finance 724/824 winter 2010 sector presentation information technology

Team Members: Hanh Bui

Vamsi NamburiHang Nguyen

Tejaswi PonnadaJonathan Schick

• General Information• Business Analysis• Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation

Agenda

• Market Cap: 114.8 B • 15 industries • Largest weight• Highly cyclical• Performance in S&P 500

– Annualized: 51.05% (2nd)– YTD: -4.01%– MTD: 4.85%

General Information

Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

Weight

• SIM over weighed by 24 basis points• Among SIM Fund’s Top Holdings, 4 from IT: Oracle, IBM, HP and Intel


Industries (as percentage of S&P 500)

Information Technology Industries 18.80% SIM

Computer Hardware 5.03% IBM, HP

Systems Software 3.69%

Communication Equipment 2.51%

Semiconductors 2.19% INTEL

Internet Software and Services 1.90%

Services- Data Procedure 1.37%

Computer Storage/ peripheral 0.67%

Application Software 0.50% Oracle

Electronic Component 0.37%

Semiconductor Equipment 0.29%

IT Consulting and Services 0.20% NCR

Electronic Equipment 0.15%

Office Electronics 0.08%

Electronic Manufacturing Services 0.06%

Home Entertainment Sofware 0.06%


• Computer Hardware: (IBM, Dell, Apple)– Companies that design and manufacture peripheral devices, storage systems etc– Generated total revenues of $411 billion in 2008, representing a CAGR of 4.8% for the

period spanning 2004-2008.

• Systems Software: (Oracle, Microsoft, SAP, Adobe)– Companies that make Device drivers, Operating Systems, servers etc.– Demand for Open-Source and On-Demand Software

• Communication Equipment: (Nokia, Siemens, Ericsson)– Companies engaged in making telephones, modems, wireless, decoders– Product ecosystem consists of – Board and chassis market, middleware,

Applications/Service Software.

• Semiconductor Industry: (Intel, AMD)– Computing market drives semiconductor sales. – APAC region (excluding Japan) accounts for 53% of total semiconductor sales.


Major Industries

Largest Companies (by Market Cap- B)


Performance(as of Feb 22, 2010)


Index Name Daily Annualized (as of Jan 21, 2010)

1 Day MTD QTD YTD 1 Year 3 year 5 Year

TOTAL RETURNS

S&P 500 (TR) -0.10% 3.38% -0.34% -0.34% 33.14% -7.24% 18.00%

PRICE RETURNS

S&P 500 -0.10% 3.18% -0.64% -0.64% 30.03% -9.28% -1.89%

PRICE RETURNS BY SECTOR

Energy -1.32% 2.66% -1.96% -1.96% 9.74% -2.80% 6.73%

Materials -0.47% 6.31% -2.90% -2.90% 43% -6.91% 0.56%

Industrials 0.06% 4.84% 3.57% 3.57% 32.64% -9.78% -3.15%

Cons Disc -0.13% 4.31% 1.23% 1.23% 50.70% -9.84% -3.11%

Cons Staples -0.15% 3.25% 1.96% 1.96% 18.93% -0.30% 2.49%

Health Care -0.08% 0.29% 0.71% 0.71% 19.10% -3.15% 1.41%

Financials 1.14% 3.09% 1.57% 1.57% 53.98% -27.39% -13.82%

Info Tech -0.28% 4.55% -4.28% -4.28% 51.05% -2.12% 1.68%

Telecom Svc -0.26% -0.45% -9.73% -9.73% 4.64% -13.38% -2.71%

Utilities -0.65% -0.09% -5.19% -5.19% 2.19% -6.92% 0.77%

• Primary drivers are innovation, cost reduction, customer service and breakthrough technologies

• Dominated by Computer Hardware and System Software industries (r=0.74) followed by Communication Equipment and Semiconductors

• Highly diverse with companies in growth, mature phase– High economies of scale and so marginal costs are minimal

• Rebalance between Customer Retention and Customer Acquisition


Business Analysis

Technology drives the world!• Technology is now a need to be competitive in any sector

– All domains within a company use technology as a key driver– Company spending on IT forecast to increase 3.3%

• Few dominant players in each industry within the sector• Dependence on cutting edge technology leads to enormous

R&D costs. Huge R&D costs means high barriers to entry– Few industries are exceptions

• Huge threat of substitutes and piracy• No serious threat of new entrants


Growth Indicators• Highly cyclical sector with large impact on SIM

– Potential for huge growth during market recovery phases

• Largely impacted by Customer and Corporate Spending– Average life cycle for products falling rapidly

• Business Intelligence Solutions• Innovative products Examples: Apple’s iPad, Google’s Nexus

Apple iPad Google Nexus


Keeping up with the Growth• Huge growth potential in developing economies

– Personal laptops, iPhones vastly used– Cell Phone usage growing at 10 million per month in India

• First mover advantage is the key to grab market share– Huge threat of substitutes from major competitors with minor enhancements– Technology gets cheaper and outmoded

• Keeping with the rapidly changing Customer needs and opportunities – Cell Phones used as PC’s to store music, photos, memory etc.


