Four computer storage device companies out of 28 others in the same category were singled out as cream of the crop as viewed from their Return on Equity (ROE). Xyratex, NetApp, Western Digital and Seagate Technology were tops on the NASDAQ exchange.
Return on equity measures profitability by the amount of profit a company generates with money shareholders have invested. In other words, ROE equals net income divided by the shareholder’s equity. For example, if ROE is 20 percent that means 20 cents in assets are created for every dollar originally invested. That return can be reinvested to provide growth or paid out in dividends to the investors which lowers the company’s growth potential.
Xyratex has a history of R&D in disk drive development, storage systems and high-speed communication protocols.
Xyratex (XRTX), based in the UK, delivered a return on equity of 12.23 percent. The company operates in two segments: Networked Storage Solutions (NSS) and Storage Infrastructure (SI). The NSS products concentrate on HDD based data storage subsystems and solutions. Their net profit margin is low, 3.37 percent, in comparison to the industry average of 13.00 percent. You could pick up a share for $12.52 today.
NetApp (NTAP) with a portfolio of application, virtualization, cloud, and service provider solutions delivered an ROE of 15.09 percent. The Mid Cap Growth company received only two stars from S&P Capital, a market research firm. NetApp’s net profit is 9.71 percent. Shares were selling for $32.63 on Friday.
Western Digital offers storage for your desktop, tablet, and cloud based data.
Western Digital (WDC), categorized as Mid Cap Value showed an ROE of 16.10 percent. Hard drives that Western Digital designs, develops, manufactures, and sells are their core business. They provide internal and external storage for business and personal use. Desktop, tablet and cloud solutions are offered. Shares in the California company were higher priced than most at $44.04 for the company which shows a net profit 12.92 percent.
Showing the highest ROE of the group was Seagate Technology (STX) at 96.04 percent and a striking net profit of 19.15 percent. The Mid Cap Value, Ireland based company is considered by some analysts to be ripe for take over because of their EV/EBITDA ratios (Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization). A low ratio means a company may be undervalued. Seagate sits at 3.6. GameStop and Dell also qualified, according to MarketWatch, as companies to consider for takeover. EV/EBITDA is important because it takes into account company debt which the acquirer will have to assume.
Morningstar also published companies they felt could face takeover challenges, including iRobot (IRBT) a Small Cap Growth company that is categorized in appliance and tools. An odd placement for a company that developed a Small Unmanned Ground Vehicle (SUGV) for military use, the 1KA SeaGlider an unmanned underwater vehicle for oceanic exploration, a pool cleaning robot, and the familiar Roomba vacuum cleaning robot.
Also on the Morningside list, Leap Wireless (LEAP) known for prepaid mobile phone services is a Small Cap Value company with over 50 million customers. At $5.28 a share, analysts marked Leap Wireless as a stock to sell. Aggressive buyers might look at buying more than just low priced shares if the EV/EBITDA looks as favorable to them as Morningstar thinks it is.