Tortora says that industry checks point to slower corporate IT spending ahead. “Businesses have shown reluctance to spend budgets and are ready to react to a downturn, as indicated by selective spending, longer approval times and scaled down purchases,” he wrote this morning. “An inventory build has begun at select stages of the supply chain. We expect pricing to be used as a lever to trim inventory levels. In a slowing environment, we favor companies with low fixed costs and demand volatility, and with product cycles that will lead to share gains.”
Tortora picked up coverage today of seven hardware stocks: Dell (DELL), Apple (AAPL), Sun Microsystems (SUNW), Hewlett-Packard (HPQ), Lexmark (LXK), Seagate (STX) and Western Digital (WDC). He gives Overweight ratings to Dell and Lexmark, a Neutral for Apple, and Underweights on the other four. Here are brief excerpts from his notes on the companies this morning:
* Dell: We see Dell as having the best chance in our universe to post material upside to consensus estimates over the next several quarters as the company appears poised to regain cost leadership, grow share in servers [and] storage and expand its services offerings for both consumer and enterprise. We think the company is undertakng initiatives to regains its PC cost leadership.
* Apple: Forecasting Apple to grow its Mac share from ~2.5% to ~4% over the next two years…Our checks indicate Apple has plans for a cellular phone in the near future. We estimate that every 1 point of share in this market represents 20-30 cents of earnings power for the company. However, we are concerned that the combination of a slowing media player market and increased competition from Microsoft adds risk to Apple’s iPod margin and market share….Remain on the sidelines until we get better visibility into the competitive dynamics of the media player space and/or new product ramps.
* Sun: While Sun’s server products have shown recent strength, we think that the company will face a number of risks over the next 1-2 years that could put pressure on its margin and market share…Sun is faced with a hole in its high-end and mid-range server roadmap…it will be difficult for Sun to retain its margin and market share in this segment…We view Sun’s fixed-cost structure as being too high for the company to achieve profitable growth given the server market’s migration to lower-margin products.
* Western Digital: We are concerned about industry conditions. PC and HDD demand growth is slowing, HDD inventory has begun building throughout the supply chain, and recent trends in industry capital spending foreshadow an acceleration of capacity additions…our $1.61 EPS forecast for FY 07 is 19 cents below consensus estimates on lower gross margin expectations.
* Seagate: We see a challenging pricing environment and margin compresson in the coming quarters. We also see overall share gains as hard to come by as more industry capacity comes online. We expect tougher competition in notebookds and risk to the company’s inherited Maxtor share in desktop and enterprise.
* Lexmark: We think Lexmark will surprise investors over the next several quarters as the company is well positioned to gain share in both inkjet and laser printer market…our EPS [estimates] of $3.91 for FY 07 and $4.92 for FY 08 are 12 cents and 22 cents above the Street, respectively.
* Hewlett-Packard: We think changes in the competitive landscape across all of HP’s major segments set the stage for slowing profit growth over the next several quarters. We view cost measures in its PC segment as largely exhausted, and expect pricing pressure to intensify as demand slow and Dell reclaims its cost lead. In servers and storage, we see profit growth as being more difficult in coming quarters due to stronger product offerings from competitors Dell, IBM (IBM) and EMC (EMC). We don’t expect printing to compensate for the slower growth in those segments.
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