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Disk drive stocks down and due to stay there

Wall Street wants an end to disk drive makers' problems but the rebound isn't coming soon.

There will be a turnaround, say analysts, but they just don't know when it will come, or how big a turnaround it will be. Wishful thinking like that gave disk-drive stocks a boost in February and then again in early May but the message now is "Don't fall for the ‘worst is over' mantra."

Disk drive stocks took a hammering on Wednesday and will probably fall further as soon as another profit warning comes along. So far in this profit warning season, Western Digital and suppliers such as Read-Rite and Komag have told Wall Street to expect hefty losses.

The story has been the same for the last year: an inventory glut slashed prices and erased hopes for easy profits. But before the barrage of profit warnings on Tuesday and Wednesday, Wall Street was ready to fall in love with hard-drive makers again. Salomon Smith Barney boosted shares of Seagate on Tuesday with a high-risk ‘buy' rating, up from a neutral.

Seagate is high risk, but along with Quantum has the best shot to survive. Quantum and Seagate both have products such as tape drives that act as a cushion against market woes. But even Quantum and Seagate are seriously limping. It can't get much worse for hard-drive stocks, but it won't get better.

Here's why investors may want avoid these stocks for now:

  • Those go-go days of soaring stock prices may not come back. In 1996, shares of Seagate, Western Digital and Quantum were all high-flyers. Why? Collectively, the trio and IBM owned 80 percent of the disk drive market. Those four players still control about 70 percent of the market, but are now joined by Maxtor Corp, a subsidiary of Hyundai Electronic Industries Co Ltd, Fujitsu, and Samsung. Same revenue pie, less profits to split.

  • Disk drives are a commodity business subject to price swings and inventory gluts. Although supply and demand could even out over the next few quarters. There's no guarantee it will stay in balance. "Even when things are balanced, it doesn't mean you will see stable pricing or profitability," said Joel Pitt, an analyst with Deutsche Bank Securities, who has a ‘buy' rating on Quantum. "Once supply and demand are in balance some may want to step up production to gain share."

  • Wall Street loves to look ahead, but it could be the December or March 1999 quarters before disk drive makers get any relief. The Christmas season and corporate buying cycles might boost demand, but don't count on it. "It may turn out to be some wishful thinking," said Pitt.