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 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.