Computer Hardware: BCA Research Advises To Stay Underweight

Computer hardware stocks are headed for trouble, warns BCA Research.

“The industry is in danger of suffering from a major overproduction cycle,” BCA said in a research note this morning, in which it asserts that a recent slide in hardware stocks is likely to accelerate.

Output of computer hardware products is booming. The latter has occurred even as inventories of hardware have started to build at the manufacturing level. That alone is a warning that profits are at risk. Worse, inventories are growing at the wholesale level. The implication is that a major liquidation phase could erupt unless demand begins to rise fast enough to mop up excess supply.

But BCA says that is not a likely scenario.

BCA notes that hardware stocks are trading at an above-market P/E multiple. “Such high aspirations will be dashed because demand could be much weaker than the industry may be hoping for, based on persistent output strength,” the firm asserts.

New order growth for computer products is nil. This reflects the slow motion consumer spending retrenchment and a lack of growth in business demand. Capital spending on computer hardware has many discretionary characteristics, as it is tightly linked to overall productivity growth. When the latter falls, spending on hardware also decelerates, implying it is one of the first items to get cut from budgets when times get tougher…Adding it up, a fresh wave of profit-sapping price cuts may lie ahead for the hardware group.

BCA recommends underweighting the hardware group; its tracking index in the sector includes IBM (IBM), Dell (DELL), Hewlett-Packard (HPQ), Apple (AAPL), Sun (SUNW) and NCR (NCR).

Yesterday: IBM’s Weak U.S. Results Weighing On Software Sector