market folly

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Jim Chanos of Kynikos Associates.  He presented "Mobile Computing Revolution: Collateral Damage in Hard Disk Drives."  He focused on hard disk drive makers Seagate Technology (STX) and Western Digital (WDC), calling them value traps.


Hard Disk Drive Decline: Short STX / WDC

Losers and winners. "Death of the PC” Units are actually just beginning to decline. Tablets increased 142% yoy in Q113. Only had one quarter of declining units so far. Hard drive decline even more slowing, began rolling over earlier than PC, but big snap back after the floods in Thailand.

Western Digital (WDC) & Seagate Technologies (STX) both look "cheap" and he says they are a value trap. 5-6x p/e, 4x EV/EBITDA. Industry consolidation has resulted in better pricing, and stronger margins.

Bulls say proliferation of user-generated data (photos, etc.) will outweigh the effects of PC unit declines.  Short Idea: WDC, STX stocks are soaring, while Dell (DELL) and Hewlett Packard (HPQ) are in decline. But pricing is up from 8% of PC BOM, to 10%.

He says cloud efficiency actually reduces Hard Disk Drive demand. STX short. Says margins will collapse from the 25-30% guidance. Says they have accounting issues, because of acquisition they put $1B in goodwill on the books, this may have goosed their profitability.

STX: Lots of insider selling of the stock. Top 4 officers have sold half their stock in the last 2 years. #3 guy quit last night abruptly. Says it's the PC business with about a year lag. End of 2013 they get hit. (For the converse argument, note he doesn't mention the huge FCF generation, and lack of significant debt).


We've recently also posted up Jim Chanos presentation on China as well as a recent interview about his longs and shorts.

Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.