Morgan Stanley Sees Major Server Cycle in 2015, Upgrades IT Hardware Sector (HPQ) (STX) (WDC) (QLGC)
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Morgan Stanley upgraded the IT Hardware sector Wednesday to In-Line from Cautious, citing server cycle-driven EPS
acceleration. Analysts led by Katy Huberty expect server growth of 10% in 2015 due to strong cloud demand, Windows Server 2003 support expiration, and Intel Grantley refresh.
The analyst said beneficiaries include of the cycle are HP (NYSE: HPQ), Seagate Technology (NASDAQ: STX), Western Digital (NASDAQ: WDC) and Qlogic Corp (NASDAQ: QLGC) (which was upgraded to OW today).
Huberty notes IT Hardware (ex-Apple) has underperformed the NASDAQ by 19 pts and S&P 500 by 15 pts in 2014. As they look forward, they see room for: 1) multiple expansion as IT Hardware currently trades at a larger than average discount to the S&P 500 multiple, and 2) Accelerating EPS growth, from +1% in 2014 to +7% in 2015 driven by refresh (server) and product (at Apple and Nimble Storage) cycles.
The analyst sees increasing evidence of server cycle next year. "Server units grew 6% in C3Q, up from 2% growth in the first half of the year. We see strong cloud demand and early innings of the Intel Grantley cycle as key drivers of the acceleration. We expect Windows Server 2003 support expiration next July to further accelerate server demand into 2015. In fact, we
raise our total 2015 server unit growth estimate from 8% to 10% on the back of checks that suggest an even more robust cycle than we first highlighted in July."
In addition to upgrading Qlogic on the server cycle, the firm raised its price target on Overweight-rated HP (NYSE: HPQ) from $40 to $44, Segate (NYSE: STX) from $65 to $77 and Western Digital from $104 to $122.
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