Apple, Cisco Lead Citi's List Of Top IT Hardware Stocks

Capital allocation and cash flow continue to be the key focus in the US IT Hardware segment in 1Q16. Citi’s Jim Suva maintained a Buy rating for Apple Inc. AAPL and Cisco Systems, Inc. CSCO.

IT Hardware Outlook

Analyst Jim Suva expects IT spending to generally remain lackluster at +3 percent in constant currency terms. While software and business services are likely to grow at a faster rate than the overall market, growth in hardware and IT services is expected to lag the overall market growth rate. Hardware accounts for 40 percent of total IT spend.

Smartphone growth could decline to high-single-digits, while PCs are expected to decline 6 percent in 2016. “Shift to cloud and software defined infrastructure continue to commoditize hardware and pressure infrastructure spend,” Suva wrote.

IDC has projected an increase in the percentage of total spending on IT infrastructure hardware used to support private/public cloud deployments, from 32 percent in 2015 to 46.6 percent in 2019. This would account for all of overall IT infrastructure spend growth during that period.

Top Picks

Suva named Apple and Cisco as the top picks in the sector, recommending players with robust FCF generation and solid capital returns, companies having stable client/subscriber base with potential for revenue growth and margin expansion “as growth product contribution outpaces legacy contribution.”

While Cisco has an attractive valuation and is a capital return story, Apple’s iPhone 7 launch and Applewood in the emerging markets are expected to drive unit growth in the back half of the year.