Morgan Stanley not ready to call a 'bottom' to tech hardware cycle
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As numerous leading tech hardware companies prepare to unleash a slate of earnings reports beginning next week, there remains a sense of uncertainty about when the sector will truly get back to a state of consistent growth amid what has been a time of tightening corporate budgets and spending cuts.
That's the assessment of the hardware sector from Morgan Stanley analyst Erik Woodring, who said that that even though tech hardware companies have performed well this year so far, "we're not ready to call the cycle bottom." Woodring said he reached his decision based on recent surveys of tech chief information officers and hardware customers.
Woodring recently upgraded his industry view on hardware to "in-line" from "cautious" on the grounds that "we were 50% to 75% through IT hardware's late cycle negative earnings revisions". However, Woodring said that even with things appearing to get better for the sector, "the No. 1 debate amongst investors remains whether the bottom has passed and now is the time to get more positive toward hardware stocks."
Adding to that sentiment was data from Morgan Stanley's recent surveys, which Woodring said showed that hardware growth expectations being lowered for the fourth-straight such survey, and the risk of CIOs cutting their budgets is now "elevated."
"While we'd argue that progress has been made, we're still waiting [and] watching to potentially get more constructive [on hardware]," Woodring said.
When it comes to particular hardware companies, Woodring said investors should turn their attention toward "quality companies with valuation support, lower risk of estimate cuts, and operational efficiency," and cited Apple (NASDAQ:AAPL), CDW (CDW) and Teradata (TDC) as examples of such companies fitting the "overweight" criteria.
At the other end of the spectrum are what Woodring called hardware companies that have an "elevated negative estimate revision risk" shares that could trade at "an unwarranted premium valuation." Woodring said companies that fall into that realm include HP Inc. (HPQ), Logitech (LOGI), Xerox (XRX) and Cricut (CRCT).
Woodring added that with a barrage or earnings reports soon to roll in, "investors need to prepare for the early cycle," which is when hardware historically outperforms the S&P 500 (SP500) by 30 to 35 points.
Along with Apple (AAPL) and other hardware companies lining up to report quarterly results in the weeks ahead, semiconductor leaders Intel (INTC) and Advanced Micro Devices (AMD) will also provide some insight into the state of the spending market among enterprises.