Transcript Information Technology Finance 724/824 SIM Class Summer 2009 Russell Kolmin Zachary McAllister Paul Melko Mahavir Sanghavi Daniel Schuerman.

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
SIM Portfolio Composition
S&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 Weighting Relative S&P
SIM Weightings Relative S&P 500
Relative Weightings of SIM vs. S&P 500
Utilities
Telecommunication Services
Materials
Information Technology
Industrials
Health Care
Financials
Energy
Consumer Staples
Consumer Discretionary
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
+/-
Sector Overview
Description
Total number of
Companies
Adj 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%
9
289,992
1.86%
-4.99%
35
348,343
5.78%
1.47%
Telecommunications
Services
Utilities
Sector Overview
Sector
Information Technology
Industry
Application Software
Communications Equipment
Computer Storage/Peripherals
Computer Hardware
Electronic Components
Electronic Equipment
Electronic Manufacturing Services
Home Entertainment Software
Internet Software and Services
IT Consulting and Services
Office Electronics
Semiconductor Equipment
Semiconductors
Services - Data Processing
Systems Software
% of S&P500 SIM Holdings
0.52%
2.82%
0.60%
5.04% AAPL
HPQ
0.38%
0.13%
0.05%
0.08%
1.89%
0.10% (NCR)
0.80%
0.35%
2.35% INTC
0.94%
3.51% ORCL
MSFT
Sector Overview
Ticker
Company
Market Cap
% of S&P 500
% of Info Tech
Sector
MSFT
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 Opportunities
– 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 Risks
– 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 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
US and World GDP (up to Q1 09)
10
US
8
World
Real GDP % Change
6
4
2
0
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
-2
-2.1
-4
-5.5
-6
-8
Is the rest of the World GDP lagging US GDP?
Jul-10
Economic Analysis
4,000
880
3,500
780
3,000
2,500
680
2,000
580
1,500
480
1,000
323.4
500
380
313.94
280
180
Jul-99
0
-500
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
-1,000
Jul-10
Global Semiconductor Bookings
Information Technology Index (SPHTI)
Global Semiconductor Bookings and Info Tech Sector Index
r = .80
Economic Analysis
40
580
530
20
480
0
-9
430
-20
380
330
313.94
-40
280
-60
230
180
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
-80
Apr-10
Corporate IT Spending Index
Information Technology Index (SPHTI)
ChangeWave Corporate IT Spending and Info Tech Sector Index
r = .68
Economic Analysis
160
880
780
110
680
60
580
10
480
-40
-73.7
380
313.94
280
180
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
-90
-140
Jul-10
Change in Real Consumption
Information Technology Index (SPHTI)
Change in real consumption and Info Tech Sector Index
r = .73
Economic Analysis
160
880
140
780
120
680
100
580
80
480
60
49.3
380
40
313.94
280
180
Jul-99
20
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
0
Jul-10
Consumer Confidence Index
Information Technology Index (SPHTI)
Consumer Confidence and Info Tech Sector Index
r = .73
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 Analysis
IT Sector Index over the past five years
500.0000
450.0000
400.0000
350.0000
300.0000
250.0000
Index Price
200.0000
150.0000
100.0000
50.0000
0.0000
07/30/2004
07/30/2005
07/30/2006
07/30/2007
07/30/2008
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?
15.00
10.00
5.00
(5.00)
(10.00)
Price Relative to S&P 500
(15.00)
(20.00)
06/01/2009
03/01/2009
12/01/2008
09/01/2008
06/01/2008
03/01/2008
12/01/2007
09/01/2007
06/01/2007
03/01/2007
12/01/2006
09/01/2006
06/01/2006
03/01/2006
12/01/2005
09/01/2005
06/01/2005
03/01/2005
12/01/2004
09/01/2004
06/01/2004
(25.00)
High: 12.3
Low: -19.4
Current: 12.3
03/01/2011
12/01/2010
09/01/2010
06/01/2010
03/01/2010
12/01/2009
09/01/2009
06/01/2009
03/01/2009
12/01/2008
09/01/2008
06/01/2008
03/01/2008
12/01/2007
09/01/2007
06/01/2007
03/01/2007
12/01/2006
09/01/2006
06/01/2006
03/01/2006
12/01/2005
09/01/2005
06/01/2005
03/01/2005
12/01/2004
09/01/2004
06/01/2004
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.
23.00
21.00
19.00
17.00
15.00
13.00
11.00
EPS
9.00
7.00
5.00
High: 20.46
Low: 10.24
Median:16.41
Current: 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
1.90
1.80
1.70
1.60
1.50
1.40
Net Profit Margin Relative to S&P 500
1.30
1.20
1.10
1.00
High: 1.9
Low: 1.2
Median: 1.4
Current: 1.9
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
IT Sector Return on Equity
•Has risen rather consistently over the past 5 year, with only a slight
decrease this year
23.0%
22.0%
21.0%
20.0%
19.0%
18.0%
Return on Equity
17.0%
16.0%
15.0%
High: 22.5%
Low: 16.7%
Median: 19.5%
Current: 21.7%
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
1.80
1.60
1.40
1.20
Return on Equity Relative to S&P 500
1.00
0.80
0.60
High: 1.7
Low: 0.9
Median: 1.1
Current: 1.7
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?
