THE TIMES 100 : RISING FORTUNES : Hard Times Hit Read-Rite : But Analysts Say the Firm Is Well Positioned to Survive
It’s always a roller-coaster ride in the world of computer component manufacturers, and Read-Rite is no exception.
Last year, the Milpitas-based maker of parts for disk drives more than doubled its sales, sending the company into first place on The Times Growth 100 list--a roster of California’s largest publicly held companies in terms of sales growth from one year to the next. Sales increased 114% to $461 million. Read-Rite also ranked No. 12 among companies with the fastest profit growth, doubling its earnings to $55 million.
Reflecting that increased business, the company’s stock hit an all-time high of $32 a share in December. The company took the opportunity to make a secondary offering of $29.25 a share, raising close to $180 million.
More recently, however, Read-Rite’s stock has hit hard times: Its shares have sold in the $15 range, shedding $5.25 in two trading days early this month.
Analysts say nothing has changed at the company itself, but market pressures are asserting themselves after a heated expansion in the personal computer market.
“The disk drive industry is in one of its notorious down cycles,” says Paul Fox, industry analyst at Montgomery Securities in San Francisco.
In recent weeks, Fox and some other analysts have lowered their fiscal 1993 earnings estimates by up to 10 cents a share. Nevertheless, Fox calls Read-Rite “a well-managed company” that should emerge from the current turmoil in good shape.
Lori Holland, Read-Rite’s chief financial officer, explains that the company has “some customers who are struggling.”
Earlier this month, the chairman of Conner Peripherals, a manufacturer of disk drives and a major Read-Rite customer, said price competition and excess capacity were taking their toll on company profit and sales. Customers were delaying purchases and bargaining more toughly. Disk drive makers, in turn, were pressuring their suppliers for price breaks.
Read-Rite enters its second decade in business as the largest independent supplier of thin-film magnetic recording heads. The heads are the tiny components that record on and retrieve data from the disks’ surfaces.
Companies such as International Business Machines, Seagate Technology and Digital Equipment also fabricate recording heads, but only for use in their own products. Last year, Read-Rite shipments accounted for 49% of independent supplies, leaving its competitors in the dust.
Read-Rite was particularly well positioned to take advantage of the seemingly ceaseless demand for more data storage capacity. Unlike some competitors, Read-Rite opted early on to use ceramic materials to manufacture its heads. Ceramic is easier to miniaturize and can handle data more quickly and cheaply. As drive makers strive to cram more storage capacity into their products, the thin-film share of the industry has increased dramatically.
Read-Rite owns manufacturing plants in Northern California, Japan and Southeast Asia. Wafer fabrication, the first step in the manufacturing of thin-film heads, is done in Milpitas. The company is spending $26 million to renovate a building in Fremont to double its wafer production. The Fremont plant, due to open this summer, will employ 600 people.
“We want to keep wafer production in California, close to our research and development group,” Holland says. For the Japanese market, Read-Rite linked with Sumitomo Metal Industries to open a plant near Osaka.
Last year, the company’s financial statements began to reflect a series of acquisitions completed in 1991. The company bought plants from customers in Malaysia and expanded into Thailand.
Read-Rite assembles those components, called head stacks and head-gimbals, and sells them to disk-drive makers.
From a strategic standpoint, the acquisitions were “a smart move,” says Todd Bakar, senior technology analyst at Hambrecht & Quist, a San Francisco investment bank. He called it “an advantage over competitors,” allowing Read-Rite to deliver more sophisticated components to its customers.
To stay ahead of the competition, Read-Rite teamed up with Hewlett-Packard to develop even smaller heads called nanosliders, which can also be used in cellular phones and faxes. The company started shipping the nano heads from its Thailand plant this quarter, and is working on prototypes for a shift to more advanced technologies.
