Auriga Securities analyst Kevin Hunt today took up coverage of computer hardware names, starting off with Buy ratings on Dell (DELL), Seagate (STX), Intevac (IVAC), and Western Digital (WDC), and Hold ratings on EMC (EMC), NetApp (NTAP), and Hewlett-Packard (HPQ).
Hunt joined Auriga recently from Hapoalim Securities, and was for a long time with Thomas Weisel before that.
On Dell versus HP, Hunt argues HP has “headwinds in 80% of its businesses,” including PCs, printers, and services. That’s going to offset the payoff from servers, networking, and storage product sales. He sees the company’s revenue growth being bounded by the overall 3% to 6% range of global IT spending, and perhaps being as little as 2% to 4% over the next three to five years.
Dell will also be constrained in that respect. However, in their case, Dell can continue to improve its operating margin this year, which will help it increase EPS 10% to 15% versus a muted revenue growth outlook. From 4.9% in fiscal 2010 that ended a year-ago January, the company improved that to 8% in Q4 of fiscal 2011 that ended in January. “Our sense is things took a modest seasonal step back in F1Q12, and that the majority of investors still don’t care all that much,” he writes,
“But it does seem very clear to us that Dell has things moving in the right direction, on a steady uptrend, and that the steady OM improvement outcome does not appear to be fully reflected in Dell’s share price due to fears over tablets, etc.” Hunt’s betting Dell can reach a steady-state operating margin of 7.5% this full fiscal year.
Hunt has a $25 price target on Dell and a $46 target on Hewlett-Packard.
Both Western Digital and Seagate should fare better than people expect because the whole tablet-computer-versus-PCs argument is overblown, he thinks. “merger. Yes, tablets are an issue, but even with very modest HDD unit growth going forward, Seagate should be able to deliver expanding margins and very attractive ROIC,” writes Hunt, and the same goes for Western. Given recent consolidation in the drive industry, both Western and Seagate can see expanding margins and profit based on unit growth of 4.6%, compounded annually, over the next 2 years.
He has a $29 price target on Seagate, and a $51 target on Western.
Continued share gains are already priced into EMC’s stock, at 19 times projected 2011 EPS, he thinks. NetApp has top-notch management, but they will be tested like never before with the recent purchase of Engenio. (See RBC’s upgrade yesterday on positive views about the Engenio deal.) The company’s probably not going to have the kind of growth going forward that it had in the past ten years, “partly due to the great success NetApp has had in expanding its business,” implying there’s not as much to gobble up.
Lastly, Intevac, which provides tools to disk drive makers, also has some opportunities in photonics and solar that are underappreciated, he thinks. Although the company has had some stumbles in these emerging areas, Hunt says they could have $3 billion out of a total $10 billion to $12 billion in new addressable markets by 2014. In particular, things such as tools for “traditional silicon based solar processes” could start to yield “substantial revenue” next year. Hunt has an $18 target on the stock.
Today the shares are performing as follows:
Dell is down 8 cents, or half a percent, at $16.65;
HP is down a penny at $41.05;
IVAC is up 56 cents, or 5%, at $11.63;
Western is up 18 cents, half a percent, at $38.62;
Seagate is up 4 cents at $17.47;
EMC is up 22 cents, or 0.8%, at $27.52;
and NetApp is up 66 cents, or 1%, at $54.63.
Article courtesy of Tech Trader Daily
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