Monday, October 30, 2006

Calls of Note Part 1

- Deutsche Bank is upgrading Komag (NASDAQ:KOMG) from Hold to Buy on upside from new opportunities. Firm views Komag's desktop business as more stable now that it is qualifying on 95mm programs with Samsung. In addition, they view Komag as very well positioned to expand into the 65mm/notebook market, which is growing faster than desktop. As Komag ramps new customers and products, and delivers on results, they expect the shares to move higher. Firm's $48 price target is based on 10x FY07 EPS, and the firm believes Komag could earn $5.00 in FY08.

They view Samsung as adding further stability to Komag's 95mm business and as buffering potential share losses at Seagate in 2008. At Samsung's current unit levels, analysis suggest 10% share at Samsung could drive an additional 1.5M units/Q (4% above 3Q06 levels). In addition, the firm views Komag as very well positioned to expand into the 65mm/notebook market and take share by leveraging its scale to deliver high-quality, low-cost products. At 5% share of the 65mm market, Komag could see an additional 3M units/Q (8% above 3Q06 levels).

Samsung has also been the fastest growing desktop HDD vendor this year, with C1Q06 units up 21% Y/Y and C2Q06 units up 62% Y/Y, outstripping Hitachi (20% and 36%, respectively), and Western Digital (15% and 16%), although Samsung is growing off of a smaller base than
Western Digital.

Komag currently trades at 7.7x DB FY07 estimate of $4.75, at a discount to its 3-year median FTM P/E of 10x. Firm expects the shares to trade higher as Komag ramps new customers and new 65mm media.

Notablecalls: As regular readers know I don't usually like highlighting rating changes on this page but this one may be actionable. Would not chase the frist upward brust, though. Think the stock needs to clear the $38 level in the coming days in order to move further up.

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