SPRING 2012
YIJUN GE
BRET ROSENTHAL
YANG SHEN
CHENGQIAO SUN
GREG VAN WAGNEN
YING ZHONG
AGENDA
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Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendations
SIZE OF THE SECTOR AND AS A PERCENT OF S&P 500
S&P 500
SIM
 Information Technology: $2,585,445
 S&P: $12,684,881
 In Millions
Source: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
16 INDUSTRIES OF THE INFO TECH SECTOR
Application Software
IT Consulting and Service
Communication Equipment
Internet Software and Services (GOOG)
Computer Hardware (AAPL, HPQ)
Office Electronics
Computer Storage and Peripherals
Semiconductor Equipment
Electronic Component (GLW)
Semiconductors (INTC)
Electronic Equipment
Services-Data PROC
Electronic MNFRG SVC
Systems Software (ORCL)
Home Entertainment Software
Technology Distribution
5 LARGEST SECTOR COMPANIES
Ticker
Price
Market Cap (Billions)
Apple Inc.
Microsoft Corporation
IBM
Google Inc.
Oracle Corporation
Hewlett-Packard
Intel
Corning Inc.
AAPL $603.00
MSFT
$31.98
IBM
$206.96
GOOG $614.98
ORCL
$29.24
SIM COMPANIES
$563.79
$268.66
$238.00
$200.05
$145.47
HPQ
INTC
GLW
$48.92
$141.80
$21.94
$24.74
$28.38
$14.45
Info Tech Sector
Performance YTD
and QTD
Largest Companies
in Info Tech Sector
Returns
YTD
QTD
Info Tech
19.83%
-1.08%
S&P 500
11.59%
-0.36%
Source: http://www.finance.google.com
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
PHASE OF THE LIFE CYCLE
 Mature with continued growth potential
BUSINESS CYCLE - CYCLICAL
 Pulling out of the recession
 Outperforming the market
Source: Baseline
BUSINESS CYCLE - CYCLICAL
 Similar moving trend with Real GDP
 Closely related to the US economy
Source: Baseline
BUSINESS ANALYSIS
Economic Environment
 Nature of economy
 Level of disposable income
 GDP
 Global economic conditions
Users and Geography
 All of the modern world
 Global
 Businesses and Individuals
FIVE FORCES ANALYSIS
Threat of new entrants – Medium
 High barriers to entry: capital investment, R&D costs
 Lower brand loyalty
 New idea creates huge growth
Power of Suppliers – Low
 Few significantly dominating suppliers
 Low switching cost
 Competition between suppliers to sell to manufacturers
FIVE FORCES ANALYSIS
Power of buyers (customers) – Medium
 Product differentiating and brand loyalty
 Low switching cost for individual buyers
 Harder for companies to switch off windows or servers
Threat of substitutes – High
 Continuing innovation keeps pushing out new products
 Windows or Android base makes conversion easy
Industry Rivalry – High
 Companies with comparable size and growth strategy
 Product innovation
 Price competition
PROFITABILITY AND PRICING
High profit margin
 Products with innovative and differentiating features can
charge a premium
High R&D costs
 Long term prospective of input and output
High industry concentration
 Key players within each industry
 Example: Computer Hardware (Apple, HP, Dell), System
Software (Oracle, IBM)
CONSUMER PRICE INDEX
 Correlation with CPI
 Historical correlation with a recent divergence
Source: Baseline
DISPOSABLE INCOME
 Strong historical correlation
 Technology is a luxury good
Source: Baseline
CONSUMER SPENDING: COMPUTERS & SOFTWARE
 Strong correlation
 Circular reasoning
Source: Baseline
FINANCIAL ANALYSIS – INFORMATION TECHNOLOGY
Revenue per Share
Revenue Per Share
2010
2011
2012
250
2007
2008
2009
Mar
36.43
39.93
34.51
39.50
46.45
50.08 200
Jun
37.45
41.62
35.16
42.29
48.78
52.61 150
Sep
38.94
40.99
37.02
44.10
49.29
54.02
Dec
42.20
38.95
42.23
48.10
54.93
60.09
100
50
Yr.
Yr. to Yr.
155.03 161.50 148.93 173.99
4%
-8%
17%
199.46
213.27
15%
7%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
 Historical growth trend
 Continued growth into the future
Source: Baseline
FINANCIAL ANALYSIS – INFORMATION TECHNOLOGY
40.00
35.00
Earnings Per Share
2007
2008
2009
Earnings per share
2010
2011
2012
Mar
4.20
4.75
3.33
6.03
7.59
8.66
Jun
4.19
4.91
4.08
6.55
8.15
8.62
Sep
4.78
5.07
4.94
7.21
8.03
9.11
Dec
5.73
4.40
6.86
8.80
9.84
11.17
30.00
25.00
20.00
15.00
10.00
5.00
Yr.
Yr.to Yr.
18.91
19.12
1%
19.21 28.59
0%
49%
33.62
36.44
18%
8%
0.00
Earnings per share
 Rapid growth
 Continued growth into the future at a normalized pace
Source: Baseline
FINANCIAL ANALYSIS – INFORMATION TECHNOLOGY
