Morgan Stanley Swings From Cautious To Bullish On IT Hardware

Things are looking up for the information technology hardware business — enough so that the industry earned a double upgrade Tuesday from an earlier critic.

The Rating

Morgan Stanley analyst Katy Huberty upgraded Hewlett Packard Enterprise Co HPE to Overweight and raised her price target from $14 to $19.

Huberty also upgraded the following stocks to Equal-Weight:

• NetApp Inc. NTAP, with a price-target increase from $41 to $64; and
• Teradata Corporation TDC, with a price-target increase from $31 to $40.

The firm downgraded HP Inc HPQ to Equal-Weight.

The Thesis

By Huberty’s assessment, the market’s underestimating the industry’s potential.

“We see multiple drivers of inflecting growth that aren't priced into most IT Hardware stocks which drives us to double-upgrade our IT Hardware Industry View from Cautious to Attractive,” Huberty wrote in a Tuesday note.

For one, clients benefiting from repatriated cash and depreciation may expand their IT budgets after two decades of underspending, which would foster accelerated revenue growth for IT players.

At the same time, gross margins are expected to expand by 60 basis points amid a weaker U.S. dollar, declining NAND flash prices, and revenue improvements.

Finally, Morgan Stanley anticipates an average 9-percent earnings-per-share boost from U.S. tax reform.

Altogether, Huberty anticipates 6.6-percent average revenue growth and 12-percent EPS growth, the latter of which may rise another 7 to 9 percent on lower tax rates and higher share repurchases.

“We are more constructive across our coverage but favor stocks with enterprise exposure that don't price in a growth acceleration,” Huberty wrote, naming HP Enterprise, International Business Machines Corp. IBM and Xerox Corp XRX her top picks.

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Image credit: włodi, flickr