THE OHIO STATE UNIVERSITY
FISHER COLLEGE OF BUSINESS
- INFORMATION TECHNOLOGY SECTOR BUSFIN 724 / 824
THE STOCK MARKET
WINTER 2012
PHILIP DERMODY
MENGYAO KONG
CHUANYUE LUO
TREVOR NIKELS
JIAYUAN ZHANG
-1-
Agenda
Sector Overview
3-8
Business Analysis
9 - 17
Economic Analysis
18 - 24
Financial Analysis
25 - 38
Valuation Analysis
39 - 42
Conclusion & Recommendation
43 - 49
Questions & Answers
END
Sector Overview
-3-
Market Size
-4-
Market Size
-5-
Various Industries
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Application Software
Communication Equipment
Computer Hardware
Computer Storage and Peripherals
Electronic Component
Electronic Equipment
Electronic MNFRG SVC
Home Entertainment Software
IT Consulting and Services
Internet Software and Service
Office Electronics
Semiconductor Equipment
Semiconductors
Services-Data PROC
Systems Software
Technology Distribution
-6-
-7-
Performance
-8-
Business Analysis
-9-
Demand

Life Cycle:
Internet, software & service: Growth
Hardware, PC & Semiconductors:
Mature
The life cycle for products is shortening
overtime, due to:
 Acceleration of innovation
 Rapid products introduction
 Competitive industries within the
sector
 Customer needs and preferences
shifting over time
- 10 -
Demand

Business Cycle: Cyclical
Relative performance to the market is positively correlated with the rate of
change of the Composite Leading Indicator
Overall performance is better than the market
Supply is growing while demand is consistently high
Business Cycle is cyclical for technology section whether in US or
internationally
- 11 -
Demand

External factors:
Economy fluctuation: the performance of technology sector fluctuate with but
overall performed better than S&P 500
Customer preference and adaptability
Government rules and policies
Existence of substitute: old-fashioned life style become trendy
The increase of the purchasing power of people from third world countries
- 12 -
Demand

User and Geography
Increasing number of customers as the “technology generation” grow up
The market in Asia, South America and even Africa could still be expanded
Attention to intellectual property right is increasing overtime
Software piracy can be a problem in developing countries where government
attention is not enough
- 13 -
Supply

New capacity additions:
New suppliers emerge as new technology is developed
Answers to the increasing demand
From developing countries or recovering economy
 New concerns from Asia
• Infosys, TCS, Alibaba, Baidu, Samsung
- 14 -
Profitability and Pricing

Higher manufacture and research costs:
Labor costs driven up by the manufacture in developing countries
Scarce technology specialists

Maximum margin:
 Irreplaceable
 Volume
sales trend


products
He/she has that, which means I want it too!
Fourth technology revolution to boost economy:
 Demand
for new economy growth point such as 90’s housing demand
 Government
subsidiary
- 15 -
Profitability and Pricing (Continued)

Cloud Based Computing:

Self management data, apps, software which all saved on internet

IT Service but not IT product anymore

Lower fixed costs

Individual users such as Apple iCloud


It is a new era!
Potential Problems with Cloud Based Computing:

