Transcript Finance 724/824 Winter 2010 Sector Presentation Information Technology Team Members: Hanh Bui Vamsi Namburi Hang Nguyen Tejaswi Ponnada Jonathan Schick.

Finance 724/824
Winter 2010
Sector Presentation
Information Technology
Team Members:
Hanh Bui
Vamsi Namburi
Hang Nguyen
Tejaswi Ponnada
Jonathan Schick
Agenda
•
•
•
•
•
•
General Information
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
General Information
•
•
•
•
•
Market Cap: 114.8 B
15 industries
Largest weight
Highly cyclical
Performance in S&P 500
– Annualized: 51.05% (2nd)
– YTD: -4.01%
– MTD: 4.85%
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Weight
S&P 500 Weight
Consumer
Discretionary
9.67%
Telecommunicatio
n Services
2.98%
Utilities
Materials
3.72%
3.41%
Consumer Staples
11.65%
Information
Technology
18.80%
Energy
11.38%
Industrials
10.51%
Health Care
13.17%
SIM Weight
Telecommunicatio
n Services
3.27%
Utilities
2.94%
Materials
3.46%
Consumer Staples
11.96%
Information
Technology
19.04%
Industrials
12.36%
Financials
14.71%
Cash
2.32%
Consumer
Discretionary
6.99%
Dividend
Receivables
0.08%
Energy
11.90%
Health Care
14.30%
Financials
11.37%
• SIM over weighed by 24 basis points
• Among SIM Fund’s Top Holdings, 4 from IT: Oracle, IBM, HP and Intel
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Industries
(as percentage of S&P 500)
Size and Composition
Information Technology Industries
18.80%
SIM
Computer Hardware
5.03%
IBM, HP
Systems Software
3.69%
Communication Equipment
2.51%
Semiconductors
2.19%
Internet Software and Services
1.90%
Services- Data Procedure
1.37%
Computer Storage/ peripheral
0.67%
Application Software
0.50%
Electronic Component
0.37%
Semiconductor Equipment
0.29%
IT Consulting and Services
0.20%
Electronic Equipment
0.15%
Office Electronics
0.08%
Electronic Manufacturing Services
0.06%
Home Entertainment Sofware
0.06%
Business Analysis
Economic Analysis
INTEL
Oracle
NCR
Financial Analysis
Valuation Analysis
Major Industries
• Computer Hardware: (IBM, Dell, Apple)
– Companies that design and manufacture peripheral devices, storage systems etc
– Generated total revenues of $411 billion in 2008, representing a CAGR of 4.8% for the
period spanning 2004-2008.
• Systems Software: (Oracle, Microsoft, SAP, Adobe)
– Companies that make Device drivers, Operating Systems, servers etc.
– Demand for Open-Source and On-Demand Software
• Communication Equipment: (Nokia, Siemens, Ericsson)
– Companies engaged in making telephones, modems, wireless, decoders
– Product ecosystem consists of – Board and chassis market, middleware,
Applications/Service Software.
• Semiconductor Industry: (Intel, AMD)
– Computing market drives semiconductor sales.
– APAC region (excluding Japan) accounts for 53% of total semiconductor sales.
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Largest Companies
(by Market Cap- B)
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Performance
(as of Feb 22, 2010)
Index Name
Daily
1 Day
MTD
Annualized (as of Jan 21, 2010)
QTD
YTD
1 Year
3 year
5 Year
TOTAL RETURNS
-0.10%
3.38%
-0.34%
-0.34%
33.14%
-7.24%
18.00%
-0.10%
3.18%
-0.64%
-0.64%
30.03%
-9.28%
-1.89%
Energy
-1.32%
2.66%
-1.96%
-1.96%
9.74%
-2.80%
6.73%
Materials
-0.47%
6.31%
-2.90%
-2.90%
43%
-6.91%
0.56%
Industrials
0.06%
4.84%
3.57%
3.57%
32.64%
-9.78%
-3.15%
Cons Disc
-0.13%
4.31%
1.23%
1.23%
50.70%
-9.84%
-3.11%
Cons Staples
-0.15%
3.25%
1.96%
1.96%
18.93%
-0.30%
2.49%
Health Care
-0.08%
0.29%
0.71%
0.71%
19.10%
-3.15%
1.41%
1.14%
3.09%
1.57%
1.57%
53.98%
-27.39%
-13.82%
-0.28%
4.55%
-4.28%
-4.28%
51.05%
-2.12%
1.68%
Telecom Svc
-0.26%
-0.45%
-9.73%
-9.73%
4.64%
-13.38%
-2.71%
Utilities
-0.65%
-0.09%
-5.19%
-5.19%
2.19%
-6.92%
0.77%
S&P 500 (TR)
PRICE RETURNS
S&P 500
PRICE RETURNS BY
SECTOR
Financials
Info Tech
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Business Analysis
• Primary drivers are innovation, cost reduction, customer service and
breakthrough technologies
• Dominated by Computer Hardware and System Software industries
(r=0.74) followed by Communication Equipment and Semiconductors
• Highly diverse with companies in growth, mature phase
– High economies of scale and so marginal costs are minimal
• Rebalance between Customer Retention and Customer Acquisition
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Technology drives the world!