Relative Price/Earnings
Forward P/E Relative to S&P 500
1.6
1.4
1.2
1.0
0.8
Forward P/E Relative to S&P 500
0.6
0.4
0.2
0.0
High
Low
Median
Current
1.4
.98
1.3
1.1
Relative Price/Book
Price/Book Relative to S&P 500
2.0
1.8
1.6
1.4
1.2
1.0
0.8
Price/Book Relative to S&P 500
0.6
0.4
0.2
0.0
High
Low
Median
Current
1.7
1.2
1.4
1.7
Relative Price/Sales
Price/Sales Relative to S&P 500
2.5
2.0
1.5
1.0
0.5
0.0
Price/Sales Relative to S&P 500
High
Low
Median
Current
2.1
1.5
1.7
2.1
Relative Price/Cash Flows
Price/CF Relative to S&P 500
1.8
1.6
1.4
1.2
1.0
0.8
Price/CF Relative to S&P 500
0.6
0.4
0.2
0.0
High
Low
Median
Current
1.6
1.1
1.4
1.3
Sector Valuation Summary
Absolute Basis
High
Low
Median
Current
P/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
P/Trailing E
High
Low
Median
Current
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
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
06/01/2004
09/01/2004
12/01/2004
03/01/2005
06/01/2005
09/01/2005
12/01/2005
03/01/2006
06/01/2006
09/01/2006
12/01/2006
03/01/2007
06/01/2007
09/01/2007
12/01/2007
03/01/2008
06/01/2008
09/01/2008
12/01/2008
03/01/2009
06/01/2009
09/01/2009
12/01/2009
03/01/2010
06/01/2010
09/01/2010
12/01/2010
03/01/2011
EPS Growth Relative to S&P 500
•IT Sector can have widely fluctuating EPS growth relative to
the S&P 500
50.00
40.00
30.00
20.00
10.00
EPS Gr (yr over yr) Rel to S&P 500
-
(10.00)
High: 40.8
Low: -10.8
Current: 14.8
(20.00)
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
Net Profit Margin in IT Sector
•Saw large increase in 2007, however fell back down in 2008
and into 2009
12.4%
12.2%
12.0%
11.8%
11.6%
11.4%
11.2%
11.0%
Net Profit Margin
10.8%
10.6%
10.4%
10.2%
High: 12.2%
Low: 11.0%
Median: 11.3%
Current: 11.3%
Holdings Valuation Analysis
Stock
P/Forward E
Median
AAPL
HPQ
INTC
MSFT
NCR
ORCL
28.5
30.1
10.7
14.4
20.3
18.8
15.3
18.0
21.5
10.2
14.5
16.3
P/S
Median
3.7
5.2
0.8
1.0
3.2
3.4
5.1
6.4
0.5
0.6
4.7
5.6
P/B
Median
5.8
6.5
2.5
2.4
2.8
3.4
6.2
6.0
4.9
1.9
4.4
5.9
19.33
27.52
6.71
11.2
10.45
9.54
9.12
15.21
4.37
5.61
8.74
14.03
26.1
34.6
7.6
11.2
12.8
11.6
11.8
18.0
5.4
6.7
12.1
16.3
P/EBITDA
Median
P/CF
Median
Holdings Valuation Analysis
Stock
P/Forward E
Median
AAPL
HPQ
INTC
MSFT
NCR
ORCL
28.5
30.1
10.7
14.4
20.3
18.8
15.3
18.0
21.5
10.2
14.5
16.3
P/S
Median
3.7
5.2
0.8
1.0
3.2
3.4
5.1
6.4
0.5
0.6
4.7
5.6
P/B
Median
5.8
6.5
2.5
2.4
2.8
3.4
6.2
6.0
4.9
1.9
4.4
5.9
19.33
27.52
6.71
11.2
10.45
9.54
9.12
15.21
4.37
5.61
8.74
14.03
26.1
34.6
7.6
11.2
12.8
11.6
11.8
18.0
5.4
6.7
12.1
16.3
P/EBITDA
Median
P/CF
Median
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
880
9
780
7
680
5
580
3
480
1
-1.8
380
-1
313.94
280
180
Jul-99
-3
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
-5
Jul-10
Consumer Spending
Information Technology Index (SPHTI)
Consumer Spending and Info Tech Sector Index
r = .58
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
10/01/2004
08/01/2004
06/01/2004
Absolute Forward Price/Earnings
Forward P/E
30
25
20
15
Forward P/E
10
5
0
High
Low
Median
Current
23.9
12.1
20.3
18.0
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
10/01/2004
08/01/2004
06/01/2004
Absolute Price/Book
Price/Book
6
5
4
3
Price/Book
2
1
0
High
Low
Median
Current
4.8
2.3
3.9
3.6
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
10/01/2004
08/01/2004
06/01/2004
Absolute Price/Sales
Price/Sales
3.5
3.0
2.5
2.0
1.5
Price/Sales
1.0
0.5
0.0
High
Low
Median
Current
3.0
1.3
2.5
2.0
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
10/01/2005
08/01/2005
06/01/2005
04/01/2005
02/01/2005
12/01/2004
10/01/2004
08/01/2004
06/01/2004
Absolute Price/Cash Flow
Price/Cash Flow
20
18
16
14
12
10
8
Price/Cash Flow
6
4
2
0
High
Low
Median
Current
17.7
8.0
14.5
11.7