Safety problems

Potential huge enterprise users
- 16 -
Porter’s Five Force Analysis
Barriers to
Entry
Threat of
Substitutes
Industry
Competition
Buyer Power
Supplier Power
 High
 High
 High
 Moderate
 Low
 High capital
investment
requirement
 Disruptive
Innovation
displaces
currently used
products (i.e.
iPads and
tablet PC
growth).
 Many intraindustry
competitors
 Various
industries
within Tech
Sector make it
difficult to
assess buyer
power
 Few dominant
suppliers
 Costly
investment in
Research &
Development
 Low brand
recognition for
new entrants
makes
securing
customer base
difficult
 Aggressive
growth
strategies
 Lower
switching cost
- 17 -
 Low branding
of suppliers
 Intense
competition
between
 Many options
suppliers to
for retail
gain access to
consumers
key
 However, some
manufactures
strong brand
loyalty (i.e.
Apple)
Economic Analysis
- 18 -
CPI vs. Sector
Sector has rebounded and
outperformed CPI since
late 2008 / early 2009
- 19 -
Real Consumer Spending vs. Sector
Sector tends to move
somewhat in-line with Real
Consumer Spending
- 20 -
Consumer Spending: Computers & Software vs. Sector
- 21 -
Capital Spending: Telecom Equipment vs. Sector
- 22 -
Real Capital Spending: Equipment & Software vs. Sector
- 23 -
Economic Analysis – S&P 500 vs. Sector
Sector dipped lower in late
2008 / early 2009 and has
outperformed since
- 24 -
Financial Analysis
- 25 -
Financial Analysis – Information Technology
- 26 -
Financial Analysis – Information Technology
- 27 -
Financial Analysis – Information Technology
- 28 -
Financial Analysis – Information Technology
- 29 -
Financial Analysis – Information Technology
- 30 -
Information Technology – Data Processing Services (Master Card)
- 31 -
Information Technology – Internet Software & Services (Google)
- 32 -
Information Technology – Computer Hardware (Apple)
- 33 -
Information Technology – Electronic Component (Corning)
- 34 -
Information Technology – Semiconductors (Intel)
- 35 -
Information Technology Sector – Margin Analysis
Net Profit Margin vs. S&P 500
• 15 Year Time Line
• High: 1.9
• Low: .8
• Median: 1.3
• Current: 1.8
EBITDA Margin vs. S&P 500
• 15 Year Time Line
• High: 1.5
• Low: .8
• Median: 1.0
• Current: 1.4
- 36 -
Information Technology Sector – Return on Equity
 Return on Equity (Absolute)
 15 Year Time Line
 High: 72.9%
 Low: 9.8%
 Median: 19.5%
 Current: 27.1%
 Return on Equity vs. S&P 500
 15 Year Time Line
 High: 4.1
 Low: .6
 Median: 1.1
 Current: 1.6
- 37 -
Financial Analysis – Cash Flow Analysis
 High Cash Flow per Share
 Continued Growth in Cash Flow Generation
- 38 -
Valuation Analysis
- 39 -
Information Technology Sector Multiples
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
64.90
57.80
4.80
3.30
25.30
Low
11.10
11.30
2.30
1.30
8.20
Median Current
22.20
13.90
20.20
13.30
3.90
3.20
2.50
2.30
14.20
10.60
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.60
2.40
1.80
2.10
2.00
Low
0.91
0.89
1.00
1.50
1.10
Median Current
1.30
1.00
1.30
1.00
1.40
1.50
1.80
2.10
1.40
1.10
- 40 -
Sector Multiples on an Absolute Basis
Absolute Basis
Services - Data Proc
Computer Hardware
Internet Softwr & Svc
Electronic Component
Semiconductors
High
32.90
32.30
216.00
19.30
422.10
Low
12.00
10.00
13.70
7.90
9.10
Median Current
19.10
16.80
18.20
11.80
33.30
14.90
11.30
10.50
21.00
114.40
Relative to S&P 500
Services - Data Proc
Computer Hardware
Internet Softwr & Svc
Electronic Component
Semiconductors
High
1.40
1.40
9.10
1.40
34.70
Low
0.84
0.78
1.10
0.67
0.73
Median Current
1.20
1.30
1.10
0.88
2.20
1.10
0.78
0.79
1.30
1.10
- 41 -
Sector Multiples Relative to S&P 500
Relative to S&P 500
Services - Data Proc
Computer Hardware
Internet Softwr & Svc
Electronic Component
Semiconductors
High
3.70
1.50
15.50
4.00
4.70
Low
1.00
0.80
3.10
1.60
1.90
Median Current
1.30
2.20
1.00
1.40
4.90
3.30
2.60
2.10
2.50
2.10
Absolute Basis
Services - Data Proc
Computer Hardware
Internet Softwr & Svc
Electronic Component
Semiconductors
High
5.80
1.90
24.40
5.10
7.30
Low
0.90
0.90
2.80
1.70
1.60
Median Current
1.80
2.70
1.50
1.70
7.40
4.10
3.80
2.60
3.40
2.60
- 42 -
Conclusion
- 43 -
Conclusion
Analysis
Value/Risk Analysis
• Value: High
• Increasing demand
• Increasing profitability and margin
Business
Analysis
Economic
Analysis
• Risk: High
• Unpredictable future trend
• High competition within the industries
• Shifting of customers’ needs
• Not a strong correlation between sector and CPI
• Sector moves in-line with Real Consumer
Spending
• Sector dipped lower in economic downturn but
has rebounded and outperformed since
- 44 -
Conclusion
Analysis
Financial
Analysis
Value/Risk Analysis
• Value: High
• Aggressive Revenue Growth
• Aggressive Earnings Growth
• More Favorable Margins vs. S&P 500
• Risk: Moderate
• Consumer spending doesn't pick up
• Revenue projections are not realized
• Estimates suggest sector may be diminishing
relative to S&P 500 (Trailing > Forward)
Valuation
Analysis
• Internet Software & Services industry stands out
among sector (Google)
- 45 -
Recommendation
- 46 -
Portfolio Weighting
 Monthly Holding Report December 2011
 SIM Weight:
 Information Technology: +2.68%
- 47 -
Portfolio Weighting
 Monthly Holding Report January 2012
 SIM Weight:
 Information Technology: +1.63%
- 48 -
Team Recommendation
 Aggressive Growth Statistics indicate that the Information
Technology sector may be a strong investment decision
 However, the SIM Portfolio is currently overweight by 1.63%
 Team Recommendation: Hold
 Current overweight portfolio
 Exorbitant P/E ratio
 High volatility of IT sector
- 49 -