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Investor concerns over blown, new opportunities and growth of magnetic storage should keep
bottom line strong
Data Storage Devices
Analyst interview covering:
Komag Inc. (KOMG-NASDAQ)
3155 NW 82nd Avenue, Suite 200
Miami, FL 33122
Mark S. Miller
Senior Vice President
Brean Murray, Carret & Co. LLC.
570 Lexington Avenue
New York, NY 10022-6822
Interview conducted by:
Lynn Fosse, Senior Editor
August 31, 2006
Mark Miller is Senior Vice President of Equity Research at Bream Murray, Carret and
Company. He covers tech hardware stocks in the areas of disk drives, photonics, and
semiconductor equipment. Prior to his seven years of investment research experience, he
worked in technical management and research positions at such firms as Seagate, 3M,
Control Data and with NASA. During his 25 years of technical experience he contributed 40
research publications and holds seven patents. Mr. Miller holds undergraduate and graduate
degrees in Physics as well as a MBA. His investment research has been recognized by a
variety of sources including the Wall Street Journal, which recently ranked him as its
number one computer hardware analyst based on the performance of his stock recommendations
Brean Murray & Co., Inc. was founded in 1973 as a research-driven investment and
merchant bank, focusing on growth companies to provide clients with superior investment
Its services include equity research, investment
banking, institutional sales and trading, syndicate, and asset management.
CEOCFO: Mr. Miller, will you tell us your background covering
Mr. Miller: Prior to coming to the investment industry
I worked 25 years in private industry and government. This technical experience includes
17 years in the data storage industry for firms like Seagate, 3M, Control Data, and HMT.
My duties ranged from research engineer to research director. I was the first analyst to
cover Komag, after they came out of bankruptcy in May of 2003. We put a buy on
it; the stock was at $8.55 and have we maintained that buy rating since that
What do you like about Komag?
Mr. Miller: While we recently lowered our estimates
for this quarter, long term we like the stock. The thing right now is that the drives
stocks are depressed and I think there is a lot of misinformation about Komag. What I like
about Komag is that it is one of the two leading media suppliers that make hard disks that
are employed in disk drives. A disk drive is similar to a record player and Komag makes
the record or in this case the disk, which is where the information is magnetically
recorded. Media has been in short supply for some time. I think it is going to remain in
short supply. Seagate (NYSE: STX) purchased Maxtor Corporation (NYSE: MXO). They completed
that transaction in May and surprisingly, they announced that they were going to shut down
Maxtors media production capabilities, 18 million disks a quarter. Even before that
media was in short supply, and I think it will continue the pressure in terms of supply.
There are other reasons I like Komag; I think they are going to add an additional customer
within the next 1 to 3 months, which I believe will be Samsung Electronics Co., Ltd.
Komag is also producing a new product for the industry. Media on 2 ½ glass
substrates are used for laptop PCs and game applications. There are two types of the
2½-inch substrates, which is what you put the magnetic coatings on. Historically, for 2
½ substrates, glass is used, but glass is very expensive and it is hard to achieve
good magnetic properties on. However, Komag has just started to ship a new product, using
2 ½ aluminum substrates, which would save money and give you better performance.
Therefore, that has attracted a lot of attention. Finally, I also like Komag, because
Microsoft Corporation (NASDAQ: MSFT) is going to introduce Vista early next year (2007)
and that should help PC sales, which in turn should help disk drives sales. There is also
a large short interest in Komag, like about 25% short interest. I think there are a lot of
misconceptions about the stock, which is the basis for the short interest that I believe
are going to be proven to be false in a short period of time.
CEOCFO: I know they are
going to have a change in management, how do you see that affecting the company?
Mr. Miller: Certainly I would like to congratulate
former CEO, T.H. Tan on his coming retirement; I think he did a wonderful job with the
company coming out of bankruptcy five years ago. I worked with Komags new CEO, Tim
Harris at Seagate, which is one of Komags largest customers, so I think that is a
positive. In addition, he has been in charge of the capacity expansion that has gone quite
well for Komag compared to some of the other component suppliers in the disk drive
industry that had trouble expanding capacity at high rates. Tim brings a lot of
experience; he brings a Seagate connection and he also understands magnetic heads, which
you need to optimize along with the media to get best performance. I think he will also be
a good spokesman for Komag with the investors.
