Information Technology
Rovin Mathew, David Walla, William Wise, Soumi Mukherjee, Xiaorui Su
Agenda
• Sector Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Sector Overview
• Major Companies:
o #1 Apple
• #5 Facebook
o #2 Google
• #6 Oracle
o #3 Microsoft
• #7 Visa
o #4 IBM
• #8 Qualcomm
Overview of Information
Technology
Makes up 20% of the weight of S&P 500
Description
• Industries:
• Communications Equipment
• Computers & Peripherals
• Electronic Equipment Instruments &
Components
• Internet Software & Services
• IT Services
• Semiconductors & Semiconductor Equipment
• Software
Market Cap
3 Mo
12 Mo
S&P 500 Index
Market
$16.3T
+2.2%
+22.2%
Information
Technology
1070 companies,
518 rated
$3.4T
+6.6%
+26.4%
Market Size
SIM Sector Break Down
S&P 500 Sector Break Down
By Jan 13, 2014
1%
3% 2%
by Feb 21 2014
Consumer Discretionary
0%
3%
3%
Consumer Staples
13%
3% 2%
Information Technology
19%
Energy
Financials
10%
10%
20%
Health Care
Financials
10%
9%
Consumer Discretionary
Health Care
16%
Industrials
Industrials
9%
11%
16%
Energy
Information Technology
14%
Materials
12%
14%
Consumer Staples
Demand-Life Cycle
Demand
• Software-growth
• Hardware-maturity
• Cyclical
• Lifecycle is becoming shorter
• Some product lines become
decline:
e.g. iPod
• Effect of Global market
Life cycle analysis by products
• Computer Hardware (AAPL, HPQ)
o
mature - Decline
• Electronic Component (GLW)
o
Early Maturity
• Internet Software and Services (GOOG)
o
Growth stage (emerging markets) , smart phone and tablet
• Semiconductors (INTC)
o
Mature to Decline
• Systems Software (ORCL, MSFT)
o
Late Maturity
Business Analysis
Business analysis of the industry
•Product differentiating
and brand loyalty
•Large number of buyers
and high demand
•Low switching cost for
individual buyers
•High switching cost for
B2B customers
Bargaining Powers
of buyers –
Medium
Threat of new
entrants – low
•High R&D cost
•Product differentiation
•Lower brand loyalty
•High profit attracts
competitors
•New innovations and
ideas creating huge low
cost opportunity
•High exit barriers
Industry Rivalry –
High
Companies with
comparable size and
growth strategy
•Short life cycle with
continuing innovation
making
•Increasingly new
products in the market
•Windows or Android
base makes conversion
easy
Threat of
substitutes - High
Power of
Suppliers – Low
•Few significantly
dominating suppliers
•Low switching cost
•Competition between
suppliers to sell to
manufacturers
•Vertical integration
SWOT
ANALYSIS
OF
THE
SECTOR
High demand across sectors across geography
High market penetration in developed
countries
Strong growth in capacity expansion and
innovation
Direct correlation of bottom line growth with
the GDP of the country ; strongly related
with per capital growth
Sensitive to global downturns
High commoditized electronic components
creating margin pressure
High R&D cost and possibility of sunk cost
Product life cycle getting shorter: constant
need for product development
High profit margin with differentiation
Technology adoption in emerging markets
Increasing market share with innovation
Software piracy is a concern
Market development in emerging economies
like Asia, South America and even Africa
Increasing regulations in some countries threat
to growth like Google in China and Russia
Security concerns with clout based computing
Increasing concerns on identity theft
Increasing patents and buyouts Providing
leverage over competitors , e.g. recent buyouts
Product penetration targeting both high end
and low end customers
Classifications by Business Cycle
• US Economy
Classifications by Business Cycle
• Global Market
Economic Analysis
Economic
Analysis
US Unemployment
Rate & Info-Tech
Sector
-uncorrelated but
good indicator at
extremes
-falling
unemployment &
