Information Technology
SPR I NG 20 13
A L E X LO WMA N
PR I S CI LLA FLO R IN
DI WU
ME NG TI AN CAO
NICK MCCR E A R Y
AGENDA
• Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Overview
Info technology as a portion of S&P and SIM
S&P 500
SIM
Telecom
Services 3.02%
Telecom Services
0.82%
Utilities Cash
Materials
3.27% 3.38%
2.63%
Utilities 3.44%
Materials 3.46%
Information
Technology
18.20%
Consumer
Discretionary
11.52%
Consumer
Staples
10.88%
Energy 11.08%
Industrials 10.22%
Health Care
12.32%
Consumer
Discretionary
12.28%
Information
Technology
18.14%
Consumer Staples
12.59%
Energy
9.83%
Industrials
9.99%
Financials 15.85%
Health Care
12.07%
Financials
14.99%
16 Industries in the Info Technology Sector
Application Software
Internet Software and Services
Communications Equipment
IT Consulting and Services
Computer Storage and Peripheral
Office Electronics
Computer Hardware
Semiconductor Equipment
Electronic Component
Semiconductors
Electronic Equipment
Services-Data Proc
Electronic Manufacturing Services
Systems Software
Home Entertainment Software
Technology Distribution
Largest Companies in the Sector and SIM
Five Largest Sector Companies
Market Capitalization (Billions)
*Apple Inc. (AAPL)
427.95
*Google (GOOG)
266.30
Int. Business Machines Corp. (IBM)
237.62
Microsoft Corporation (MSFT)
235.37
*Oracle Corporation (ORCL)
170.62
SIM Companies
Market Capitalization (Billions)
*QUALCOMM Incorporated (QCOM)
110.92
*Intel Corporation (INTC)
105.15
*Corning Inc. (GLW)
18.92
Info Technology Performance
• Largest sector by market
capitalization (18.2% of S&P)
• S&P QTD = 8.83%
• IT QTD = 4.12%
• S&P Annually = 10.91%
• IT Annually = -0.20%
• S&P Three Year = 11.1%
• IT Three Year = 10.15%
Business Analysis
Five Forces Analysis
New
Entrants
Buyer
Power
Supplier
Power
Threat: Low
Threat: Medium
Threat: Low
Distribution Channels
High Number of Buyers
Low Concentration
Economies of Scale
Switching Costs
Supplier Input
Importance
Similar Growth Rates
Switching Costs
Product Sources
Switching Costs
Product Differentiation
High Capital
Requirements
Backward Integration
Forward Integration
Product Differentiation
Importance of Product
Backward Integration
Substitutes
Rivalry
Threat: High
Threat: High for
Consumer Market
Threat: Low for B2B
Market
Highly concentrated
with large competitors
Buyers Switching Costs
High Exit Barriers
Life Cycle
• Computer Hardware (AAPL, HPQ)
• Decline
• Electronic Component (GLW)
• Early Maturity
• Internet Software and Services (GOOG)
• Late Growth
• Semiconductors (INTC)
• Mature to Decline
• Systems Software (ORCL)
• Late Maturity
• Sector as a whole is reaching maturity stage until next big tech breakthrough
-20.0000
02/01/2013
11/01/2012
08/01/2012
05/01/2012
02/01/2012
11/01/2011
08/01/2011
05/01/2011
02/01/2011
11/01/2010
08/01/2010
05/01/2010
02/01/2010
11/01/2009
08/01/2009
05/01/2009
02/01/2009
11/01/2008
08/01/2008
05/01/2008
02/01/2008
11/01/2007
08/01/2007
05/01/2007
02/01/2007
11/01/2006
08/01/2006
05/01/2006
02/01/2006
11/01/2005
08/01/2005
05/01/2005
02/01/2005
11/01/2004
08/01/2004
05/01/2004
02/01/2004
11/01/2003
08/01/2003
05/01/2003
02/01/2003
Info Tech vs. S&P 500
140.0000
120.0000
Blue : Info Tech
Red : S&P 500
100.0000
80.0000
60.0000
40.0000
20.0000
0.0000
-50.0000
02/01/2013
11/01/2012
08/01/2012
05/01/2012
02/01/2012
11/01/2011
08/01/2011
05/01/2011
02/01/2011
11/01/2010
08/01/2010
05/01/2010
02/01/2010
11/01/2009
08/01/2009
05/01/2009
02/01/2009
11/01/2008
08/01/2008
05/01/2008
02/01/2008
11/01/2007
08/01/2007
05/01/2007
02/01/2007
