Information Technology Finance 724/824 SIM Class Summer 2009
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Transcript of Information Technology Finance 724/824 SIM Class Summer 2009
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Information Technology
Finance 724/824SIM Class
Summer 2009Russell Kolmin
Zachary McAllisterPaul Melko
Mahavir SanghaviDaniel Schuerman
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Agenda• Sector Overview• Business Analysis• Economic Analysis• Financial Evaluation• Valuation• Recommendation
Agenda
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SIM Portfolio Composition
SIM Portfolio CompositionS&P 500 Weight
SIM Weight +/-
Consumer Discretionary 8.97% 7.50% -1.46%Consumer Staples 12.32% 12.36% 0.04%Energy 12.05% 10.68% -1.37%Financials 13.70% 9.33% -4.37%Health Care 14.06% 13.58% -0.49%Industrials 9.79% 11.57% 1.78%Information Technology 18.43% 20.19% 1.76%Materials 3.20% 4.12% 0.92%Telecommunication Services 3.39% 3.28% -0.11%Utilities 4.10% 3.87% -0.23%Cash 0.00% 3.53% 3.53%
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SIM Weightings Relative S&P 500
SIM Weighting Relative S&P
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Sector OverviewDescription Total number of
CompaniesAdj MktCap (in Miilions) QTD YTD
S&P 500 500 8,587,679 6.52% 8.42%
Energy 40 1,059,652 5.98% 2.55%
Materials 28 290,442 11.80% 25.52%
Industrials 58 841,227 6.35% -1.82%
Consumer Discretionary 81 779,409 8.03% 16.16%
Consumer Staples 41 1,019,872 5.88% 2.24%
Health Care 53 1,188,645 5.71% 4.70%
Financials 79 1,149,074 4.16% -0.80%
Information Technology 76 1,621,022 9.14% 35.42%Telecommunications Services 9 289,992 1.86% -4.99%
Utilities 35 348,343 5.78% 1.47%
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Sector Overview Sector Industry % of S&P500 SIM Holdings
Information Technology Application Software 0.52% Communications Equipment 2.82% Computer Storage/Peripherals 0.60% Computer Hardware 5.04%AAPL
HPQElectronic Components 0.38% Electronic Equipment 0.13% Electronic Manufacturing Services 0.05% Home Entertainment Software 0.08% Internet Software and Services 1.89% IT Consulting and Services 0.10%(NCR)Office Electronics 0.80% Semiconductor Equipment 0.35% Semiconductors 2.35%INTCServices - Data Processing 0.94% Systems Software 3.51%ORCL
MSFT
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Sector OverviewTicker Company Market Cap % of S&P 500 % of Info Tech
SectorMSFT Microsoft 208.7 2.43% 12.87%
IBM IBM 154.11 1.79% 9.51%
AAPL Apple 143.31 1.67% 8.84%
GOOG Google 141.12 1.64% 8.71%
CSCO Cisco 126.2 1.47% 7.79%
ORCL Oracle 111.81 1.30% 6.90%
INTC Intel 108.32 1.26% 6.68%
HPQ Hewlett Packard 99.55 1.16% 6.14%
QCOM Qualcomm 78.71 0.92% 4.86%
TXN Texas Instruments 30.39 0.35% 1.87%
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Business Analysis-Info Technology
• Largest sector with a focus primarily on computer hardware and software.
• Sector growth depends primarily on technological advancement and innovation.– Unpredictable: what is hot now may be obsolete in 6 months
• Dependence on cutting edge technology leads to enormous R&D costs.– These R&D costs are the largest barrier to entry
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Business Analysis (cont.)• Cyclical Sector with large impact on S&P500
– Tends to follow market cycles, can be highly volatile– A leading indicator during recovery, growth periods
• Largely impacted by Corporate and Consumer Spending– Current Corporate/Consumer spending is down, however with
ongoing technological advancements, corporations will be upgrading IT as recovery begins
• Primary indicator is Personal Computer demand– PC Demand tends to create “pin-action” on all other IT
components (i.e. Software, Peripherals, Storage, Services)
• New Trend – Cell phones becoming handheld PCs– Leads to need for PC style software, hardware, storage, etc.