• Technology is now a need to be competitive in any sector
– All domains within a company use technology as a key driver
– Company spending on IT forecast to increase 3.3%
• Few dominant players in each industry within the sector
• Dependence on cutting edge technology leads to enormous
R&D costs. Huge R&D costs means high barriers to entry
– Few industries are exceptions
• Huge threat of substitutes and piracy
• No serious threat of new entrants
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Growth Indicators
• Highly cyclical sector with large impact on SIM
– Potential for huge growth during market recovery phases
• Largely impacted by Customer and Corporate Spending
– Average life cycle for products falling rapidly
• Business Intelligence Solutions
• Innovative products
Examples: Apple’s iPad, Google’s Nexus
Apple iPad
Size and Composition
Business Analysis
Google Nexus
Economic Analysis
Financial Analysis
Valuation Analysis
Keeping up with the Growth
• Huge growth potential in developing economies
– Personal laptops, iPhones vastly used
– Cell Phone usage growing at 10 million per month in India
• First mover advantage is the key to grab market share
– Huge threat of substitutes from major competitors with minor enhancements
– Technology gets cheaper and
outmoded
• Keeping with the rapidly changing
Customer needs and opportunities
– Cell Phones used as PC’s to store music,
photos, memory etc.
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
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
– Depends on Consumer
Spending
– GDP growth
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Economic Analysis
• Monopoly Characteristics in Short Run
• Premium Pricing during launch. Prices fall
down as other firms catch up.
Monopoly Gain
Monopoly
Price
MC=MR
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Examples
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Business Cycle
Info Technology
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
World Wide User Spending
(Billions of US Dollars)
Region
United States
Canada
Latin America
Western Europe
Eastern Europe
Middle East &
Africa
Japan
Asia Pacific
Total
2007
2008
2009
2010
2010 (%)
929
74
222
872
148
957.2
77.7
250.7
906
170.2
932.1
71.3
236.4
811.9
142.6
958.3
74.7
257.1
836.1
140.5
2.8%
4.7%
8.8%
3%
-1.5%
192
273
472
205.7
301.3
503.6
205.7
306.7
490.9
217.1
304.5
515.6
5.6%
-0.7%
5%
3,156 3,372.2 3,197.6
3,304
3.3%
Source: http://www.gartner.com/it/page.jsp?id=1209913
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Key Factors
• B2B category (Oracle, SAP, IBM, HP) depends on
Company Budget Allocations and GDP growth
– Companies spend forecasted to increase 3.3% in 2010
• B2C (Dell, Apple, HP) depends mainly on Consumer
Confidence and Consumer Spending
– Lot of untapped potential in developing economies
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
YTD & 1 Year Variations
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Employment vs. Technology
R=0.46
450
3
2
400
1
0
350
-1
Technology
-2
300
Employment
-3
-4
250
-5
200
Jun-04
-6
Jun-05
Size and Composition
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Capital Spending vs. Technology
R=0.67
450
110
105
400
100
IBM.S
Technology
Capital
Spending
95
350
90
85
300
80
75
250
70
65
200
Jun-04
Size and Composition
60
Jun-05
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Consumer Confidence vs. Technology
R=0.65
450
400
120
Technology
100
Consumer
Confidence
80
350
60
300
40
250
20
200
Jun-04
0
Jun-05
Size and Composition
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Consumer Spending vs. Technology
R=0.68
500
20
Technology
450
15
400
10
350
5
300
0
250
-5
200
Jan-04
-10
Size and Composition
Jan-05
Jan-06
Business Analysis
Jan-07
Jan-08
Economic Analysis
Jan-09
Consumer
Consumer
Spending
Confidence
Jan-10
Financial Analysis
Valuation Analysis
Velocity Of Money vs. Technology
R=0.67
450
2.00
Technology
1.95
400
1.90
350
1.85
300
1.80
Velocity of Money
Supply
1.75
250
1.70
200
Jun-04
1.65
Jun-05
Size and Composition
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Federal Funds Rate vs. Technology
R=0.67
450
6
Technology
5
400
Federal Funds
Rate
4
350
3
300
2
250
1
200
Jun-04
Size and Composition
0
Jun-05
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Real GDP vs. Technology
R=0.35
450
8
Technology
6
400
4
Real Gross Domestic
Product
2
350
0
300
-2
-4
250
-6
200
Jun-04
Size and Composition
-8
Jun-05
