With the first quarter earnings season right around the corner, many of the top firms on Wall Street that we cover are starting to handicap how they feel the numbers will turn out. With a variety of headwinds over the past 90 days, some companies may come in light to current expectations. RBC Capital Markets has issued a new research report identifying the top information technology (IT) hardware companies it thinks investors should buy ahead of earnings.
So far 2015 has been very volatile for IT hardware, with only a handful of RBC’s stocks outperforming the broader markets. Despite the currency headwinds, the slowing personal computer (PC) market and more, the analysts see other areas where growth remains robust. We focused on the RBC stocks rated Outperform, which are Apple Inc. (NASDAQ: AAPL), CDW Corp. (NASDAQ: CDW), EMC Corp. (NYSE: EMC), QLogic Corp. (NASDAQ: QLGC), Seagate Technology PLC (NASDAQ: STX) and Western Digital Corp. (NASDAQ: WDC).
Apple
Apple is hardly a stranger to the tech hierarchy, and the company passed another milestone when it was added to the Dow Jones Industrial Average last month, replacing the venerable AT&T. Apple absolutely crushed earnings estimates when it reported back in January, hitting on all cylinders. With huge sales of both iPhone 6 models, the iconic Silicon Valley firm has traded in spectacular fashion since.
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The RBC team says investors need to stay long the stock into first-quarter earnings, and through the second quarter. They see strong continued iPhone 6 and 6 Plus sales, as well as numerous catalysts on the horizon. While they do not see upside to the first quarter, they do see the second quarter being better than usual.
Apple investors are paid a 1.5% dividend. The RBC price target for the stock is at $142. The Thomson/First Call consensus price target is $139.59. The stock closed Tuesday at $126.01 a share.
CDW
CDW had a very large secondary stock offering last fall that added to the free float. CDW came back from private equity land with a highly anticipated IPO and has gone straight up in price for almost two years. CDW provides IT products and services to business, government, education and health care customers in the United States and Canada. It offers discrete hardware and software products to integrated IT solutions, such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.
The RBC team sees the stock as a defensive play for investors. They are forecasting high single-digit sales growth and double-digit earnings-per-share growth for the stock. They cite numerous reasons for the earnings and sales growth, the top one being a rebound in PC and server sales.
CDW investors are paid a small 0.75% dividend. The RBC target price is $39, and the consensus target is at $40. The stock closed most recently at $37.18.
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EMC
Shares are trading at an incredibly low 13.2 times estimated adjusted 2015 earnings versus 15.1 for 2014. The company is the leader in storage, and the constant increase in data makes the stock a core holding for technology investors. EMC missed revenue estimates for the fourth quarter and just squeaked by on the bottom line beating estimates by a penny.
With the company expected to buy back $3 billion of stock in 2015 and the lower VMware numbers baked into future calculations, now may be a good time to add shares of this outstanding technology stock. EMC owns 80% of the cloud software company, and activist investors have urged a spin-off, which does not seem likely in the near future.
The RBC team thinks the company will miss the first-quarter projections and lower full-year numbers due to currency headwinds. They point out that the stock already has sold off significantly since the analyst day announcements, and if they stay in line with current projections, the stock should remain flat to up.
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EMC investors are paid a 1.75% dividend. The RBC price objective is $30, and the consensus is slightly higher at $30.61. Shares closed yesterday at $26.18.
QLogic
This company designs and supplies high-performance server and storage networking infrastructure products that provide, enhance and manage computer data communication. Its products facilitate the transfer of data and enable resource sharing between servers, networks and storage in enterprise data centers, cloud computing, Web 2.0 and other environments.
The stock is one in the RBC universe that has outperformed the broader market, and it is a solid small cap name for more aggressive accounts to own. The RBC analysts feel that the company is in good position through 2015, as they think it will see benefits from multiple cyclical tailwinds that should bolster server sales and demand.
While the RBC price target is $17, and the consensus estimate is at $16.42, QLogic shares closed Thursday at $14.59.
Seagate Technology
This stock is still down sharply from the highs posted late last year, and some insiders sold stock in the first quarter. The company and other hard disk drive (HDD) stocks took a hit during earnings season and are just now starting to bounce back. Seagate’s sizable stock repurchase program may put some support under the stock. With 40% of the HDD market, the company may have issues in the first quarter as soft PC demand translates to lower HDD units being shipped.
While the PC business is the current headwind, the HDD growth is expected to accelerate over the next two years, and growth in the cloud has been a positive for the leaders. The RBC team thinks Seagate comes in below expectations. However margins and average-selling-prices may offset the miss.
Seagate investors are paid a very solid 4% dividend. The RBC price target is $58, but the consensus estimate is at $63.56. Shares close Tuesday at $53.75.
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Western Digital
Western Digital is another leader in the total addressable HDD market at a very impressive 43%, and like Seagate should experience lower shipments if PC trends stay the same through the balance of the quarter. Western Digital attributed much of the gain in revenue growth in recent quarters to the consumer electronics/gaming unit, which saw the biggest upside in their fiscal fourth quarter, shipping 10.9 million units, up 67% year over year. This could help temper the PC decline.
Some on Wall Street think that cloud data centers are being built using solid-state drives and NAND flash memory, the vast majority of storage in the public cloud is stored on traditional HDDs, a positive for both of the top companies in the space. The RBC team’s outlook for Western is in line with Seagate, where they think both are oversold more than demand trends would indicate.
Western Digital investors are paid a 2.12% dividend. The RBC price target is set at $116, and the consensus target is lower at $119.20. The stock closed on Tuesday at $94.11 a share.
This could be a rocky earnings season, so investors may want to wade in carefully, buying partial positions and waiting to see what the news brings.
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