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As numerous leading technology hardware companies prepare to release a slate of earnings reports starting next week, there remains a sense of uncertainty as to when the sector will truly return to a state of steady growth amid what has been. a time of tightening corporate budgets and spending cuts.
That’s Morgan Stanley analyst Erik Woodring’s assessment of the hardware sector, who said that while tech hardware companies have performed well this year so far, “we’re not ready to hit the bottom of the cycle.” Woodring said he made his decision based on recent surveys of CIOs and hardware customers.
Woodring recently upgraded his industry view on hardware from “cautious” to “in line” arguing that “we went from 50% to 75% of TI hardware last cycle negative earnings reviews.” However, Woodring said that even as things seem to be looking up for the industry, “the number one debate among investors remains whether the bottom has been hit and now is the time to be more positive on hardware stocks.”
Adding to that sentiment was recent survey data from Morgan Stanley, which according to Woodring showed that hardware growth expectations were lowered for the fourth time in a row, and the risk of CIOs cutting budgets is now “elevated.”
“Although we would say that progress has been made, we are still waiting [and] seeing to be potentially more constructive [on hardware]Woodring said.
When it comes to hardware companies in particular, Woodring said investors should focus their attention on “quality companies with valuation support, lower risk of estimate cuts, and operating efficiencies,” citing Apple (NASDAQ:AAPL), CDW (CDW) and Teradata (TDC) as examples of companies that meet the “overweight” criteria.
At the other end of the spectrum are what Woodring called hardware companies that hold stocks with a “high negative estimated revision risk” that could trade at “an unreasonable higher valuation.” Woodring said companies that fall into that realm include HP Inc. (HPQ), Logitech (LOGI), Xerox (XRX) and Cricut (CRCT).
Woodring added that with a flurry or earnings reports coming soon, “investors should prepare for the early cycle,” which is when hardware historically outperforms the S&P 500 (SP500) by 30 to 35 points.
Along with Apple (AAPL) and other hardware companies preparing to report quarterly results in the coming weeks, semiconductor leaders Intel (INTC) and Advanced Micro Devices (AMD) will also provide insight into the state of the spending market between the companies.