information technology finance 724/824 sim class summer 2009
DESCRIPTION
Information Technology Finance 724/824 SIM Class Summer 2009. Russell Kolmin Zachary McAllister Paul Melko Mahavir Sanghavi Daniel Schuerman. Agenda. Agenda. Sector Overview Business Analysis Economic Analysis Financial Evaluation Valuation Recommendation. SIM Portfolio Composition. - PowerPoint PPT PresentationTRANSCRIPT
Information Technology
Finance 724/824SIM Class
Summer 2009Russell Kolmin
Zachary McAllisterPaul Melko
Mahavir SanghaviDaniel Schuerman
Agenda• Sector Overview• Business Analysis• Economic Analysis• Financial Evaluation• Valuation• Recommendation
Agenda
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%
SIM Weightings Relative S&P 500
SIM Weighting Relative S&P
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%
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
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%
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
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.
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)
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
Business Cycle Analysis
Investopedia.com
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
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.
Economic Analysis
-2.1
Is the rest of the World GDP lagging US GDP?
Economic Analysis
323.4
Economic Analysis
Economic Analysis
-73.7
Economic Analysis
49.3
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.
Financial AnalysisIT Sector Index over the past five years
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
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
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
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
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
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?
High 1.4Low .98Median 1.3Current 1.1
Relative Price/Earnings
High 1.7Low 1.2Median 1.4Current 1.7
Relative Price/Book
High 2.1Low 1.5Median 1.7Current 2.1
Relative Price/Sales
Relative Price/Cash Flows
High 1.6Low 1.1Median 1.4Current 1.3
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
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.
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.
Appendix
EPS Growth Relative to S&P 500
•IT Sector can have widely fluctuating EPS growth relative to the S&P 500
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%
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
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
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
-1.8
Absolute Forward Price/Earnings
High 23.9Low 12.1Median 20.3Current 18.0
Absolute Price/Book
High 4.8Low 2.3Median 3.9Current 3.6
Absolute Price/Sales
High 3.0Low 1.3Median 2.5Current 2.0
Absolute Price/Cash Flow
High 17.7Low 8.0Median 14.5Current 11.7