Western Digital, Seagate Could Hit Currency Jackpot

       

Deadly bombings in Bangkok this week appeared to target Thailand's tourism industry. Tourism is the "last standing engine supporting the Thai economy," a JPMorgan analyst wrote in a Tuesday note to investors. Tourism in Thailand is nearly three times as important as it is in the U.S., measured by percentage contribution to gross domestic product. Vulnerable companies could include Airports of Thailand (ticker: AOT.TH), Thai Airways International (THAI.TH), shopping center operator Central Pattana (CPN.TH), and hotelier Minor International (MINT.TH).
        But Thailand's turmoil could indirectly bolster the profits of a pair of U.S. hard drive companies with operations in the country: Western Digital (WDC) and Seagate Technology (STX). RBC Capital Markets estimates that Western Digital has 19% of its manufacturing footprint there and Seagate 20%. That's enough exposure to make the hard drive market sensitive to Thai events. Late 2011 flooding in Thailand, for example, led to two years of elevated hard drive prices.
        Now, investors should turn their attention to the sliding baht. Exports in Thailand are falling on weak demand from China, and a surprise devaluation of China's currency threatens to make Thai goods less competitive. Thai officials have lowered their 2015 GDP growth forecasts three times this year, recently to a range of 2.7% to 3.2%. The central bank has joined a parade of countries engaging in monetary easing in an effort to spur growth. The U.S., meanwhile, has signaled that it could begin to increase interest rates in coming months.
        That has pushed the baht down 4.5% versus the dollar since just the end of June. That's enough to add 3.3% to earnings per share for Western Digital and 2.5% for Seagate in their fiscal years ending June 2016, assuming the two currencies hold their current levels, calculates RBC. But if the Bangkok bombings indeed cut into tourism as feared, the result could be a further slowing of GDP growth, more monetary easing, and a deeper slide for the baht.
        Thailand's tragedy and its currency effects alone are insufficient (and perhaps unsavory) reasons to invest. But Western Digital and Seagate could be poised for share price recoveries with or without the help of the falling baht. Both companies have seen profits sapped in recent years by weak demand for personal computers, but pricing and margins have stabilized, and long-term demand is likely to get support from cloud computing. Wall Street predicts both companies will see earnings per share bottom this fiscal year before rebounding by double-digit percentages next year. Shares of each company trade cheaply at about 12 times forward earnings projections and carry plump dividend yields: 2.4% for Western Digital and 4.2% for Seagate. Based on price targets, analysts are more bullish on Western Digital, predicting 20% upside over the next year, versus 10% for Seagate.
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        (END) Dow Jones Newswires

        August 18, 2015 21:18 ET (01:18 GMT)