What are your concerns about the company?
Mr. Miller: Outside of my short term concern about
shipments to Seagate this quarter, my concern is that the fears that a lot of people have
about Komag been over blown and actually proven to be, at least, in the last couple of
years, completely false. I think now, the whole disk drive group, like technology, is
completely depressed and under priced by about 25 or 30%. One concern that people should
no longer have about Komag, has been the effect of the Seagate and Maxtor Corporation
merger. When Seagate announced this in December, people thought it would be bad news for
Komag because Seagate does 85% of its media in-house. However, Seagate is going to be
closing down the Maxtor Corporations media production operation for at least 18
months, so they will need to buy that media on the market or eventually produce it
internally; that instead of a negative, I think is going to be a positive. Eventually,
Seagate will redirect most of that media in-house, but that is not until sometime in the
first half of 2008. If you look at the projections for media to grow 15% between now and
2008, Seagate is still going to purchase 13.5 to 15 million disks on the open market and
most of those will come from Komag. Last quarter, Komag shipped around 12 million discs to
Seagate and Maxtor Corporation combined. So people have had this Draconian impression that
by 2008, there is going to be a large decrease in media sales by Komag to Seagate; I just
do not see it, I think there may be a modest decrease, maybe flat. There have been many
misconceptions, in fact, they were expecting that to happen this year and now it appears
that Seagate wont have the Maxtor production fully back on line until the first half
of 2008. When Seagate announced it was closing the Maxtor plant, those misconceptions
should have ended. I think that has been one of the fundamental misconceptions, thinking
that Seagate was going to take a lot of business away from Komag; however, that is not
going to happen. Seagate is still going to be buying a large number of discs, more than
they bought from Komag last quarter on the external market.
CEOCFO: You mentioned
Tim Harris being a good spokesman for the company, has Komag not addressed investors or do
they not focus on that and should they?
Mr. Miller: I think they have done a good job of it.
You cannot fault T.H. Tan. Komag over the last three years, Komag is one of the best
performing technology stocks in the entire stock market, so certainly he deserves credit
for that. However, with Tims experience in the industry; I think he will be a good
replacement. I think he will be an asset with Wall Street.
CEOCFO: What is your
price target and what should people be looking for in the next few years with Komag?
Mr. Miller: My price target is $57 dollars; we moved
our 2007 estimates up after Seagate announced they were going to be buying media
externally instead producing at Maxtor Corporation. We moved them up from $4.86 to $5.51;
consensus is around $5.00 a share, which makes Komag an incredibly cheap technology stock,
a PE of 7, or 7½. It is hard to find a tech stock that cheap. I do see growth next year
around 15% bottom line growth for the firm. Right now, there is some concern about
inventory at Seagate effecting Komags ships this quarter, however we believe is a
one-quarter issue. As such, we recently lowered our Komag estimates this quarter from
$1.26 to $1.13 per share, but we believe this situation can be cleaned up this quarter and
the distribution channel looks pretty clean. That excess inventory at Seagate is
relatively small if you consider that Seagate is taking the Maxtor media production
offline and they will need to buy disks starting in September from people like Komag. In
addition, as I mentioned, Komag will be adding another customer in the next 1 to 3 months,
which should be positive and something to look for.
Any final thoughts for our readers?
Mr. Miller: Long term, you need to look at the
positives; there have been too many negatives that have been distorted, a lot of
hand-waving arguments about the Seagate/ Maxtor merger, about Hitachi Ltd. (NYSE: HIT)
also doing the same thing. Hitachi, which is one of their customers, is adding capacity;
but a lot of that is for glass. People have to stop thinking of the Komag glass as being
half empty and start thinking about the positives, which I see as Seagate having to buy,
at least for the next 1 ½ to 2 years, these extra disks Maxtor was producing on the open
market. The possible addition of Samsung Electronics Co., Ltd. and this two-and-a-half
inch program on aluminum substrates are other positives for Komag. Komag is just starting
to ramp that 2 ½ program and there could be other applications for this product
besides games. I think other things like Microsofts Vista will help the disk drive
industry grow next year. Finally, Komags current valuation is 25 to 30% below
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