11/01/2006
08/01/2006
05/01/2006
02/01/2006
11/01/2005
08/01/2005
05/01/2005
02/01/2005
11/01/2004
08/01/2004
05/01/2004
02/01/2004
11/01/2003
08/01/2003
05/01/2003
02/01/2003
350.0000
Info Tech vs. International
300.0000
250.0000
200.0000
FTII
150.0000
CSEX
AAPL.S
100.0000
EAFE
50.0000
0.0000
Profitability and Pricing
• Overall decrease in margins across industry as market is flooded and
rivalry increases
• Companies must increase utilization of R&D or ultimately fail
• Premium can be charged for innovation
• Cannibalization high with low innovation
• Companies searching for profit by switching industries within sector
Economic Analysis
Nominal GDP
Consumer Confidence
Employment
Disposable Income
Real Consumer Spending
Financial Analysis
Revenues Per Share
$250.00
Info Tech Revenue per share
2008
March
$ 39.93
$
June
$ 41.62
$
Sept
$ 40.99
$
Dec
$ 38.95
$
YR
$ 161.50
$
Yr/Yr
$200.00
2009
34.51
35.16
37.02
42.23
148.93
-8%
$
$
$
$
$
2010
39.50
42.29
44.10
48.10
173.99
17%
$
$
$
$
$
2011
46.45
48.78
49.29
54.93
199.46
15%
$
$
$
$
$
2012 2013E
51.97
$ 54.29
51.94
$ 55.05
51.53
$ 55.70
58.31
$ 62.07
213.74
$ 223.84
7%
5%
$150.00
$100.00
$50.00
$2008
2009
2010
2011
2012
2013E
Earnings Per Share
40
35
Earnings Per Share
2007
March
4.2
June
4.19
Sept
4.78
Dec
5.73
Yr
18.91
Yr/Yr
2008
4.75
4.91
5.07
4.4
19.12
1%
2009
3.33
4.08
4.94
6.86
19.21
0%
2010
6.03
6.55
7.21
8.8
28.59
49%
2011
7.59
8.15
8.03
9.84
33.62
18%
2012 2013E
8.77
8.68
8.73
8.94
8.19
9.21
10.14
11.24
35.83
36.97
7%
3%
30
25
20
15
10
5
0
2007
2008
2009
2010
2011
2012
2013E
2.5000
Margins Relative to S&P
2.0000
1.5000
EBITDA
ROE
Net Profit Margin
1.0000
0.5000
0.0000
01/01/2003
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
01/01/2009
01/01/2010
01/01/2011
01/01/2012
1.8000
Computer Hardware vs. Sector
1.6000
1.4000
1.2000
1.0000
Net Profit Margin
EBITDA Margin Relative to Sector
0.8000
Return on Equity Relative to Sector
0.6000
0.4000
0.2000
0.0000
01/01/2003
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
01/01/2009
01/01/2010
01/01/2011
01/01/2012
4.0000
Systems Software vs. Sector
3.5000
3.0000
2.5000
Net profit
2.0000
EBITDA Margin
Return on Equity
1.5000
1.0000
0.5000
0.0000
01/01/2003
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
01/01/2009
01/01/2010
01/01/2011
01/01/2012
2.0000
Semiconductors vs. Sector
1.8000
1.6000
1.4000
1.2000
Net Profit
1.0000
EBITDA Margin
Return on Equity
0.8000
0.6000
0.4000
0.2000
0.0000
01/01/2003
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
01/01/2009
01/01/2010
01/01/2011
01/01/2012
Internet Software and Services vs. Sector
Net Profit
8.0000
7.0000
6.0000
5.0000
4.0000
3.0000
Net Profit
2.0000
1.0000
0.0000
-1.0000
-2.0000
-3.0000
01/01/2003
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
ROE and EBITDA Data Unavailable from 2007 to mid 2010
01/01/2009
01/01/2010
01/01/2011
01/01/2012
Valuation Analysis
Portfolio Performance
Relative Portfolio Performance
Mar 2013
IT
117%
SPX
83%
Mar 2013
IT
34%
SPX
0.0%
Sector Valuation (Absolute)
0
10
20
30
40
P/E (Trailing)
P/E (Forward)
P/B
P/S
P/CF
MONTHLY HIGH
P/CF
17.9
P/S
3.3
P/B
4.8
P/E (Forward)
31.1
P/E (Trailing)
41.5
MONTHLY LOW
8.2
1.3
2.3
11.3
11.1
MEADIEM
13.3
2.4
3.8
18.1
20.1
CURRENT
10.7
2.2
3.2
12.9
13.4
Sector Valuation (Relative to SP500)
0
0.5
1
1.5
2
2.5
P/E (Trailing)
P/E (Forward)
P/B
P/S
P/CF
MONTHLY HIGH
P/CF
1.6
P/S
2.1
P/B
1.8
P/E (Forward)
1.8
P/E (Trailing)
2.1
MONTHLY LOW
1.1
1.5
1.2
0.89
0.91
MEADIEM
1.3
1.8
1.5
1.2
1.2
CURRENT
1.1
1.7
1.4
0.91
0.91
Industries Within IT Sector (Absolute)
