Jefferies' Top IT Pick Is Western Digital, Sees Loser In IBM

Amid an aging infrastructure of business computing assets and the rise of so-called Big Data, an analyst launched coverage of computer hardware companies with a raft of mostly upbeat recommendations.

Western Digital Corp WDC got a "top pick" rating from Jeffries' James Kisner, who awarded International Business Machines Corp. IBM with his only Underperform rating in the group.

With expanding use of cloud computing, Western Digital has top market share of commodity-style hard drives that are key components in the technology according to Kisner, who hung a $124 target on the company.

Although flash technologies are increasingly replacing traditional hard drives, Kisner said the cost advantages of Western's traditional magnetic media will persist far into the future.

Moreover, with nearly half Western Digital's revenue tied to the market for personal computers, Kisner said the sector should soon stabilize, with projections of a 2 percent growth rate in PC shipments for 2015, versus a 1 percent decline in the current year and a 7 percent drop in 2013.

As for old Big Blue, Kisner said much of its recent EPS growth has been driven by stock buybacks.

IBM is "in a period of transition" as the software business shifts to subscription models from licensing and as the adoption of cloud computing eats into IBM's more traditional outsourcing of computing services.

Kisner also cautioned about IBM's increasing reliance on vendor financing for its sales as well as trouble converting its earnings to free cash flow.

Citing scenarios broadly similar to Western Digital's outlook, other companies launched with Outperform ratings by Kisner include Seagate Technology PLC with a target of $70, EMC Corp. with a target of $37 and Nimble Storage Inc. with a target of $33.