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Business Analysis (cont.)• Information Technology Life Cycle – primarily impacted
by the life cycle of PCs– PCs’ typical life-span = 3-5 yrs (physically longer, however obsolete)
• Demand – largely affected by developed countries, growth potential in under-developed– 60% of all PCs owned by 15% of the world-wide population1
• LOTS of untapped demand– Increasing handheld device demand/infrastructure
• Tel-com sector expanding infrastructure and increased cell phone capabilities desired
1: www.garnter.com (June 23, 2008)
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Business Analysis (cont.)• Growth OpportunitiesOpportunities
– US Healthcare reform (Electronic Patient records)– Windows 7 (How will it be received?)
• Office 2010– Increased Corporate Spending/ Consumer Saving Rate (following
recovery, where will money be spent?)– Stimulus Package (how will broadband infrastructure expansion impact
demand?)– Asia Growth/Savings Rates (exploding demand?)
• Growth RisksRisks– Regulations (China, Iran, North Korea, etc)– Double-dip recession or unstable recovery
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Business Cycle Analysis
Investopedia.com
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Business Analysis Summary• IT Growth Opportunities outweigh risks
– However double-dip still possibleHowever double-dip still possible• Demand is Strong Long Term
– IT becoming a business staple with massive growth potential innovation
• Short-term…what happens with Windows7 and Corporate Spending?– It appears IT spending is going to increase
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Economic Analysis• Key facts about Info Tech sector
– Over 75% of sales outside the U.S. for almost all major companies.
– Leading Indicators• Global Semiconductor Bookings• Corporate IT Spending Index• Change in Real Consumption (U.S.)
– Consumer Confidence Index is a good gut check.– Data on leading indicators was available only up to June 09,
which limited the predictive power of the analysis in the short term.
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Economic Analysis
-2.1
Is the rest of the World GDP lagging US GDP?
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Economic Analysis
323.4
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Economic Analysis
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Economic Analysis
-73.7
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Economic Analysis
49.3
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Economic Analysis Summary• Leading Indicators show that the sector may be
overvalued based on the comparative analysis.• If the assumption that ROW is going into a recession
holds true then IT sector will be hurt. • In the short term,
– With a slowly recovering global economy, this sector may be a drag with no significant upside.
– With the possibility of a double dip recession in the U.S. and slowing global economy, the sector has a significant downside.
• In the long run,– The sector is more attractive at a reasonable valuation.
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Financial AnalysisIT Sector Index over the past five years
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Index price relative to S&P 500
•The IT Index has been lagging relative to the S&P 500 the past couple years – recovering from tech bubble•However this has changed so far this year, with the Index well outpacing the S&P 500 – will it continue?
High: 12.3Low: -19.4Current: 12.3
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EPS Analysis•Year to year EPS increased until 2009•This latest year is the first one that saw a decrease in EPS for the last five year.
High: 20.46Low: 10.24Median:16.41Current: 17.71
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Net Profit Relative to S&P 500•Profit has consistently been higher than the S&P 500 average•Over the past couple of years this difference has jumped even higher
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IT Sector Return on Equity
High: 22.5%Low: 16.7%Median: 19.5%Current: 21.7%
•Has risen rather consistently over the past 5 year, with only a slight decrease this year
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ROE Relative to S&P 500•The IT sector ROE has been relatively close to S&P 500 average, however this has changed since 2007
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Financial Evaluation Summary• Even though the IT sector has gone down in
EPS, ROE and Net Profit Margins, it has still out performed the S&P 500 in these areas
• This outperformance is probably why the IT sector has gone up in price more than any other sector in the S&P 500 this year
• Have prices caught up with this performance, or will they continue to outpace the S&P 500?
