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Information Technology SectorKevin KrayTrimon LamsonCaitlin LeddySimon LustenbergerMichael MarandoMatthew McFadden
Fall 2011
Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendations
Information Technology Sector
General Overview Largest Sector in the S&P 500
Total Market Cap = $3.7 Trillion
SIM Portfolio currently holds 6 sector companies
Sector Performance:
Information Technology Sector
IT Sector S&P 500YTD 6.17% 2.18%QTD 13.57% 13.58%
IT Sector in SIM portfolio is currently 207 basis points above S&P 500
Consumer Discretionary
10.65%
Consumer Staples11.68%
Energy11.63%
Financials13.59%Health Care
12.14%
Industrials10.27%
Information Technology
19.44%
Materials3.36%
Telecom. Services,
3.29%
Utilities3.97%
Cash0% Dividend
Receivables0%
S&P 500 Weight
Consumer Discretionary
8.28%
Consumer Staples12.44%
Energy11.97%
Financials, 9.91%
Health Care12.47%
Industrials8.66%
Information Technology
21.51%
Materials3.05%
Telecom. Services
4.48%Utilities2.84%
Cash4.29%
Dividend Receivables
0.10%
SIM Weight
Information Technology Sector
There are 16 Industries within the Sector Application Software Communications
Equipment Computer Hardware Computer Storage and
Peripherals Electronic Component Electronic Equipment Electronic MNFRG SVC Home Entertainment
Software
IT Consulting and Services
Internet Software and Services
Office Electronics Semiconductor
Equipment Semiconductors Services-Data PROC Systems Software Technology Distribution
Information Technology Sector
10 Largest Companies in the SectorCompany Ticker Market Cap Stock Price*Apple, Inc. AAPL 376.36B 404.95
Microsoft Corporation
MSFT 226.96B 26.98
IBM IBM 220.93B 187.45
Google, Inc. GOOG 194.38B 600.14
Oracle Corporation
ORCL 169.95B 33.69
Intel Corp INTC 131.17B 24.98
Samsung Electronics Co Ltd
SSNLF 119.76B 422.50
Cisco Systems Inc. CSCO 99.91B 18.56
Qualcomm, Inc. QCOM 89.41B 53.23
Sap AG ADR SAP 76.74B 62.54
Information Technology Sector
*As of October 28, 2011
Five Forces Analysis Barriers to Entry: High – Capacity constraints are
the largest driver of this note: product development barriers are relatively
low Supplier Power: Low to Medium – Many options
for large companies to choose from. However, capacity constraints lead to some power for companies like Intel
Information Technology Sector
Five Forces Continued Buyer Power: Depends – Retail buyers have low
power (demand for products drives this). Competition within industries gives some companies power (i.e. Apple buying chips)
Substitutes: High – ex. Many different types of smart phones. However, brand equity and capacity help to mitigate this threat
Competition: Medium – Fierce competition within industries is mitigated by product differentiation (price wars) and capacity constraints, limiting the number of combatants
Information Technology Sector
Life Cycle Highly Cyclical Moore’s Law Product Life Cycles Getting Shorter
both due to, and causing a need for, rapid innovation
Can be Volatile luxury items for individuals, slow demand for
businesses in down economies
Information Technology Sector
Life Cycle Continued Products:
PC’s & Semiconductors: Mature Mobile Products: Growth
Services: Growth
shift to cloud based services, more adoption of technology services in general
Information Technology Sector
Business Cycle Demand Drivers
Innovation Increased Global Adoption Global Economic Growth Competition Global Shift Towards Reliance on Technology Status
Information Technology Sector
External Factors Global Recession
Slowed demand for tech products in 2009. As recovery happens, tech sector is a leader
Increased global adoption of technology Younger generations around the world adopting
tech products at an advanced rate Europe?
Information Technology Sector
User/Geography User:
Younger Generation Businesses/Institutions One last hurrah for Baby Boomers?
Adoption of tech products by the baby boomer generation could have large effects on demand
Geography: Increasingly Global as More Nations Become
Developed Emerging Markets Pose Huge Potential
Information Technology Sector
Sector Profitability High Margins
Premium pricing driven by demand helps bottom line performance for end consumer product manufacturers (as well as pass through pricing)
Volume needs help keep top line revenue strong for input suppliers (Intel, ARM)
Cost reduction across the sector helps to widen margins
Information Technology Sector
Sector Profitability Continued Growing Mobile Market Shift Towards Cloud Based Services
Lowering fixed costs for many, leading to increased availability of capital for spending
Shifting of risk from individual entities to cloud based service providers should help to maintain premium pricing
Information Technology Sector
Negative Revenue growth in 2009 15% up from Q2 2010 to Q2 2011 Growth rates are projected to be positive for 2011/2012
Information Technology Sector
Financial Analysis – Information Technology
EPS in Info Tech have increased on an annual basis Growth rates are projected to be positive for 2011/2012
Financial Analysis – Information Technology
