J.P. Morgan published a report entitled "IT Hardware" on January 12, 2012. In the report, Mark Moskowitz, Anthony Luscri, and Mike Kim suggest that in the IT sector, mobility and storage may be able to provide protection against the macroeconomic uncertainties. A positive inflection point was expected in the month of December but J.P. Morgan believes that "one month does not make a trend". The PC, printer, and server sub-segments are likely to go back to "GDP-or-less growth profiles". The report isn't available online, but we will discuss the SMid stocks identified by J.P. Morgan (JPM).
Aeroflex (ARX) designs, engineers, manufactures, and sells microelectronic products, and test and measurement equipment. J.P. Morgan has given Aeroflex a neutral rating and it expects the company's revenue streams to face continued headwinds. The company's greater-than 30% exposure to the Government poses a risk, despite high profit margins. Aeroflex is also looking to face increased competition as the next wave of LTE wireless investment cycles shifts from base stations to handsets. J.P. Morgan expects the company's growth profile to lack outperformance potential. Shares of Aeroflex are currently trading at $12.6 per share and are expected to reach a price target of $11.5.
Brocade Communications Systems (BRCD) supplies Internet protocol based Ethernet networking solutions and storage area networking solutions. It has been given an underweight rating by J.P. Morgan. With little growth prospect, a likelihood of further delays in its new IT projects will negatively impact the company. Investors looking for a sound technology portfolio are expected to look for sturdier companies. This is mainly due to Brocade's difficulty in delivering on both its storage and Ethernet networking segments. A combination of macro and company-specific factors has led to a volatile financial performance. Shares of the company are currently trading at $5.8 per share.
Emulex (ELX) is a provider of network convergence solutions that connect servers, storage, and networks within a data center. It has been given an underweight rating by J.P. Morgan due to expectations of the stock being under pressure in 2012. The company's legacy Fibre Channel business is facing significant headwinds resulting in low long-term growth prospects. A slow adoption rate of FCoE and the Romley-based servers could result in an added pressure to the company's growth profile. Shares of Emulex are currently trading at $8.5 per share and are expected to go south of $6 by the end of 2012. Ken Griffin had $14 million invested in Emulex at the end of the third quarter.
National Instruments (NATI) is a manufacturer and supplier of measurement and automation products. It has been given an overweight rating by J.P. Morgan because it believes that National Instruments is likely to outperform its peers in 2012. With a robust growth margin profile and an above-average revenue growth potential, the company is looking to increase its valuation. An improved global production environment in the first half of 2012, along with a quick traction in the company's field application efforts is going to provide a positive catalyst. Shares of the company are currently trading at $25.7 per share and are expected to go north of $32. Chuck Royce had $139 million invested in NATI at the end of September.
Orbotech (ORBK) engages in the design, manufacture, marketing, and services of yield-enhancing and production solutions. J.P. Morgan has given the company a neutral rating. With a robust market position in the inspection and testing of LD and PCB applications, the company is likely to benefit from the growth in the smart phones and tablets markets. J.P. Morgan is also looking for the capital expenditure trend-line to show increasing downside risk. Although Orbotech is currently looking to expand its addressable market, a further absence of revenue drivers is going to negatively impact the company. Shares of Orbotech are currently trading at $10.7 per share and are expected to reach a price target of $11.5.
Qlogic (QLGC) designs and supplies storage networking, high performance computing networking, and converged networking infrastructure solutions. J.P. Morgan has given the company an underweight rating due to the lack of a great-than average appreciation potential. There has been an increase in its Ethernet-based solutions segment and the company's Fibre Channel business is expecting muted growth prospects. J.P. Morgan is of the opinion that Romley is not good for the company's growth profile as it may result in less demand for dedicated storage offload engines. Shares of Qlogic are currently trading at $16 per share and are expected to reach a price target of $12.5.
Seagate (STX) is a designer, manufacturer, marketer, and seller of hard disk drives. J.P. Morgan has given Seagate a neutral rating. With the catastrophic flooding in Thailand, Seagate's competitors are expected to face greater relative struggles. This will provide the company an opportunity to exhibit a potential appreciation, although the market share gain opportunities may not strong. J.P. Morgan believes that investors are likely to own Seagate's stock until the other companies are able to recover. This makes the company's risk-reward profile not an attractive one to long-term investors, according to J.P. Morgan. Shares of the company are currently trading at $19.5 per share and are expected to reach a price target of $21. David Einhorn had nearly $150 million in Seagate at the end of the third quarter.
STEC, Inc. (STEC) is a designer, manufacturer, and marketer of enterprise-class flash solid-state drives. It has been given an underweight rating by J.P. Morgan due to its limited appreciation potential in the short- to mid-term. The company is also facing increased competition, leading to pressurized revenue and earnings growth. To counter the rise in competition, STEC has highlighted some new product transitions such has ZeusIOPS, MLC, and the introduction of PCIe cards. J.P. Morgan is of the opinion that the timing on these products is too stretched to give any support to the company's stock or model. Shares of STEC are currently trading at $9.5 per share and are expected to go south of $6.
Western Digital Corporation (WDC) is a provider of solutions for the collection, storage, management, protection, and use of digital content. It has been given a neutral rating by J.P. Morgan which expects the company's near-term earnings potential to be upward biased. Long-term investors are likely to be attracted to Western Digital's risk-reward profile. The company is also looking to increase its market share in the enterprise sector if the Hitachi GST deal is closed and there is recovery in Thailand. The company's hard disk drive shipments are expected to remain constrained going into the second quarter of 2012. Shares of the company are currently trading at $33.4 per share and are expected to reach a price target of $32 by the end of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.