third quarter guidance, which boosted its stock and indicates that overall industry trends remain steady.

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The Bottom Line
For the full year, analysts are projecting an 8% sales decline at Xyratex and total sales just north of $1.3 billion. They also expect earnings of $1.68 per share, which puts the forward P/E in a very reasonable territory at 7.4. In the industry, Dell and Western Digital trade at lower forward multiples of 6.5 and 4.1, respectively. Overall, there appears to be a number of ways to gain exposure to the industry, which is growing, at favorable valuations. Dell is obviously a more diversified technology play, as is IBM. EMC (NYSE:EMC) is another key industry player, but trades at a more lofty forward multiple closer to 14.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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