Sell Soggy Seagate, 8% Yield and All

“Running a disk drive company is a little bit like driving in stop-and-go traffic. Sometimes you’re going 15 miles an hour and sometimes you’re going 85 miles an hour. You usually get to your destination on time and no one’s hurt. But it’s stressful as [heck] for the driver and oftentimes for the passengers too.”

That was Seagate Technology (STX) CEO Steve Luczo on yesterday’s conference call, and as he spoke his stock was in all-out puke mode, dropping 16.5% by the end of the day in response to disappointing earnings.

Seagate posted fourth-quarter operating earnings of 65 cents a share, way below expectations for 98 cents a share. It blamed sales shortfalls in cloud storage systems as well as enterprise hard disk drives (HDD), and issued a subpar outlook as well, noting weakness could persist into next year.

The company continues to generate far more cash than it needs to pay a dividend now yielding an annualized 7.8%. Unfortunately that’s doing nothing to allay concerns that recent revenue declines might prove irreversible. Sales were down 9% year-over-year in the most recent quarter.

The promotion of the chief operating officer into the CEO’s role while Luczo becomes an executive chairman didn’t provide much consolation, nor should it have: this is after all still the same team that got Seagate here.

Sales are slipping as flash memory continues to supplant the older HDD technology; Seagate’s limited investments in flash have yet to bear visible fruit. This is in painful contrast to its leading rival Western Digital (WDC), which is prospering thanks to a major and well-timed flash acquisition.

The stock is down a bit more today on the usual volley of brokerage downgrades, but near-term the downside appears contained. Even a widely suspect value trap can count on some support from an 8% yield and ample free cash flow.

What’s not in the cards any more, at least any time soon, is the ample upside I was hoping for had Seagate been able to prove the skeptics wrong. That didn’t happen. And since the thesis for buying the stock has gone up in flames, it’s time to unload. There’s nothing to be gained in the long run by hanging on and hoping for the best. Sell STX.

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