Information Technology Sector Stocks

June 1st, 2010Greg Price

Greg Shaskus

Min Shen

Matt Sims

Chris Stuart

S & P 500 Sector Weights (as of 4/30/2010)

Sector Current Index Weight

Current SIMWeight

Consumer Discretionary 10.55% 10.44%

Consumer Staples 10.91% 11.71%

Energy 11.18% 9.76%

Financials 16.47% 11.41%

Health Care 11.55% 14.63%

Industrials 10.76% 13.10%

Information TechnologyInformation Technology 18.91%18.91% 20.18%20.18%

Materials 3.45% 1.64%

Telecommunication Services 2.73% 3.70%

Utilities 3.48% 2.10%

IT Recap

• Currently 127bps overweight

• Class voted to increase our position by 100bps– Result is that the IT Sector will be 227bps

overweight

Sector Holdings

Hewlett Packard Co. 4.98%

Intel Corp. 4.30%

NCR Corp. 2.65%

Oracle Corp. 4.88%

Research In Motion 3.38%

Total Weight 20.18%

Current Holdings

Hewlett Packard Co. 4.98%

Intel Corp. 4.80%

NCR Corp. 2.65%

Oracle Corp. 4.88%

Research In Motion 0.00%

Lecroy 4.38%

Total Weight 21.18%

Recommended Holdings

Intel—Buy

• Intel is the world’s largest semiconductor chip maker

• Offers products for personal computers, servers, and mobile devices

• Two major growth opportunities: – Asia– “Smart” market

• Buy 50 bps – 430 bps480 bps

Global Internet Traffic

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2008 2009 2010 2011 2012 2013

Petabytes Per Month

Financial Analysis

Revenue EPS

-40%

-20%

0%

20%

40%

60%

80%

100%

0.00

0.50

1.00

1.50

2.00

2.50

2005 2006 2007 2008 2009 2010 2011 2012

EPS % Chg.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

$-$5,000

$10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000

2005 2006 2007 2008 2009 2010 2011 2012

Revenue (mlns) y-o-y %Chg.

Financial Analysis—Margins & ROE y-o-y Chg.

-15%

-10%

-5%

0%

5%

10%

15%

2006 2007 2008 2009 2010

EBITDA Margin Net Profit Margin Return on Equity

Valuation—Multiples

Relative to Industry High Low Median Current Relative to S&P 500 High Low Median CurrentP/Trailing E 1.2 0.32 0.81 0.55 P/Trailing E 2.7 0.55 1.1 0.86P/Forward E 2.5 0.07 0.84 0.93 P/Forward E 2.9 0.8 1.2 0.82P/B 1.6 0.8 1.1 0.9 P/B 2.9 1 1.4 1.3P/S 3.2 0.9 1.4 1 P/S 7.5 1.9 3.4 2.7P/CF 1.4 0.5 1 0.7 P/CF 2.6 0.7 1.2 0.9

Absolute Valuation High Low Median Current

Target Multiple

Target Metric/Share Target Price

Implied Upside (%)

P/Forward E 67.5 7.0 18.0 11.0 17.0 1.70 $ 28.90 35%P/S 16.9 1.6 4.1 3.0 4.0 7.42 $ 29.68 39%P/B 15.3 1.8 3.7 2.7 3.5 7.94 $ 27.79 30%P/EBITDA 33.5 5.4 10.0 7.0 10.0 2.97 $ 29.70 39%P/CF 43.8 6.6 12.6 8.8 12.6 2.40 $ 30.24 41%

Mean 29.26$ 37%Median 29.68$ 39%

Valuation—Comparable Companies

Company Price P/Trail P/Forward P/CF EV/EBITDAIntel 20.91 14.0x 11.0x 8.8x 6.5xAMD 8.40 NM 18.6x 13.8x 6.8xBroadcomm 32.67 17.5x 13.4x 15.7x 13.2xIBM 125.42 12.2x 10.9x 8.9x 7.5xQualcomm 35.89 15.0x 15.3x 12.9x 9.0xTI 24.57 14.3x 10.3x 10.0x 7.1xMean (excl. Intel) 14.8x 13.7x 12.3x 8.7xMedian (excl. Intel) 14.7x 13.4x 12.9x 7.5x

Comparable Public Companies Valuation(in millions of $ except per share amounts)

LTM EBITDA 16,290$ EBITDA Mult. (+10% prem.) 9.6xImplied EV 156,384$ Less: Net Debt 2,606$ Equity Value 158,990$ Fully-Diluted Shares O/S (mln) 5,681 Target Share Price 28$

Valuation—DCF Analyst: Gregory Shaskus Terminal Discount Rate = 10.5%5/23/2010 Terminal FCF Growth = 5.0%(in USD Millions)Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Revenue 42,855 47,569 48,996 51,936 55,052 58,355 61,856 65,568 69,502 73,324 76,991 % Grow th 11.0% 3.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 5.5% 5.0%