Margins relative to S&P 500
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2003
2004
2005
2006
EBITDA Margin
2007
2008
2009
Net Profit Margin
2010
2011
ROE
 Outpacing S&P 500
 Growing margins over past 10 years
Source: Baseline
FINANCIAL ANALYSIS – COMPUTER HARDWARE
Margins Relative to Sector
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
2003
2004
2005
2006
EBITDA Margin
2007
2008
Net Profit Margin
2009
2010
2011
ROE
 Consistent with slight growth recently
 Sustained consistency into the future
Source: Baseline
FINANCIAL ANALYSIS – SYSTEM SOFTWARE
Margins relative to Sector
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2003
2004
2005
2006
EBITDA Margin
2007
2008
Net Profit Margin
2009
2010
2011
ROE
 Historic al down trend
 Projected leveling off compared to the sector
Source: Baseline
FINANCIAL ANALYSIS – SEMICONDUCTORS
Margins relative to Sector
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2003
2004
2005
2006
EBITDA
2007
Net profit margin
2008
2009
2010
2011
ROE
 Decreasing historically
 Slight growth recently that will level off in the future
Source: Baseline
FINANCIAL ANALYSIS – INTERNET SOFTWARE & SERVICE
Margins relative to Sector
2.50
2.00
1.50
1.00
0.50
0.00
2003
2004
2005
2006
EBITDA
2007
Net profit margin
2008
2009
2010
2011
ROE
 Historically consistent
 Expecting consistent margins into the future
Source: Baseline
SECTOR VALUATION
Absolute Basis
High
Low
Median
Current
P/Trailing E
59.3
11.1
22.1
14.3
P/Forward E
47.1
11.3
20.1
14
P/B
4.8
2.3
3.9
3.5
P/S
3.3
1.3
2.5
2.4
P/CF
23.1
8.2
14.1
11.3
Relative to SP500
High
Low
Median
Current
P/Trailing E
2.4
0.91
1.3
1.1
P/Forward E
2.1
0.89
1.3
1.1
P/B
1.8
1
1.4
1.6
P/S
2.1
1.5
1.8
1.9
P/CF
1.8
1.1
1.4
1.2
 Below median and near lows
 High potential upside
Source: Baseline
INDUSTRY VALUATION – P / FORWARD E
Absolute Basis
High
Low
Median
Current
Semiconductors (INTC)
422.1
9.1
20.8
13.9
27.4
10
18.1
11.6
184.5
13.7
33
15.2
Electronic Component (GLW)
19.3
7.9
11.3
12.1
System Software (ORCL)
30.9
9.8
18.4
12.1
Computer Hardware (APPL, HPQ)
Internet Software & Service (GOOG)
Relative to SP500
High
Low
Median
Current
Semiconductors (INTC)
34.7
0.73
1.3
1
Computer Hardware (APPL, HPQ)
1.3
0.78
1.1
0.85
Internet Software & Service (GOOG)
8.1
1.1
2.2
1.1
Electronic Component (GLW)
1.4
0.67
0.77
0.88
System Software (ORCL)
1.7
0.78
1.2
0.88
 Electronic Components are above median
 All others below average and near lows
Source: Baseline
INDUSTRY VALUATION – PRICE / SALES
Absolute Basis
High
Low
Median
Current
7.3
1.6
3.3
2.5
2
0.9
1.5
2
Internet Software & Service (GOOG)
24.4
2.8
7.3
4.1
Electronic Component (GLW)
5.1
1.7
3.8
2.8
System Software (ORCL)
9.7
2.2
4.9
3.2
Semiconductors (INTC)
Computer Hardware (APPL, HPQ)
Relative to SP500
High
Low
Median
Current
Semiconductors (INTC)
4.7
1.9
2.5
2
Computer Hardware (APPL, HPQ)
1.6
0.8
1
1.6
15.5
3.1
4.8
3.2
4
1.6
2.6
2.2
6.4
2.3
3.3
2.5
Internet Software & Service (GOOG)
Electronic Component (GLW)
System Software (ORCL)
 Computer Hardware is at the high
 All others below average and near lows
Source: Baseline
TECHNICAL ANALYSIS
TA on our stocks in the Information Technology Sector
Weekly P&F
Point & Figure
View
$SPT S&P 500 Information Technology Sector Index (EOD)
Daily P&F
$SPT Weekly View
$SPT Daily View
$SPT S&P 500 Information Technology Sector Index
(EOD)
Other Important
Information
Technology
Benchmarks to note:
$XIT Information Technology
Index AMEX
IXN iShares S&P Global
Information Technology Sector
VITAX Vanguard
Information
Technology Fund
Fund
INDIVIDUAL STOCK PERFORMANCES CHARTED
WITH S&P INFO TECH SECTOR
INFO TECH SECTOR RECOMMENDATION
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We recommend remaining overweight in the sector relative to the S&P 500
Positives
Risks
Moore’s Law
Apple (Can they keep this up?)
Innovative Technology
Company Maturity
Continued Product Growth
Europe Apocalypse / U.S. DEBT
Industry

Overweight Internet Software and Services because of high profit margins and attractive
financial ratios. (GOOG)

Underweight Computer Hardware because ratios are at 10 year highs and there has been
huge growth.

Comfortable with current weighting of the three other industries in Info Tech sector.