higher highs for IT is
a good sign
S&P500
(representation
of US
economy)
-Resistance at 1850:
testing it for the 3rd
time this year – bad
sign
- Either to break-up,
break-down, or
channel sideways
Cautious Stance
U.S. Economy
• Weak Start 2014:
o PMI fell from 57 to 51.3
o S&P at a standstill -.25% YTD
• Continued Tapering
o Likely to see rising rates
o Likely to see shift in money supply to higher
yields assets
World Economy
• Slowing Growth
o Deflation Worries – Japan, UK, Eurozone
o China’s Credit Crunch
• Tensions over Russia & US with
Syria and Ukraine
Financial Analysis
Financial Analysis
1) Sector
2) Industry
3) Major Companies
Information Technology
Free Cash flow generator
200
Sales
100
55%
Sales Margins
40%
Information Technology
R&D: growing at similar pace to sales
ROE: Is undergoing 3% dip
Sub Industries
•
•
•
•
•
Market Cap
Profit Margins
Return on Equity
Long Term Debt to Equity
EPS 5 year Growth
Description
Market Cap
6 Mo
12 Mo
Information Technology
Sector
$3.4T +15.6%
+26.4
%
Communications Equipment
123 companies, 56 rated
$322.2B
+6.3%
+13.4%
Computers & Peripherals
55 companies, 28 rated
$675.1B
+7.0%
+23.4%
Electronic Equipment Instruments &
Components
189 companies, 78 rated
$151.3B
+20.7%
+36.0%
Worst Performance
Communications
Equipment
Best Performance
Internet Software & Services
193 companies, 86 rated
$501.0B
+34.0%
+42.8%
IT Services
119 companies, 71 rated
$655.2B
+12.0%
+18.5%
Semiconductors & Semiconductor Equipment
176 companies, 97 rated
$404.5B
+17.5%
+30.0%
Software
214 companies, 102 rated
$668.4B
+18.7%
+28.4%
Internet Software and
Services
Description
Information Technology
Sector
Profit
LT Debt To
Margin Return on Equity
Equity EPS Growth 5Yr
11.31%
16.98%
0.25
13.34%
15.56%
14.25%
0.21
12.26%
Computers & Peripherals
55 companies, 28 rated
9.17%
17.51%
0.17
12.12%
Electronic Equipment
Instruments & Components
189 companies, 78 rated
3.44%
10.03%
0.26
13.19%
Communications Equipment
123 companies, 56 rated
Internet Software & Services
193 companies, 86 rated
22.56%
15.62%
0.11
16.37%
IT Services
119 companies, 71 rated
12.69%
32.58%
0.53
13.59%
Semiconductors &
Semiconductor Equipment
176 companies, 97 rated
10.38%
10.70%
0.26
15.55%
Software
214 companies, 102 rated
18.93%
19.00%
0.26
11.71%
IT Services Sales
Computers and Peripherals
Sales
Evaluation Analysis
Stocks
• Qualcomm = Communications Equipment
• Intel Corp = Semiconductors
Qualcomm
Stock
Communicatio
n Equipment
Price/Earnings TTM
20.7
38.9
Price/Book
3.5
2.6
Price/Sales TTM
5.2
2.2
Rev Growth (3 Yr Avg)
31.3
-7.5
Net Income Growth (3 Yr Avg)
28.3
-22.8
Operating Margin % TTM
26.1
7.7
Net Margin % TTM
26.8
5.4
ROA TTM
ROE TTM
Debt/Equity
15.0
18.9
—
3.5
6.4
0.4
Qualcomm (blue) Vs Information
Technology (orange)
Intel Corp
Intel
Semiconductors
Price/Earnings TTM
12.9
22.6
Price/Book
2.1
2.8
Price/Sales TTM
2.4
2.8
Rev Growth (3 Yr Avg)
6.5
3.0
Net Income Growth (3 Yr
Avg)
-5.7
-9.4
Operating Margin % TTM
23.3
15.7
Net Margin % TTM
18.3
12.1
ROA TTM
10.9
7.7
ROE TTM
17.6
12.8
Debt/Equity
0.2
0.3
Intel Corp (blue) Vs Information
Technology (orange)
P/E- All Sectors
P/E
Industrials
Consumer Services
Basic Materials
Health Care
Consumer Goods
Telecommunications
Utilities
Oil & Gas
Financials
Technology
All Sectors
Number of
Average P/E Median P/E
Std Dev
Securities
77
16.99
17.49
73
18.04
17.48
25
17.35
17.41
47
18.03
17.24
61
16.97
16.42
6
16.43
16.37
32
16.5
15.56
41
13.72
13.55
84
16.39
13.5
50
17.91
15.47
496
16.46
16.42
High
3.41
6.87
9.36
5.29
3.69
19.02
2.98
5.96
12.66
9.52
6.31
27.3
44.01
52.61
33.77
26.18
61.27
24.9
34.95
68.74
52.71
50.87
Low
9.39
9.23
11.4
10.37
8.98
12.2
10.51
7.95
8.83
8.01
7.95
• Technology’s average P/E is slightly overvalued compared to the rest
of the S&P 500.