Operating Income 13,671 14,699 14,160 15,061 15,415 15,756 16,083 16,392 16,680 16,865 16,938 Operating Margin 31.9% 30.9% 28.9% 29.0% 28.0% 27.0% 26.0% 25.0% 24.0% 23.0% 22.0%

Interest Income 759 842 867 919 974 1,033 1,095 1,161 1,230 1,298 1,363 Interest % of Sales 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%

Taxes 4,420 4,759 4,598 4,384 4,476 4,564 4,646 4,722 4,790 4,826 4,828 Tax Rate 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0%

Net Income 9,838 10,592 10,233 11,597 11,913 12,225 12,531 12,831 13,121 13,337 13,472 % Grow th 7.7% -3.4% 13.3% 2.7% 2.6% 2.5% 2.4% 2.3% 1.6% 1.0%

Add Depreciation/Amort 4,928 6,184 6,369 6,752 7,157 7,586 8,041 8,524 9,035 9,532 10,009 % of Sales 11.5% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%

Plus/(minus) Changes WC (960) (471) (143) (493) (523) (554) (588) (623) (660) (697) (731) % of Sales -2.2% -1.0% -0.3% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%

Subtract Cap Ex 4,928 6,184 6,859 6,752 7,157 7,586 8,041 8,524 9,035 9,532 10,009 Capex % of sales 11.5% 13.0% 14.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%

Free Cash Flow 8,877 10,120 9,601 11,103 11,390 11,670 11,944 12,208 12,461 12,640 12,741 % Grow th 14.0% -5.1% 15.6% 2.6% 2.5% 2.3% 2.2% 2.1% 1.4% 0.8%

NPV of Cash Flows 68,050 43%NPV of terminal value 89,620 57% Terminal Value 243,236 Projected Equity Value 157,671 100%Free Cash Flow Yield 7.30% Free Cash Yield 5.24%

Current P/E 12.4 11.5 11.9 Terminal P/E 18.1 Projected P/E 16.0 14.9 15.4 Current EV/EBITDA 6.4 5.7 5.8 Terminal EV/EBITDA 8.9 Projected EV/EBITDA 8.3 7.4 7.6

Shares Outstanding 5,681

Current Price 21.42$ Implied equity value/share 27.75$ Upside/(Downside) to DCF 29.6%

Debt 2,382 Cash 4,988 Cash/share 0.88

Target Share Price Upside/(Downside) from Current Price Discount Rate = Discount Rate =

9.5% 10.0% 10.5% 11.0% 11.5% 9.5% 10.0% 10.5% 11.0% 11.5%4.0% 29.64$ 27.24$ 25.20$ 23.45$ 21.93$ 4.0% 38% 27% 18% 9% 2%4.5% 31.45$ 28.68$ 26.37$ 24.41$ 22.74$ 4.5% 47% 34% 23% 14% 6%5.0% 33.65$ 30.41$ 27.75$ 25.54$ 23.66$ 5.0% 57% 42% 30% 19% 10%5.5% 36.40$ 32.52$ 29.41$ 26.87$ 24.74$ 5.5% 70% 52% 37% 25% 15%6.0% 39.94$ 35.16$ 31.44$ 28.46$ 26.02$ 6.0% 86% 64% 47% 33% 21%

Terminal Growth =

Terminal Growth =

Recommendation—Buy

Valuation Summary Buy 50 bps

• Equal weight for all three valuation methods yields a target share price of $28.00 (rounded)

• 34% upside potential (incl. 3.0% div.)

• Catalysts:– Growth of the Internet– Growth opportunities in

Asia– Expansion into “smart”

market

• Risks:– Prolonged economic

downturn– Unsmooth shift into “smart”

market

Research In Motion

• Designs, manufacturers, and markets innovative wireless solutions for a global mobile communication market (aka Blackberry)– Its popularity was based on the convenience of its

mobile email system and its cost compared to competitors

• Debut of new 6.0 Operating System next quarter• Rumors about entering the Tablet PC market• Sell all BP’s of RIM