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High 1.4Low .98Median 1.3Current 1.1
Relative Price/Earnings
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High 1.7Low 1.2Median 1.4Current 1.7
Relative Price/Book
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High 2.1Low 1.5Median 1.7Current 2.1
Relative Price/Sales
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Relative Price/Cash Flows
High 1.6Low 1.1Median 1.4Current 1.3
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Absolute Basis High Low Median CurrentP/Trailing E 31.5 11.1 22.3 17.2
P/Forward E 23.9 12.1 20.3 17.5
P/B 4.8 2.3 3.9 3.5
P/S 3.0 1.3 2.5 1.9
P/CF 17.7 8.0 14.5 11.3
Relative to SP500 High Low Median Current
P/Trailing E 1.6 .91 1.3 1.1
P/Forward E 1.4 .98 1.3 1.1
P/B 1.7 1.2 1.4 1.7
P/S 2.1 1.5 1.7 2.1
P/CF 1.6 1.1 1.4 1.3
Sector Valuation Summary
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Valuation Summary• On an absolute basis, the sector is
inexpensive.• Relative to the S&P500, the sector is a
little expensive.• The direction of the market will determine
the sector’s future.
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Recommendation• Currently over-weighted in the SIM (1.76%)
– Almost same as Industrials• Best performing sector in the S&P for the year• Will performance continue?• Yes, world-wide growth will drive IT growth• Yes, recovery will drive IT spending• Yes, long-term growth of IT seems inevitable• Yes, IT is becoming a business staple• Yes, near-term IT spending is trending up• No, economic analysis reveals that the sector may be overvalued.• No, short-term run is ending based on P/S (which is above its median)• Recommend weighting stands where it is.
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Appendix
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EPS Growth Relative to S&P 500
•IT Sector can have widely fluctuating EPS growth relative to the S&P 500
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Net Profit Margin in IT Sector
•Saw large increase in 2007, however fell back down in 2008 and into 2009
High: 12.2%Low: 11.0%Median: 11.3%Current: 11.3%
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Holdings Valuation Analysis
Stock AAPL HPQ INTC MSFT NCR ORCL
P/Forward EMedian
28.530.1
10.714.4
20.318.8
15.318.0
21.510.2
14.516.3
P/SMedian
3.75.2
0.81.0
3.23.4
5.16.4
0.50.6
4.75.6
P/BMedian
5.86.5
2.52.4
2.83.4
6.26.0
4.91.9
4.45.9
P/EBITDAMedian
19.3327.52
6.7111.2
10.459.54
9.1215.21
4.375.61
8.7414.03
P/CFMedian
26.134.6
7.611.2
12.811.6
11.818.0
5.46.7
12.116.3
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Holdings Valuation Analysis
Stock AAPL HPQ INTC MSFT NCR ORCL
P/Forward EMedian
28.530.1
10.714.4
20.318.8
15.318.0
21.510.2
14.516.3
P/SMedian
3.75.2
0.81.0
3.23.4
5.16.4
0.50.6
4.75.6
P/BMedian
5.86.5
2.52.4
2.83.4
6.26.0
4.91.9
4.45.9
P/EBITDAMedian
19.3327.52
6.7111.2
10.459.54
9.1215.21
4.375.61
8.7414.03
P/CFMedian
26.134.6
7.611.2
12.811.6
11.818.0
5.46.7
12.116.3
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Economic Analysis
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Economic Analysis
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Economic Analysis
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Economic Analysis
-1.8
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Absolute Forward Price/Earnings
High 23.9Low 12.1Median 20.3Current 18.0
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Absolute Price/Book
High 4.8Low 2.3Median 3.9Current 3.6
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Absolute Price/Sales
High 3.0Low 1.3Median 2.5Current 2.0
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Absolute Price/Cash Flow
High 17.7Low 8.0Median 14.5Current 11.7