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Computer Hardware Sets the Pace

06/04/2007 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

Sam Stovall, chief equity strategist for Standard & Poor’s, says computer hardware stocks have been among the best performers this year and he expects the trend to continue.

Year to date through May 25, the Standard & Poor’s Computer Hardware Index is up 12.3%, vs. a 7.3% gain for the S&P 1,500. In the past 13 weeks, this sub-industry index gained 10.8% to the market's climb of 4.3%. Its trailing-12-month price performance is now in the top 10% of all 136 sub-industry indexes in the S&P 1,500.

There are ten large-, mid-, and small-cap companies in the S&P computer hardware sub-industry index. The two highest-ranked members are Apple (NASDAQ: AAPL), ranked Five STARS (strong buy), and IBM (NYSE: IBM), which carries a Four-STARS (buy) opinion. Jim Yin covers the sub-industry for S&P Equity Research, and has a positive fundamental outlook for the group.

Standard & Poor's estimates unit sales of personal computers in 2007 will grow 10%-12% year over year, due in part to the release of Microsoft’s (MSFT) Vista, for which sales in the first two months of release were better than expected. Yin sees faster growth coming from emerging markets in Asia, Eastern Europe, Latin America, and the Middle East.

The analyst believes many computer hardware vendors have taken costs out of their infrastructure over the past few years, and profitability should benefit from lower component costs as a result of rapidly falling [dynamic random access memory, or DRAM, chip] prices and a price war between Intel and Advanced Micro Devices. Therefore Yin believes the S&P Computer Hardware sub-industry index should outperform the S&P 1,500.

Yin sees longer-term fundamentals in the computer industry remaining attractive, as he thinks that a global appetite for technology products should boost productivity and communications. S&P sees global competition forcing companies to be more productive, largely through technology. Many vendors also streamlined operations during the industry's downturn, and S&P sees this boosting longer-term profit potential.

Yin notes that demand for Internet-based applications is growing; he thinks this is because they offer opportunities to reduce costs and improve customer service. Although some initial deployments have been made to capitalize on this opportunity, S&P thinks the evolution of the platforms could produce another wave of investment as Internet use matures. For example, Yin thinks the growing complexity of computing infrastructures should lead to investments in hardware that have self-management features and eventually on-demand or automated computing.

In addition, as price pressures in the PC industry have remained intense, Yin thinks that hardware vendors have been seeking to offset the negative impact on profits by offering higher-margin services, servers, and storage.

The group's longer-term momentum is firm, and the group's overall fundamental outlook is positive, indicating that this sub-industry index may continue to see strong price performances in the period ahead.

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