Goldman Turns Bullish on Hardware: Dell Top Buy Idea

Goldman Sachs analyst David Bailey late Thursday raised his stance on the hardware sector to Attractive from Neutral, “shifting toward a more offensive stance” on his stock ratings.

“Up to this point, we have been cautious on enterprise demand based on our checks and deteriorating macro conditions,” he writes in a research note. “But now, we think downward estimate revisions are mostly behind us (down 35% since the peak in August 2008), and we see greater upside than downside to estimates into the seasonally stronger second half of the year and in 2010.” That factor, combined with a 25% decline in Goldman’s tech index since August 2008, “creates a compelling buying opportunity.”

Here’s a rundown on his rating changes:

• Dell (DELL): Upgraded to Conviction Buy from Neutral.
• Western Digital (WDC): Downgraded to Neutral from Buy.
• Seagate (STX): Upgraded to Buy from Neutral.
• IBM (IBM): Downgraded to Neutral from Buy.

Bailey also repeated buy ratings on Arrow Electronics (ARW) and Hewlett-Packard (HPQ).

He also resumed coverage of both EMC (EMC) and NetApp (NTAP) with Neutral ratings.

Bailey contends that a return to normal seasonal trends in tech should serve as a catalyst in the back half of 2009, followed by increased IT spending a corporate upgrade cycle in 2010. He contends that improving demand will translate into better-than-expected earnings after significant cost cuts over the past 12 months. He sees 35%-50% upside in the stocks and expects hardware to outperform in the second half.

Bailey writes that Dell is his top buy idea, given significant operating leverage, increasing confidence in a corporate PC upgrade cycle in 2010 and the opportunity for improved investor sentiment after underperforming by 23 percentage points over the past year.

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Comments

[wendling_r:]

EMC will be a strong candidate for sharply higher stock prices in the near term. With their latest purchase of Data Domain their cash inflows will increase dramatically. I have just written a report on eMC and posted it on my reports page on my site. The link is listed with this post.

Of all the companies listed above I believe EMC has the greatest chance for significant growth.

For disclosure purposes I am long EMC and several other tech stocks not listed in this article.

Richard

Jul 11 12:46 PM

[dmeharc:]

Even though Dell has near $11 Billion in Cash they only have $1.8 Billion in net tangible assets. Dell could be finished in 12-18 months. Their Q108 vs Q109 shipments are down over 18% - Acer is up 9.5%. The attack from other Taiwan companies, ASUS, MSI and Gigabyte has begun putting both Dell and HP in a position of declining market share. The Goldman report seems more like Brown Nosing to try and get an Acquisition deal position with Dell.

Jul 11 11:11 PM

[brewer:]

Hillarious idea, buying Dell. Get an Adamo while you are at it, you could be the first to actually purchase one, though they have been on sale for awhile now.

Jul 13 03:35 PM