Download - Deborah Koch, CFA Senior Equity Analyst
© 2009 Northern Trust Corporation northerntrust.com
FALL FOCUS
2009
INVESTMENT CONFERENCE
Deborah Koch, CFASenior Equity Analyst
Technology SectorInternet, Software, and Hardware
2 2009 Fall FOCUS Investment Conference
S&P IT Sector vs. S&P 500 Performance – 1 yr
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%S
ep-0
8
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb
-09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Sep
-09
Oct
-09
Ind
exed
To
tal R
etu
rn S&P 500-11.5%
IT Sector4.0%
Source: FactSet
3 2009 Fall FOCUS Investment Conference
S&P IT Sector vs. S&P 500 Performance – 5 yr
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%S
ep-0
4
Dec
-04
Mar
-05
Jun-
05
Sep
-05
Dec
-05
Mar
-06
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Ind
exed
To
tal R
etu
rn
S&P 500-5.6%
IT Sector15.5%
Source: FactSet
4 2009 Fall FOCUS Investment Conference
Technology
We are positive on the technology sector, and we expect spending on technology products and services to improve in C2010 as the global economy improves
We expect enterprise I.T. spending to be better the 2H2009, as budgets were set later than normal. We also expect consumer tech spending to be decent for the holidays, given solid back to school results
In C2010, we expect enterprise I.T. spending to increase in the low-mid single digits, with hardware spending recovering sooner than software and services
While consumer spending may remain constrained depending on the pace of an employment recovery, technology continues to gain share of wallet, driven by digitization
Tech company balance sheets remain strong, with high levels of cash and little debt; M&A activity has picked up recently; valuations are reasonable; and currency should begin to help reported growth rates in CQ42009
Sector Overview: Overweight
5 2009 Fall FOCUS Investment Conference
Industries facing massive business transformations, global competition and increased compliance and regulation are using technology to generate new revenue streams and to gain competitive advantages vs. their peers
Enterprises are reducing the number of tech vendors they deal with, which is driving consolidation of smaller providers and helping the large cap tech companies gain share of corporate budgets
Tech companies have a relatively high international exposure, and should continue to benefit from the long term secular growth trends of globalization and infrastructure build out in developing countries
New technologies like software as a service; virtualization; mobile applications; and Web 2.0 technologies such as social networking will be implemented by enterprises to improve productivity and reduce costs
Digital technologies, mobile applications and digital content will continue to drive consumer technology spending
Technology
Secular Drivers for Tech:
6 2009 Fall FOCUS Investment Conference
With technology stocks outperforming YTD, expectations are rising, and evidence of a recovery in growth will be necessary to sustain valuations and estimates at some point
Most companies have completed their cost cutting programs, and further margin expansion will require a return to revenue growth
Technology price deflation seems to be accelerating, and could reduce revenue growth and put pressure on margins for many tech companies
High balances of overseas cash may result in higher levels of debt on tech company balance sheets in the future, since overseas cash cannot be used for share repurchases, dividends or domestic acquisitions without incurring a tax penalty
Technology
Risks to Monitor:
7 2009 Fall FOCUS Investment Conference
Tech Price/Sales – 10 yr
Source: FactSet
8 2009 Fall FOCUS Investment Conference
NTM Margins and Valuation
*Uses NTM FactSet consensus estimates for our companies
ATVI
ADBE
AMZNADSK
CTXSCTSH
EBAY
GOOG
INTU
JNPR
MFE
MSFTORCL
SAI
CRM
SAP
SYMC
YHOO
ACN
AAPLCSCO
JNPR
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
NTM operating margin
Pric
e / F
CF,
cur
rent
9 2009 Fall FOCUS Investment Conference
NTM Revenue Growth and Valuation
*Uses NTM FactSet consensus estimates for our companies
ATVI
ADBE
AMZNCTXS
CTSH
EBAY
GOOG
INTU
MFE
MSFTORCL
SAI
CRM
SAP
SYMC
YHOO
ACN
AAPLCSCO
JNPR
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
-5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0%
NTM revenue growth
Pric
e / F
CF,
cur
rent
10 2009 Fall FOCUS Investment Conference
Technology
1 – Sector Outperform Activision (ATVI) Apple (AAPL) Adobe (ADBE) Amazon.com (AMZN) BMC Software (BMC) Cognizant Technology Solutions
(CTSH) Google (GOOG) McAfee (MFE) Oracle (ORCL)
2 – Sector Perform Accenture (ACN) Autodesk (ADSK) Cisco (CSCO) Citrix (CTXS) eBay (EBAY) Electronic Arts (ERTS) Intuit (INTU) Juniper (JNPR) Microsoft (MSFT) SAIC (SAI) SAP AG (SAP) Symantec (SYMC) Yahoo (YHOO)
Coverage (Deb Koch):
11 2009 Fall FOCUS Investment Conference
AAPL has perfected the user experience in all of its devices, with tight integration between hardware, software, internet based services and third party content
We expect new devices at new price points, new carrier relationships and new geographies to expand AAPL’s addressable market
Mac sales continue to benefit from iPhone and iPod success
Based on the iPhone’s current deferred revenue model, estimates seem conservative and valuation is reasonable; we expect an accounting rule change could result in upward estimate revisions
Technology
Apple (AAPL, 1/A): Continued Share Gains Expected Due To Superior Technology Platform
12 2009 Fall FOCUS Investment Conference
eCommerce share gains should continue driven by category and geographic expansion, and by increasing penetration of Prime membership, third party sales and digital media
Margins should expand gradually over time driven by a slow mix shift toward third party, private label and digital media
While the Kindle has been a success, we expect AMZN to sell digital media – including ebooks, movies and music – on any open device over time, which we view as a long term positive
AMZN is one of the best cash flow stories that we follow, given its negative cash cycle and low capex requirements; the stock is currently selling at less than 20X our 2010E FCF/share of $5.00
Technology
Amazon.com (AMZN, 1/B): eCommerce Share Gainer
13 2009 Fall FOCUS Investment Conference
MFE has been gaining share in enterprise security as customers have moved from point products to integrated suites with higher price points, and has differentiated itself with a common management platform
MFE was early to focus on the PC OEM and ISP channels in the consumer market, which has allowed them to gain share
Revenue is mostly recurring, and margins should continue to expand as management integrates past acquisitions and improves internal efficiencies
New management has more consistently executed on strategy, resolved accounting issues, added to the product portfolio with key technology acquisitions and improved credibility with investors
Technology
McAfee (MFE, 1/C): Security Share Gainer
14 2009 Fall FOCUS Investment Conference
Technology
Qualcomm, QCOM (1/B): The company gets revenue from licensing intellectual property
and is the market leader for baseband communications chips QCOM is uniquely positioned to benefit from global 3G wireless
build-out and the shift to smartphones
Altera, ALTR (1/B): ALTR is a leading provider of programmable logic devices (PLDs),
benefiting from global communications infrastructure growth and PLD market share capture from other types of chips
New products and an effective market duopoly point to sustained, high margins
Texas Instruments, TXN (2/B): TXN is transforming itself from being primarily a wireless company
into an analog and embedded processing chip company Margin expansion and refocused growth offset by lost operating
profit from exiting wireless baseband
Coverage (Bill Hurley, so far):
© 2009 Northern Trust Corporation northerntrust.com
FALL FOCUS
2009
INVESTMENT CONFERENCE
Questions?
© 2009 Northern Trust Corporation northerntrust.com
FALL FOCUS
2009
INVESTMENT CONFERENCE
Deborah Koch, CFASenior Equity Analyst
Thank you.