Transcript Information Technology Sector Finance 724/824 SIM Class Autumn 2009 A Presentation By: Scott McGrath John Morgan Denise Morrison.

Information Technology
Sector
Finance 724/824
SIM Class
Autumn 2009
A Presentation By:
Scott McGrath John Morgan Denise Morrison
Agenda
•
•
•
•
•
Sector Information
Business Analysis
Performance / Economic Indicators
Valuation
Recommendation
S & P 500 By Sector
Utilities, 3.65%
Consumer
Discretionary,
9.19%
Healthcare,
12.54%
Consumer
Staples, 11.78%
Financials,
14.59%
Telecom, 3.02%
Energy, 12.39%
IT
19.09%
Industrials,
10.29%
Materials,
3.46%
Info Technology Sector is Currently Overweight by 288 Basis Points
SIM Portfolio By Sector
Utilities, 3.19%
Consumer
Discretionary,
7.51%
Healthcare, 13.13%
Consumer Staples,
12.23%
Financials, 6.59%
Telecom, 3.51%
Energy, 12.80%
IT
21.97%
Industrials, 11.97%
Materials, 4.52%
Info Technology Sector is Currently Overweight by 288 Basis Points
Information Technology
• Largest sector in S&P 500
– Both by weighting and market cap
– Highest performing sector YTD
Market Cap
(in $Mill)
QTD
YTD
Info Tech
1,830,673
4.95%
51.96%
Financials
1,411,209
-0.87%
18.15%
Helat Care
1,200,285
3.14%
11.25%
Energy
1,177,157
7.73%
14.13%
Cons Staples
1,124,491
4.33%
11.32%
Industrials
1,000,311
3.61%
15.97%
Cons Desc
896,499
4.35%
33.34%
Utilities
347,528
0.05%
0.73%
Materials
335,484
2.60%
39.39%
Telecom
290,830
-1.72%
-4.72%
Sector
SIM Info Technology Stocks
Industry
Application Software
Computer Hardware
Internet Software & Services
IT Consulting & Services
Computer Storage Equipment
Electron Instruments
Networking Equipment
Office Electronics
Semiconductors
Systems Software
SIM Stocks
IBM, Hewlett-Packard, NCR
Intel
Microsoft, Oracle
Information Technology:
Industry Performance
S&P 500
DOW JONES 30
NASDAQ 100
INFO TECH SECTOR:
IT CONSULTING & SVC
ELECTRONIC MNFRG SVC
INTRNET SOFTWR & SVC
COMPU STORAGE/PERIPH
COMPUTER HARDWARE
TECHNOLOGY DISTRIB
ELECTRONIC COMPONENT
APPLICATION SOFTWARE
COMMUNICATIONS EQUIP
SEMICONDUCTORS
SYSTEMS SOFTWARE
ELECTRONIC EQUIPMENT
SERVICES-DATA PROC
SEMICONDUCTOR EQUIP
HOME ENTMT SOFTWARE
OFFICE ELECTRONICS
QTD
YTD
2008
1.20
3.20
0.70
18.40
14.20
42.80
-38.49
-33.84
-41.89
11.20
-1.10
6.50
0.40
3.50
-0.80
2.40
4.80
-0.10
-4.20
7.50
-3.30
4.80
-9.30
-0.30
2.50
138.10
69.60
68.10
65.40
64.80
51.60
50.90
50.60
44.10
38.10
37.20
34.50
28.30
27.10
18.50
-0.50
-52.64
-54.79
-54.59
-44.67
-40.59
-46.28
-48.29
-45.33
-40.58
-46.92
-38.29
-57.46
-31.14
-60.28
-72.54
-50.77
Market Cap: $Billions
Largest Companies
1) Microsoft
2) Apple
3) Google
4) IBM
5) Cisco Systems
6) Hewlett-Packard
7) Oracle
8) Intel
Market Cap (Billions)
253.7
173.8
173.7
161.4
138.0
115.8
106.8
105.7
Only other Info Technology stock we own is NCR with a market cap of 1.6 Billion
Business Analysis- Info Technology
• Sector growth depends primarily on
technological advancement and
innovation.
– Unpredictable: what is hot today 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
– Can be a leading indicator during recovery, growth periods
• Largely impacted by Corporate and Consumer Spending
– Current Corporate/Consumer spending is down– mixed reviews
on when this starts to recover
– Some analysis suggests IT spending takes 7-9 quarters
following the trough in the cycle (Q209) to return to consistent
YOY growth
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 countries
– 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 Opportunities
– US Healthcare reform (Electronic Patient records)
– Windows 7/Office 2010/Snow Leopard
– Increased Corporate Spending/ Profits (following recovery, where /
when will money be spent?)
– Stimulus Package (everyone wins, right?)
– New Technology from Afghanistan/Iraq (like GPS from 1st Iraq war)
– Asia / India / Emerging Markets development(exploding demand?)
