We have been building a thesis that, regardless of the recent deceleration of economic growth in the US economy, the enterprise IT sector is on a bit of a roll that should persist for the next several quarters. Investors may want to look at business/enterprise IT technology for overweighted returns. Please note that 26% of the aggregate market cap of the sector is in cash and/or equivalents.
RIMM, MSFT, ORCL, VMW, and HP all reported better than expected results, and all presented fairly positive outlooks. Although CSCO met expectations, its outlook was positive. Our channel sources confirm that American business is investing in productivity at the desktop, in the pocket, and in the back office.
Current growth estimates for technology upgrades and replacement:
data center -> 20%
desktop -> 10%.
mobile -> 40%.
The objective is to make current employees more productive ahead of hiring new ones.
Based on previous recession recovery periods, the channels see a repeat of past patterns. US companies are currently making fairly meaningful investments in productivity tools to enhance TCO of IT, and to maximize current employee productivity. Although timing is difficult to predict, the current investment pattern suggests that companies will begin rehiring in a meaningful way within 2 quarters. By H2 2011, US employee growth should boost the prospects of MSFT, RIMM, ORCL and HP – companies which benefit directly from more bums in seats.
Alas, but here is the catch for the general US economy. The first to hire will likely be companies with global markets, manufacturers, and exporters. The last area of employment recovery is likely to be the services industry targeted at the domestic consumer market. The concern for the long-term health of the US economy is that this represents approximately 70% of employment. Whereas full employment in the United States once meant an unemployment rate of 4%, there is a higher probability that the natural unemployment rate could be closer to 7% until domestic consumer-centric jobs shake out (how many real estate agents and mortgage brokers does America need now?).
Bottom line: As companies continue to wring productivity out of its reduced workforce, and as a modest employment recovery begins to take hold during 2011, enterprise IT suppliers are likely to benefit. Stocks like MSFT, ORCL and RIMM have been trading at historically low multiples, thus could be a buying opportunity.
Disclosure: I do not own shares of any of the companies mentioned.