Jun-06
Business Analysis
Jun-07
Jun-08
Economic Analysis
Jun-09
Jun-10
Financial Analysis
Valuation Analysis
Economic Analysis Summary
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•
•
•
GDP (very cyclical)
Globalization
Corporate Profits
Consumer Confidence– need strong economy
with consumer participation
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Financial Analysis
Source: http://www.readwriteweb.com
NCR, IBM, Intel, HP, Oracle
R&D
NI
NCR, IBM, Intel, HP,
Oracle
Revenue
R&D
161,587
23,651
23,801
2008
Size and Composition
14,788
2007
Business Analysis
Revenue
146,432
143,110
14,984
NI
14,411
100.00%
100.00%
100.00%
16.63%
10.47%
14.64%
9.15%
13.41%
9.84%
19,641
2006
Economic Analysis
2008
2007
Financial Analysis
2006
Valuation Analysis
Financial Analysis
Absolute margin
High
Low
Median
Current
EBITDA
25.3
18.8
21.4
25.3
Net profit
12.2
5.0
11.1
11.5
ROE
22.5
9.8
18.7
20.8
Absolute Margin
EBITDA Margin
Net profit Margin
ROE margin
25.3
22.7
21.2
21.4
18.8
10.9
22.5
20.8
18.7
9.8
18.7
9.8
11.5
12.2
11.0
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
12/01/2009
08/01/2009
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
5.0
Valuation Analysis
Financial Analysis
Margin ~ SP500
High
Low
Median
Current
EBITDA
1.4
.8
1.0
1.4
Net profit
1.8
.8
1.3
1.8
ROE
1.8
.6
1.1
1.7
Relative Margin to SP500
EBITDA Margin ~ S&P 500
Net Profit Margin ~ S&P 500
Return on Equity ~ S&P 500
SP500
1.8
1.4
1.3
1.1
1.0
Size and Composition
1.0
1.2
1.1
1.1
0.8
Business Analysis
Economic Analysis
Financial Analysis
12/01/2009
08/01/2009
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
0.6
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
0.8
0.6
1.4
1.3
1.3
1.8
1.7
Valuation Analysis
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Low
Median
Current
Absolute value
24.97
4.98
15.21
16.75
Relative to SP500
40.80
-43.00
0.00
1.10
07/01/2011
High
11/01/2010
EPS
03/01/2010
EPS Gr (yr over yr) Rel to S&P 500
07/01/2009
11/01/2008
03/01/2008
07/01/2007
11/01/2006
03/01/2006
07/01/2005
11/01/2004
03/01/2004
07/01/2003
Expected
24.97
11/01/2002
Absolute EPS
03/01/2002
07/01/2001
11/01/2000
03/01/2000
04/01/2011
09/01/2010
02/01/2010
07/01/2009
12/01/2008
05/01/2008
10/01/2007
03/01/2007
08/01/2006
01/01/2006
06/01/2005
11/01/2004
04/01/2004
09/01/2003
02/01/2003
07/01/2002
12/01/2001
05/01/2001
10/01/2000
03/01/2000
Financial Analysis
Relative EPS to SP500
SP500
Current
16.75
Valuation Analysis
Valuation Analysis
Absolute Basis
High
Low
Median
Current
P/Trailing E
74.6
11.1
24.3
20.3
P/Forward E
64.7
12.1
21.6
15.0
P/B
15.1
2.3
4.0
3.5
P/S
6.7
1.3
2.6
2.3
P/CF
40.8
8.2
15.5
12.4
Relative to S&P 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
3.0
.9
1.4
1.7
P/S
3.0
1.5
1.8
2.0
P/CF
2.5
1.1
1.4
1.2
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Price / Earnings Trailing
Absolute
High
74.6
Low
11.1
Median
24.2
Current
20.4
Relative to S&P
Size and Composition
Business Analysis
Economic Analysis
High
2.6
Low
.91
Median
1.4
Current
1.1
Financial Analysis
Valuation Analysis
Price / Earnings Forward
Absolute
High
64.7
Low
12.1
Median
21.5
Current
15.0
Relative to S&P
Size and Composition
Business Analysis
Economic Analysis
High
2.7
Low
.98
Median
1.4
Current
1.1
Financial Analysis
Valuation Analysis
Price / Book
Absolute
High
15.1
Low
2.3
Median
4.0
Current
3.6
Relative to S&P
Size and Composition
Business Analysis
Economic Analysis
High
3.0
Low
.9
Median
1.4
Current
1.7
Financial Analysis
Valuation Analysis
Price / Sales
Absolute
High
6.7
Low
1.3
Median
2.6
Current
2.3
Relative to S&P
Size and Composition
Business Analysis
Economic Analysis
High
3.0
Low
1.5
Median
1.8
Current
2.1
Financial Analysis
Valuation Analysis
Price / CF
Absolute
High
40.8
Low
8.2
Median
15.5
Current
12.5
Relative to S&P
Size and Composition
Business Analysis
Economic Analysis
High
2.5
Low
1.5
Median
1.4
Current
1.3
Financial Analysis
Valuation Analysis
Technical Analysis
•Broke 50 day moving average in January
•In an upward trend
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Currently we are 24 basis points above S&P and we recommend
to INCREASE by 26 Basis Points
•
•
•
•
•
Positive
Consumer Spending is
growing in Global Markets
Last Year returns of 51%
Companies spending more
on R&D (Buzz and iPad’s)
Target Prices show upside
potential
IT spending is forecasted to
increase 3.3% in 2010 vs.
5.2% decline in 2009
Negative
• Uncertainty in the economy
• GDP expectations unclear
Q&A