• Growth Risks
– Regulations (China, Iran, North Korea, etc)
– Double-dip recession or unstable recovery or long, slow growth
– Tax Effects
Business Analysis Summary
• Long Term
– IT Growth Opportunities outweigh risks
– Demand will undoubtedly increase long term
– IT becoming a business staple with massive
growth potential innovation globally
• Short-term
– Corporate Spending/Profits rebound?
– GDP growth
Info Technology
S & P 500 vs. Info Technology
QTD
7.0000
6.0000
6%
5.0000
4.0000
4%
3.0000
2.0000
SPX
1.0000
0.0000
-1.0000
S & P 500 vs. Info Technology
YTD
50.0000
42%
40.0000
30.0000
20.0000
14%
10.0000
0.0000
-10.0000
SPX
-20.0000
-30.0000
Jan
-40.0000
Mar
May
July
Aug
Nov
Info Tech Sector vs. US GDP
Growth– 3 year time frame
Info Tech Sector vs. US Corp
Profits-- 3 year time frame
Info tech vs. US Consumer
Confidence- 3 years
Key Drivers
•
•
•
•
GDP (very cyclical)
Globalization
Corporate Profits
Consumer Confidence– need strong
economy with consumer participation
Valuation: Info Tech Sector
Absolute Basis
High
Low
Median
Current
P/Trailing E
74.6
11.1
25
20.5
P/Forward E
64.7
12.1
21.8
17.3
P/B
15.1
2.3
4
4
P/S
6.7
1.3
2.6
2.3
P/CF
45.8
8
15.5
12.9
Green= Cheap
Red= Expensive
Valuation: Info Tech Sector
Relative to
SP 500
High
Low
Median
Current
P/Trailing E
2.6
.91
1.4
1.1
P/Forward E
2.7
.98
1.4
1.1
P/B
3
.9
1.4
1.8
P/S
3
1.5
1.8
2.1
P/CF
2.6
1
1.4
1.2
Green= Cheap
Red= Expensive
Valuation: Computer Hardware
Absolute
Basis
High
Low
Median
Current
P/Trailing E
49.2
10.4
22.8
17.4
P/Forward E
45.6
10.8
19.5
15.4
P/B
11.2
3
4.3
5.3
P/S
3.3
.9
1.5
1.6
P/CF
29.2
7.1
13.6
11.9
Valuation: Computer Hardware
Relative to
SP 500
High
Low
Median
Current
P/Trailing E
1.8
.87
1.2
.98
P/Forward E
1.9
.81
1.2
.92
P/B
2.5
1.2
1.5
2.4
P/S
1.5
.8
1
1.4
P/CF
1.7
.9
1.2
1.1
Valuation: Semiconductors
Absolute
Basis
High
Low
Median
Current
P/Trailing E
135.8
11.6
27.5
47.1
P/Forward E
422.1
12.9
24.4
17.2
P/B
13.8
1.8
3.6
3.0
P/S
13.0
1.6
4.0
2.8
P/CF
37.3
6.4
14.0
14.9
Valuation: Semiconductors
Relative to
SP 500
High
Low
Median
Current
P/Trailing E
5.6
.8
1.5
2.7
P/Forward E
34.7
.6
1.4
1.0
P/B
2.6
.9
1.3
1.4
P/S
5.8
1.9
2.7
2.6
P/CF
2.4
.9
1.3
1.4
Valuation: Systems Software
Absolute Basis High
Low
Median
Current
P/Trailing E
75.6
9.4
23.2
15.9
P/Forward E
35.1
9.8
20.1
15.5
P/B
26.6
3.0
5.2
4.7
P/S
21.8
2.2
7.2
3.5
P/CF
65.6
8.2
18.2
13.1
Valuation: Systems Software
Relative to
SP 500
High
Low
Median
Current
P/Trailing E
2.5
.83
1.3
.90
P/Forward E
1.7
.78
1.2
.92
P/B
5.2
1.3
1.9
2.20
P/S
9.7
2.8
4.6
3.20
P/CF
3.7
1.1
1.7
1.20
Recommendation
• Long Term:
– Info Tech will be sector leader amongst S&P
• Short Term:
– Have enjoyed strong outperformance
– Rebound in economy/spending may take time
Recommendation
 Lower our weight of the info technology sector
by 250 basis points
• Why?
– Currently overweight by 288 basis points
– Info Tech sector is up 42% YTD compared to
14% for the S&P 500
• GDP Growth forecasted 2% – 2.5% for years to
come puts some pressure on IT growth
• Majority of growth s/t likely to come from smaller
companies (we don’t own)
Recommendation
– Use proceeds to possibly bring financials
sector to S&P 500 level weight?
– Being in-line with S&P 500 index still has Info
Tech at a 19% allocation