Playing Tech Hardware Earnings

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From Goldman Sachs client Newsletter:


OUR CHECKS SUGGEST THAT almost all of our hardware companies at least met Street expectations for the March quarter, driven by a combination of a strong backlog coming out of the fourth quarter, currency [effects] and low expectations.

That said, virtually all of our enterprise-facing companies – including IBM -- saw slowing during the critical last two weeks of March. The end-of-quarter weakness -- in the form of push outs and smaller-than-expected deal sizes -- showed up most prominently in the U.S. but also impacted sales in the U.K. and Germany.

As a result, the baseline and trajectory heading into the June quarter is unfavorable, and we are lowering estimates again for half of our calendar-quarter companies.

Currency continues to be a major contributor to revenue growth, offsetting some of the fundamental slowing. For the March quarter, the weaker dollar should add about 450 basis points on average to top-line growth, which is 50 to 75 basis points more than what was expected when these companies reported in mid-January.

For the year, we are now looking for a currency tailwind of 350 to 400 basis points, up over 100 basis points from earlier in the year.

Of the 10 companies that we are previewing, we would like to highlight four.

We think that Apple's March-quarter results will be strong enough to satisfy the Street and, with the 3G iPhone launch now just two months away, we would buy Apple shares here. We are raising our target price to $185.

Ingram Micro's quarter should be in line with expectations. We think that investors should continue to add to positions on stabilizing fundamentals post the hard reset last quarter and the stock's historically low valuation.

Our checks suggest that Sun Microsystems' revenue came in below plan, raising the risk to Sun's new business model, which requires more growth to reach its longer-term margin targets. We would avoid Sun shares at this point.

Lexmark International should deliver earnings-per-share upside (driven by weaker hardware) and the shares could pop on the print, but the intermediate outlook remains weak. We would look to short the stock after a potential run up post earnings.

-- David C. Bailey
-- Min Park
-- Hongyu Cai, CFA
-- Brian Cho