Information Technology Sector
12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011
Net Profit Margin 11.27 12.20 11.84 12.90 16.43 16.94
Relative to S&P 500 1.21 1.43 1.83 1.86 1.91 1.83
EBITDA Margin 21.20 21.70 22.60 24.00 27.50 27.60
Relative to S&P 500 0.89 0.85 1.18 1.40 1.47 1.39
ROE 18.80 20.20 22.50 18.70 26.00 26.20
Relative to S&P 500 0.90 1.13 1.50 1.78 1.70 1.62
Equity Risk Premium 4.61 5.75 9.23 7.44 8.02 9.30
Cash Flow per Share 22.21 24.90 27.91 25.23 34.99 40.08
Financial Analysis – Information Technology
• Margins are growing but benchmark has caught up• ROE and Equity Risk Premium are increasing• High Cash Flow per Share growth since 2009
Information Technology Sector
Financial Analysis – Computer Hardware
Apple (AAPL.I) & HP (HPQ.I) Revenues: latest Quarter (Jun 11) up 25% Earnings: latest Quarter up 68%
Information Technology Sector
Financial Analysis – Computer Hardware
• Margins are lower in comparison with the sector• ROE is higher relative to the sector
12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011
Net Profit Margin 7.38 8.59 8.70 9.88 11.50 12.98
Relative to Info Tech 0.65 0.70 0.73 0.77 0.70 0.77
EBITDA Margin 12.90 14.00 14.80 17.10 17.10 19.50
Relative to Info Tech 0.61 0.65 0.65 0.71 0.62 0.71
ROE 21.50 26.60 30.70 30.50 30.60 35.90
Relative to Info Tech 1.14 1.32 1.36 1.63 1.18 1.37
Cash Flow per Share 32.10 39.50 46.30 50.18 60.01 81.14
Information Technology Sector
Financial Analysis – Internet Software & Services
Google (GOOG.I) Revenues: latest Quarter (Jun 11) up 18% Earnings: latest Quarter up 32%
Information Technology Sector
Financial Analysis – Internet Software & Services
• Margins are higher in comparison with the sector• ROE is lower relative to the sector
12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011
Net Profit Margin 18.28 19.05 19.25 20.57 22.40 23.24
Relative to Info Tech 1.62 1.56 1.63 1.59 1.36 1.37
EBITDA Margin 35.60 50.80 36.70 45.00 40.80 40.70
Relative to Info Tech 1.68 2.34 1.62 1.88 1.48 1.47
ROE 15.40 17.40 18.60 17.50 17.20 18.40
Relative to Info Tech 0.82 0.86 0.83 0.94 0.66 0.70
Cash Flow per Share 5.11 7.44 8.91 9.91 11.36 13.29
Information Technology Sector
Financial Analysis – Semiconductors
Intel (INTC.I) Revenues: latest Quarter (Jun 11) up 11% Earnings: latest Quarter up 1%
Information Technology Sector
Financial Analysis – Semiconductors
• EBITDA Margin is higher in comparison with the sector• ROE lags behind the sector
12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011
Net Profit Margin 15.06 13.35 10.11 11.53 21.69 21.25
Relative to Info Tech 1.34 1.09 0.85 0.89 1.32 1.25
EBITDA Margin 33.70 28.30 31.10 25.60 39.60 37.00
Relative to Info Tech 1.59 1.30 1.38 1.07 1.44 1.34
ROE 16.30 12.20 15.10 6.40 27.10 25.10
Relative to Info Tech 0.87 0.60 0.67 0.34 1.04 0.96
Cash Flow per Share 28.58 25.69 29.54 19.99 39.72 43.15
Information Technology Sector
Absolute Basis High Low Median Current
P/Trailing E 25 11.1 17.7 12.8
P/Forward E 22.4 11.3 16.3 12.1
P/B 4.8 2.3 3.8 3.0
P/S 3.0 1.3 2.4 2.2
P/CF 17.7 8.2 11.5 10.2
Relative to SP500 High Low Median Current
P/Trailing E 1.5 .91 1.1 1.0
P/Forward E 1.4 .91 1.1 .99
P/B 1.8 1.3 1.6 1.5
P/S 2.1 1.7 1.8 1.9
P/CF 1.6 1.1 1.2 1.2
Information Technology Sector Multiples
Information Technology Sector
Absolute Basis High Low Median Current
Computer Hardware 25 11.1 17.7 12.8
Internet Software Serv. 37.8 13.7 19.7 13.7
Systems Software 20.3 8.7 13.7 9.5
IT Consulting 181.5 11.1 18.8 14.3
Industry P/Forward Earnings
Absolute Basis High Low Median Current
Computer Hardware 25 11.1 17.7 12.8
Internet Software Serv. 8.8 2.8 4.7 4.3
Systems Software 7 2.4 4.1 3.2
IT Consulting 4.4 .4 1.4 2.1
Price/Sales
Information Technology Sector
Sector Multiples on an Absolute Basis
Relative S&P 500 High Low Median Current
Computer Hardware 1.3 .78 1.0 .82
Internet Software Serv. 2.4 1.1 1.4 1.2
Systems Software 1.3 0.78 0.95 0.87
IT Consulting 11.6 0.85 1.3 1.1
Industry P/Forward Earnings
Relative S&P 500 High Low Median Current
Computer Hardware 1.5 .9 1.3 1.3
Internet Software Serv. 5.6 3.1 4.1 3.5
Systems Software 3.6 2.4 3.1 2.6
IT Consulting 3.8 0.2 1.3 1.8
Price/Sales
Information Technology Sector
Sector Multiples Relative to S&P 500
Concluding Thoughts We believe the Sector is currently undervalued
The sector is currently priced at a premium relative to the S&P 500
Current year growth of 22% and a 2012 growth of 18% show the strength of this sector compared to the S&P 500, and a long term future growth rate of 14%
Most recent quarter outperformed estimates by 9% Multiples increasing from recession, and we expect
to them to return to median levels
Information Technology Sector
Recommendation Sector Opportunities
Great growth in sector and LT growth rates at 14% Global shift towards more reliance
Sector Risks Price wars between large companies Location concerns and government regulations
Sector is currently undervalued Current SIM holding weight: 21.51% Stay at current weight or increase a maximum of
50 basis points
Information Technology Sector