P/E (Trailing)
250
Median
8
Current
7
P/B
Median
Current
200
6
5
150
4
3
100
2
50
1
0
0
Communications EquipmentSemiconductors Electronics Components Systems Software
P/S
9
Median
8
Communications
Equipment
Computer Hardware
Current
Semiconductors
Electronics
Components
Systems Software
P/CF
23
Median
21
7
19
6
17
5
15
4
13
3
11
2
9
Computer Hardware
Current
7
1
5
0
Communications
Equipment
Semiconductors
Electronics
Components
Systems Software
Computer Hardware
Communications
Equipment
Semiconductors
Electronics
Components
Systems Software
Computer Hardware
Industries Within IT Sector (Relative)
P/E (Trailing)
12
Median
P/B
3
Median
Current
10
2.5
8
2
6
Current
1.5
4
1
2
0.5
0
Communications
Equipment
Semiconductors
Electronics
Components
P/S
7
6
Systems Software
Computer Hardware
0
Communications
Equipment
Median
Semiconductors
Electronics
Components
P/CF
2.5
Systems Software
Computer Hardware
Median
Current
Current
2
5
4
1.5
3
2
1
1
0.5
0
Communications
Equipment
Semiconductors
Electronics
Components
Systems Software Computer Hardware
Communications
Equipment
Semiconductors
Electronics
Components
Systems Software Computer Hardware
Original Data
INDUSTRY
Communications Equipment
INDUSTRY
Semiconductors
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
211.9
475.1
5.3
4.3
21.5
Low
11
11.7
1.9
1.2
8.8
Median
20.4
18.9
3.4
3
14.7
Current
14.6
12.7
2.6
3
11.6
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
98.3
422.1
5.3
7.3
18.3
Low
10.1
9.1
1.8
1.6
6.4
Median
21.5
20
3.2
3.2
11.3
Current
12.8
15.6
2.4
2.2
10.7
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
10.1
29.1
1.8
3
2
Low
0.88
0.87
1
1
1.1
Median
1.2
1.2
1.4
2.2
1.5
Current
0.99
0.91
1.1
2.2
1.2
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
4.9
34.7
1.7
4.7
1.6
Low
0.79
0.73
1
1.5
0.8
Median
1.3
1.3
1.3
2.4
1.1
Current
0.87
1.1
1.1
1.6
1.1
Original Data
INDUSTRY
Electronics Components
INDUSTRY
Systems Software
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
47.7
19.3
4.6
5.1
17
Low
7.5
7.9
1.2
1.7
5.8
Median
34.7
11.1
2
3.8
8.3
Current
12.5
13.1
1.2
2.6
8.5
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
28.2
27.8
6.8
8.3
20.5
Low
9.4
9.8
3
2.2
8.2
Median
17.8
16.2
4.4
4.3
14
Current
12
10.5
3.2
3.1
9.6
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.8
1.4
2.4
4
1.7
Low
0.65
0.67
0.5
1.6
0.7
Median
2
0.81
0.9
2.6
0.9
Current
0.84
0.92
0.6
1.9
0.9
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.4
1.6
2.4
5.8
1.9
Low
0.81
0.74
1.3
2.3
1
Median
1.1
1.1
1.9
3.2
1.3
Current
0.81
0.74
1.4
2.3
1
Original Data
INDUSTRY
Computer Hardware
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
27.2
23.8
6.2
2
16.2
Low
9.2
9.3
3
0.9
7.1
Median
17.6
16.1
4.3
1.5
11.8
Current
9.3
9.5
3.1
1.4
7.8
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1
1.1
1.5
0.9
1.1
Low
0.6
0.7
0.9
0.5
0.8
Median
0.9
0.9
1.2
0.7
0.9
Current
0.7
0.7
1
0.6
0.8
Technical Forecast
Recommendation
Team Recommendation
• SIM Portfolio is currently underweight .06% relative to the S&P
• Currently weighted at 18.14% in sim Portfolio vs 18.2% in S&P 500
• Team Recommendation: Hold with a reweighting of individual
industries
• Increased competition is decreasing margins
• Innovation has driven this sector but innovation could come from any sector
• High volatility of sector makes it unattractive for investors in an already volatile
market
• High revenue growth in recent past likely to slow as other sectors come out of
recession
• Explore entering other industries
• Service Data industry
Questions?