[Hardware] Hardware Stocks Are on Fire. Here’s Why Morgan Stanley Sees More Gains Ahead.

[#Drennn.]

Amid increased signs of an accelerating recovery in enterprise technology spending, Morgan Stanley analyst Katy Huberty on Thursday raised her estimates and price targets for a host of hardware stocks.

Huberty turned bullish on the group last October in a prescient call—most of the stocks in the group have posted market-beating, double-digit returns for the year to date. And on Thursday, she’s upping the ante.

Huberty notes that a new Morgan Stanley survey of chief information officers suggest that there will be “a more-robust IT-spending recovery, and implies material upside to current Street estimates.” She lifted estimates across her coverage universe, and says she’s now between 3% and 6% above Street consensus for calendar 2021 revenue and profit estimates.

“In October 2020, we upgraded our industry view to Attractive on improving enterprise IT demand, and while our thesis has played out over the last several months, we believe it still has legs,” she writes.

Huberty says that history shows that in a typical economic recovery, most hardware stocks outperform the market—and she notes that since IT spending bottomed in the 2020 second quarter, enterprise hardware has been the best performing tech group, beating the market by 46 percentage points. She thinks the trend will continue.

Huberty ups her target prices on nine stocks, while trimming her targets on two.

Among stocks she rates at Overweight, she boosts her target for CDW (ticker: CDW) to $188 from $164; for Dell Technologies (DELL), to $107 from $98; for NCR (NCR), to $51 from $47; for Seagate Technology (STX), to $90 from $86; for HP (HPQ), to $39 from $38; and for NetApp (NTAP), to $92 from $90.

Among stocks with an Equal Weight rating, she lifts her target for Hewlett Packard Enterprise (HPE) to $17 from $15.50; for International Business Machines (IBM) to $150 from $140; and for Teradata (TDC), to $45 from $44.

She trims her targets for Pure Storage (PSTG) to $25 from $28, and for Nutanix (NTNX), to $30 from $35, citing lower peer-market valuations. Huberty rates both storage stocks at Equal Weight.

In the note, she writes that she highlights both Seagate and NetApp “on the back of robust operating leverage in a recovery and direct exposure to recovering infrastructure demand.” She views NCR as “a strong recovery play” due to its exposure to cyclical end markets (such as retailing) and synergies from its pending Cardtronics (CATM) acquisition.

She likes HP, Dell and CDW “on the back of structurally higher PC demand and exposure to the mid-market,” which she notes was hit hard by Covid should recover. She’s also bullish on the potential Dell spinoff of its majority stake in VMware (VMW), and HP’s continued aggressive stock-buyback program.

In a separate note, Morgan Stanley analyst Keith Weiss writes that CIOs surveyed by Morgan Stanley expect a sharper rebound in 2021 than in 2010, with IT budgets see up 3.9% for the year. “Longer-term, almost 40% of CIOs see IT budgets expanding as a percentage of revenues versus 12% expecting declines,” Weiss writes.