Business Analysis Summary• Long Term

– IT Growth Opportunities outweigh risks– Demand will undoubtedly increase long term– IT becoming a business staple with massive growth potential innovation globally

• Short-term– Depends on Consumer Spending– GDP growth


• Monopoly Characteristics in Short Run • Premium Pricing during launch. Prices fall

down as other firms catch up.

MC=MR

Monopoly Price

Monopoly Gain


Economic Analysis

Examples


Info Technology

Business Cycle


World Wide User Spending(Billions of US Dollars)

Region 2007 2008 2009 2010 2010 (%)United States 929 957.2 932.1 958.3 2.8%Canada 74 77.7 71.3 74.7 4.7%Latin America 222 250.7 236.4 257.1 8.8%Western Europe 872 906 811.9 836.1 3%Eastern Europe 148 170.2 142.6 140.5 -1.5%Middle East & Africa 192 205.7 205.7 217.1 5.6%Japan 273 301.3 306.7 304.5 -0.7%Asia Pacific 472 503.6 490.9 515.6 5%

Total 3,156 3,372.2 3,197.6 3,304 3.3%


Source: http://www.gartner.com/it/page.jsp?id=1209913

http://www.gartner.com/it/page.jsp?id=1209913

Key Factors• B2B category (Oracle, SAP, IBM, HP) depends on

Company Budget Allocations and GDP growth– Companies spend forecasted to increase 3.3% in 2010

• B2C (Dell, Apple, HP) depends mainly on Consumer Confidence and Consumer Spending – Lot of untapped potential in developing economies


YTD & 1 Year Variations


Employment vs. Technology


R=0.46

Capital Spending vs. TechnologyR=0.67


Technology

Consumer Confidence vs. TechnologyR=0.65


Consumer Spending vs. TechnologyR=0.68


Velocity Of Money vs. TechnologyR=0.67


Federal Funds Rate vs. TechnologyR=0.67


Real GDP vs. TechnologyR=0.35


Economic Analysis Summary• GDP (very cyclical)• Globalization• Corporate Profits• Consumer Confidence– need strong economy

with consumer participation


Source: http://www.readwriteweb.com


Financial Analysis

Absolute margin High Low Median Current

EBITDA 25.3 18.8 21.4 25.3

Net profit 12.2 5.0 11.1 11.5

ROE 22.5 9.8 18.7 20.8

Financial Analysis


Margin ~ SP500 High Low Median Current

EBITDA 1.4 .8 1.0 1.4

Net profit 1.8 .8 1.3 1.8

ROE 1.8 .6 1.1 1.7

Financial Analysis


EPS High Low Median Current

Absolute value 24.97 4.98 15.21 16.75

Relative to SP500 40.80 -43.00 0.00 1.10

Financial Analysis

Current 16.75

Expected 24.97


Absolute Basis High Low Median Current

P/Trailing E 74.6 11.1 24.3 20.3

P/Forward E 64.7 12.1 21.6 15.0

P/B 15.1 2.3 4.0 3.5

P/S 6.7 1.3 2.6 2.3

P/CF 40.8 8.2 15.5 12.4

Relative to S&P 500 High Low Median Current

P/Trailing E 2.6 .91 1.4 1.1

P/Forward E 2.7 .98 1.4 1.1

P/B 3.0 .9 1.4 1.7

P/S 3.0 1.5 1.8 2.0

P/CF 2.5 1.1 1.4 1.2

Valuation Analysis


Price / Earnings Trailing

Relative to S&P

High 2.6

Low .91

Median 1.4

Current 1.1

Absolute

High 74.6

Low 11.1

Median 24.2

Current 20.4


Price / Earnings Forward

Relative to S&P

High 2.7

Low .98

Median 1.4

Current 1.1

Absolute

High 64.7

Low 12.1

Median 21.5

Current 15.0


Price / Book

Relative to S&P

High 3.0

Low .9

Median 1.4

Current 1.7

Absolute

High 15.1

Low 2.3

Median 4.0

Current 3.6


Price / Sales

Relative to S&P

High 3.0

Low 1.5

Median 1.8

Current 2.1

Absolute

High 6.7

Low 1.3

Median 2.6

Current 2.3


Price / CF

Relative to S&P

High 2.5

Low 1.5

Median 1.4

Current 1.3

Absolute

High 40.8

Low 8.2

Median 15.5

Current 12.5


Technical Analysis

•Broke 50 day moving average in January •In an upward trend


Positive

• Consumer Spending is growing in Global Markets

• Last Year returns of 51%• Companies spending more

on R&D (Buzz and iPad’s)• Target Prices show upside

potential • IT spending is forecasted to

increase 3.3% in 2010 vs. 5.2% decline in 2009

Negative

• Uncertainty in the economy• GDP expectations unclear

RecommendationCurrently we are 24 basis points above S&P and we recommend to INCREASE by 26 Basis Points

finance 724/824 winter 2010 sector presentation information technology

Documents

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ncr electronic equipment

total semiconductor