Discounted Cash Flow Model

Sensitivity Analysis

Target Share Price Dicscount Rate

Terminal Growth Rate 10.00% 10.50% 11.00% 11.50%

4.00% 73.33 66.71 61.06 56.19

4.50% 78.19 70.66 64.31 58.89

5.00% 84.02 75.32 68.1 62.01

5.50% 91.14 80.92 72.58 65.65

Upside/Downside Discount Rate

Terminal Growth Rate 10.00% 10.50% 11.00% 11.50%

4.00% 23.60% 12.50% 2.90% -5.30%

4.50% 31.80% 19.10% 8.40% -0.70%

5.00% 41.60% 27.00% 14.80% 4.50%

5.50% 53.60% 36.40% 22.40% 10.70%

Valuations

Absolute Valuation

High Low Median Current #Your Target

Multiple

*Your Target E, S, B, etc/Share

Your Target Price

P/Forward E

928.6 10.8 31.8 10.9 12 5.39 64.68

P/S 186.3 2.2 8.7 2.2 3 24 72

P/B 40 0.8 6.1 4.3 4 13..79 55.16

P/EBITDA 443.2 7.21 68.41 8.56 10 6.93 69.3

P/CF 616.8 10 60.3 10.8 12 5.49 65.9

Risks for RIM

• Increase in competition in Smartphone market with i-phone and android phones– Starting to lose market share as of Q1 2010

compared to Q1 2009– Growing popularity of more advanced Smartphones

(applications)• Strategy to increase global expansion

– Received 35% of Revenue last year from outside of North America

– Uncertainty in Foreign Currency• Limited potential for Upside with a several

realistic risks

Lecroy—Buy

• Operates in Test and Measurement industry• Products are used to design, develop, and manufacture electronic

equipment

• Develops, manufactures, sells, and licenses high-performance oscilloscopes and global communication protocol analyzers– Oscilloscopes are tools used to measure and analyze

electronic signals (volts)– Protocol analyzers are tools used to analyze

communication between two electronic devices– Lecroy’s products are used in the computer,

semiconductor, data storage, communications, consumer electronics, automotive/industrial, and defense industries

• Buy 438 bps

Buy Rationale

• Growth in the Test and Measurement market– Improvements in electronic systems performance

• Driven by advances in semiconductor technology– Growth in electronics market– Emerging technologies and standards

• Lecroy offers essential analysis tools for electronic equipment designers and engineers

• Potential acquisition target • Trading at a discount

Financial Analysis

Revenue EPS

-20%

-10%

0%

10%

20%

30%

40%

0

20

40

60

80

100

120

140

160

180

2005 2006 2007 2008 2009 2010 2011

Revenue (mlns) y-o-y %Chg.

-100%

-50%

0%

50%

100%

150%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2005 2006 2007 2008 2009 2010 2011

EPS y-o-y %Chg.

Financial Analysis—Margins & ROE

Valuation

High Low Median Current Target Target Metric/Share Target PriceP/Forward E 927.0 9.2 17.0 9.2 13.0 0.4 5.07$ P/S 2.3 0.1 0.9 0.5 0.7 12.0 8.40$ P/EBITDA 62.4 1.3 9.0 4.4 7.6 1.2 9.12$ P/CF 531.5 1.1 9.6 5.6 6.7 0.9 5.98$

Target 7.14$

JDS Agilent LecroyP/Forward E 18.4 15.4 9.2P/S 2.1 2.4 0.5P/EBITDA 9.37 NM 4.4P/CF 10 18.6 5.6

Relative to Sector High Low Median Current Relative to Industry High Low Median CurrentP/Forward E 1.1 0.5 0.7 0.7 P/Forward E 1.3 0.5 0.7 0.6P/S 0.6 0.1 0.3 0.2 P/S 0.9 0.1 0.3 0.2P/EBITDA 1.1 0.2 0.7 0.5 P/EBITDA 1.2 0.1 0.6 0.1P/CF 0.9 0.1 0.5 0.5 P/CF 0.8 0.1 0.4 0.3

Recommendation—Buy

Valuation Summary Buy438 bps

• Target Price of $7.00 derived from absolute valuation

• 40% upside from current price of $5.00

• Catalysts:– Growth in electronics markets– Improvements in technology – New technological standards

• Risks– Prolonged economic

downturn– Competition

• Lecroy is much smaller than its competitors

Questions

Hewlett Packard

Fundamental Drivers:• Focus on offering a complete solution for all of a

company’s IT needs • Transforming from a purely infrastructure

company to a services and infrastructure company

• Aggressive approach to winning business from rivals

• Sales in the Brazil, Russia, India, and China regions

Hewlett Packard Co.

Absolute Valuation

High Low Median Current Target Multiple

Target E, S, B,etc/Share

Target Price (E x F)

A. B. C. D. E. F. G.

P/Forward E 37.90 5.70 13.20 9.70 12.5 4.49 56.13

P/S 3.00 .40 1.00 .90 1.0 50.76 50.76

P/B 6.90 .80 2.30 2.60 2.5 17.57 43.93

P/EBITDA 49.79 2.72 8.51 6.21 8.0 7.36 58.88

P/CF 29.10 3.80 10.50 7.30 9.5 6.26 59.47

• Current stock price of $45.58

• Target price of $60 which is a 32% upside

Hewlett Packard DCF

Target = $65.97

Hewlett Packard Sum-of-the-Parts

Target = $58.83