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3.00% |
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2.96% |
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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400.09 |
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848.03 |
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636.26 |
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1,701.05 |
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1,276.26 |
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174.07 |
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425.30 |
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2,469.58 |
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5,428.50 |
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This Week's Best U.S. Bond: Seagate Technologies |
Seeking Alpha - Aug. 25, 2010
Seagate Technologies (STX) 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), gaming counsels and data storage for customers buying for private personal use to large corporate applications.
At Durig Capital we have developed a process to review, select, purchase and monitor corporate bonds on an ongoing basis. 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 - Yield Curve at 4-7 Years Out.
We like this time frame because we think it is the “sweet spot” of the yield curve meaning we are frustrated with the virtually non existent short term money market, CD, and T bill yields and nervous about inflation effecting long term principal. This Seagate issue matures in six years. Principal reduction is a real risk attributable to inflation and to protect our client in this worst case scenario we would just plan to hold to maturity.
Step 2 - We like companies that are profitable.
For the last quarter, net income attributable to shareholders was $378 million, or $.77 a share. While these numbers are down over the previous quarter, their yearly net income and earning per share numbers have shown steady improvement over the last four years, an $1,609 million in net income meaning a $3.29 earnings per share. The hard drive market is a mature industry as evident in the decline in the byte per dollar rate but as technology develops into faster, smaller and mobile devices there will be a constant need for data storage.
Seagate generated free cash flow to firm of $836 million in the last fiscal year ending July 2, 2010. The rough economy for the last has been very challenging for Seagate and business in general, but Seagate still generated enough cash flow in 2010 to be able to pay off 38% of their entire principal debt. This is very strong position knowing the overall economy.
Step 3 - We like companies with lower debt to cash ratio.
Seagate Technologies' current long term debt is $2,173 million while having cash and short term investments of $2,515 million. If Seagate applied its current cash and short term investments to its current long term debt, their long term debt could be repaid. Their current balance sheet can be viewed here.
With the combination of high cash flow, plus high levels of cash, Seagate has two simple ways to cover most of their outstanding debt obligations.
Step 4 - We like companies that have flexible balance sheets.
Seagate Technologies' debt to equity ratio is 29% illustrating that, if it needed, they could float more common shares or issue debt to raise capital. At Durig Capital, we like debt to equity ratios around these levels as it gives the issuer options if additional capital were needed. Having financial flexibility in these uncertain economic times is important as one bump in Seagate’s business plan should not derail the locomotive.
Step 5 - We like high yields.
Seagate Technologies’ bonds currently have a 6.147% yield. With the corresponding Treasury yielding 2.07%, this gives Seagate an attractive 4.077% spread over Treasuries.
Step 6 - We currently like shorter maturities.
This issue matures in 10/01/2016 or just under six years. As stated above, we seek issues that mature in 4 to 8 years as this is the part of the yield curve we want to be invested in.
Summary
This is a good 6.147% yield for just over 6 years. Even though it doesn't have an investment grade rating, a large cash position, investment coverage and profitability illustrates the relative health of the company. These metrics are similar to our previous bond reports such as Expedia (EXPE), Interpublic (IPG), Unitrin (UTR), and Fidelity. Delivering profit soon after a tremendous shock to the markets and economy helps demonstrate the strength of their business model. With the low debt level and good profitability, they are well situated for an upgraded bond rating. You can find other corporate bonds listed on our web site here.
For the complete article visit Seeking Alpha
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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Income Security Recommendation January 2013 Issue.
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