• However the median P/E shows that a majority of securities in the
Technology sector is undervalued compared to all the securities in the
S&P 500.
Multiples Relative to S&P
Technology
P/E
P/B
P/S
P/CF
Sales Growth
Average
Technology Relative to S&P 500
P/E
P/B
P/S
P/CF
Sales Growth
Average
Median
17.91
4.69
4.05
13.37
7.40%
High
15.47
3.58
3.48
13.47
0.94%
Median
1.09
0.98
1.55
0.98
1.50
Low
52.71
13.18
10.12
33.27
32.06%
High
0.94
1.18
1.80
1.07
0.25
8.01
1.26
0.51
4.03
-14.47%
Low
1.04
0.07
1.05
0.73
0.91
1.01
2.38
3.00
2.63
0.61
• Technology’s multiples hover around the average S&P 500.
• However, technology achieves greater sales growth than the S&P 500,
signifying it should be valued slighlty above the S&P.
Sector Sales Growth
Sales Growth
Oil & Gas
Utilities
Consumer Services
Health Care
Consumer Goods
Industrials
Financials
Basic Materials
Telecommunications
Technology
Average(%)
Sales Growth
3.28
7.38
6.92
5.87
3.09
2.52
4.46
3.57
3.63
7.4
• Technology has by far the greatest sales growth than any sector.
Industry Multiples Relative to S&P 500
S&P 500
P/E
P/B
P/S
P/CF
Average
Software & Computer Services
P/E
P/B
P/S
P/CF
Average
Median
16.46
4.8
2.62
13.61
Technology Hardware & Equipment Average
P/E
P/B
P/S
P/CF
High
16.42
3.03
1.93
12.6
Median
22.02
4.69
5.06
19.88
High
20.53
3.74
5.34
18.63
Median
13.19
2.93
2.96
10.09
Low
50.87
200.5
9.61
45.61
Low
52.71
9.41
10.12
42.77
High
14.54
2.79
2.69
11.11
7.95
0.53
0.17
1.53
10.21
1.41
0.7
8.78
Low
23.98
6.29
6.62
23.5
8.01
1.16
0.51
4.03
• Technology Hardware & Equipment is very undervalued compared to the S&P 500.
• Companies in Tech. Hardware & Equip such as Qualcomm, Texas Instruments, and
Altera should possibly be valued higher.
P/E Ratio Compared to S&P 500
Recommendation
Recommendation
• Due to
o Higher expected sales growth relative to other sectors
o >50% steady margins in the IT
o Growth in services
• We recommend to remain overweight in the sector
o With cautious a cautious eye on the economy
Industry
Recommendations on
Industries
Information Technology
Sector
Communications Equipment
123 companies, 56 rated
Industry Rating: A
Computers & Peripherals
55 companies, 28 rated
Industry Rating: A
Electronic Equipment Instruments
& Components
189 companies, 78 rated
Industry Rating: B
Internet Software & Services
193 companies, 86 rated
Industry Rating: C
IT Services
119 companies, 71 rated
Industry Rating: B
Semiconductors & Semiconductor
Equipment
176 companies, 97 rated
Industry Rating: A
Software
214 companies, 102 rated
Industry Rating: B
A = Overweight
B = Neutral
C = Underweight