Information
Technology Sector
Fall 2011
Kevin Kray
Trimon Lamson
Caitlin Leddy
Simon Lustenberger
Michael Marando
Matthew McFadden
Agenda
 Overview
 Business
Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendations
Information Technology Sector
General Overview
 Largest
 Total
 SIM
Sector in the S&P 500
Market Cap = $3.7 Trillion
Portfolio currently holds 6 sector companies
 Sector
Performance:
IT Sector
S&P 500
YTD
6.17%
2.18%
QTD
13.57%
13.58%
Information Technology Sector
IT Sector in SIM portfolio is currently 207
basis points above S&P 500
SIM Weight
S&P 500 Weight
Telecom.
Services,
3.29%
Utilities
3.97%
Cash
0%
Dividend
Receivables
0%
Materials
3.36%
Consumer
Discretionary
10.65%
Telecom.
Services
4.48%
Cash
4.29%
Utilities
2.84%
Dividend
Receivables
Consumer
0.10%
Discretionary
8.28%
Materials
3.05%
Consumer
Staples
12.44%
Consumer
Staples
11.68%
Information
Technology
19.44%
Energy
11.63%
Information
Technology
21.51%
Energy
11.97%
Industrials
10.27%
Health Care
12.14%
Financials
13.59%
Industrials
8.66%
Information Technology Sector
Financials,
9.91%
Health Care
12.47%
There are 16 Industries within the Sector
 Application
Software
 Communications
Equipment
 Computer Hardware
 Computer Storage and
Peripherals
 Electronic Component
 Electronic Equipment
 Electronic MNFRG SVC
 Home Entertainment
Software
 IT
Consulting and
Services
 Internet Software and
Services
 Office Electronics
 Semiconductor
Equipment
 Semiconductors
 Services-Data PROC
 Systems Software
 Technology Distribution
Information Technology Sector
10 Largest Companies in the Sector
Company
Ticker
Market Cap
Stock Price*
Apple, Inc.
AAPL
376.36B
404.95
Microsoft
Corporation
MSFT
226.96B
26.98
IBM
IBM
220.93B
187.45
Google, Inc.
GOOG
194.38B
600.14
Oracle
Corporation
ORCL
169.95B
33.69
Intel Corp
INTC
131.17B
24.98
Samsung
SSNLF
Electronics Co Ltd
119.76B
422.50
Cisco Systems Inc. CSCO
99.91B
18.56
Qualcomm, Inc.
QCOM
89.41B
53.23
Sap AG ADR
SAP
76.74B
62.54
*As of October 28, 2011
Information Technology Sector
Five Forces Analysis
 Barriers
to Entry: High – Capacity constraints are
the largest driver of this

note: product development barriers are relatively
low
 Supplier
Power: Low to Medium – Many options
for large companies to choose from. However,
capacity constraints lead to some power for
companies like Intel
Information Technology Sector
Five Forces Continued
 Buyer
Power: Depends – Retail buyers have low
power (demand for products drives this).
Competition within industries gives some
companies power (i.e. Apple buying chips)
 Substitutes: High – ex. Many different types of
smart phones. However, brand equity and
capacity help to mitigate this threat
 Competition: Medium – Fierce competition within
industries is mitigated by product differentiation
(price wars) and capacity constraints, limiting the
number of combatants
Information Technology Sector
Life Cycle
 Highly
Cyclical
 Moore’s Law
 Product Life Cycles Getting Shorter

both due to, and causing a need for, rapid
innovation
 Can

be Volatile
luxury items for individuals, slow demand for
businesses in down economies
Information Technology Sector
Life Cycle Continued
 Products:


PC’s & Semiconductors: Mature
Mobile Products: Growth
 Services:

Growth
 shift
to cloud based services, more adoption of
technology services in general
Information Technology Sector
Business Cycle
 Demand






Drivers
Innovation
Increased Global Adoption
Global Economic Growth
Competition
Global Shift Towards Reliance on Technology
Status
Information Technology Sector
External Factors
 Global

Recession
Slowed demand for tech products in 2009. As
recovery happens, tech sector is a leader
 Increased

global adoption of technology
Younger generations around the world adopting
tech products at an advanced rate
 Europe?
Information Technology Sector
User/Geography
 User:



Younger Generation
Businesses/Institutions
One last hurrah for Baby Boomers?
 Adoption
of tech products by the baby boomer
generation could have large effects on demand
 Geography:


Increasingly Global as More Nations Become
Developed
Emerging Markets Pose Huge Potential
Information Technology Sector
Sector Profitability
 High



Margins
Premium pricing driven by demand helps bottom
line performance for end consumer product
manufacturers (as well as pass through pricing)
Volume needs help keep top line revenue strong for
input suppliers (Intel, ARM)
Cost reduction across the sector helps to widen
margins
Information Technology Sector
Sector Profitability Continued
 Growing
Mobile Market
 Shift Towards Cloud Based Services


Lowering fixed costs for many, leading to increased
availability of capital for spending
Shifting of risk from individual entities to cloud based
service providers should help to maintain premium
pricing
Information Technology Sector
Real GDP vs. Sector
Information Technology Sector
CPI vs. Sector
Information Technology Sector
Real Consumer Spending vs. Sector
Information Technology Sector
Consumer Spending: Computers & Software vs.
Sector
Information Technology Sector
Capital Spending: Communication Equipment
vs. Sector
Information Technology Sector
Real Capital Spending: Equipment & Software
vs. Sector
Information Technology Sector
Economic Analysis – S&P 500 vs. Sector
Information Technology Sector
Financial Analysis – Information Technology



Negative Revenue growth in 2009
15% up from Q2 2010 to Q2 2011
Growth rates are projected to be positive for 2011/2012
Information Technology Sector
Financial Analysis – Information Technology


EPS in Info Tech have increased on an annual basis
Growth rates are projected to be positive for 2011/2012
Information Technology Sector
Financial Analysis – Information Technology
12/31/2006
Net Profit Margin
12/31/2007
12/31/2008
12/31/2009
12/31/2010
10/31/2011
11.27
12.20
11.84
12.90
16.43
16.94
1.21
1.43
1.83
1.86
1.91
1.83
21.20
21.70
22.60
24.00
27.50
27.60
0.89
0.85
1.18
1.40
1.47
1.39
18.80
20.20
22.50
18.70
26.00
26.20
Relative to S&P 500
0.90
1.13
1.50
1.78
1.70
1.62
Equity Risk Premium
4.61
5.75
9.23
7.44
8.02
9.30
22.21
24.90
27.91
25.23
34.99
40.08
Relative to S&P 500
EBITDA Margin
Relative to S&P 500
ROE
Cash Flow per Share
•
•
•
Margins are growing but benchmark has caught up
ROE and Equity Risk Premium are increasing
High Cash Flow per Share growth since 2009
Information Technology Sector
Financial Analysis – Computer Hardware



Apple (AAPL.I) & HP (HPQ.I)
Revenues: latest Quarter (Jun 11) up 25%
Earnings: latest Quarter up 68%
Information Technology Sector
Financial Analysis – Computer Hardware
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
10/31/2011
Net Profit Margin
7.38
8.59
8.70
9.88
11.50
12.98
Relative to Info
Tech
0.65
0.70
0.73
0.77
0.70
0.77
12.90
14.00
14.80
17.10
17.10
19.50
0.61
0.65
0.65
0.71
0.62
0.71
21.50
26.60
30.70
30.50
30.60
35.90
1.14
1.32
1.36
1.63
1.18
1.37
32.10
39.50
46.30
50.18
60.01
81.14
EBITDA Margin
Relative to Info
Tech
ROE
Relative to Info
Tech
Cash Flow per
Share
•
•
Margins are lower in comparison with the sector
ROE is higher relative to the sector
Information Technology Sector
Financial Analysis – Internet Software &
Services



Google (GOOG.I)
Revenues: latest Quarter (Jun 11) up 18%
Earnings: latest Quarter up 32%
Information Technology Sector
Financial Analysis – Internet Software &
Services
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
10/31/2011
Net Profit Margin
18.28
19.05
19.25
20.57
22.40
23.24
Relative to Info
Tech
1.62
1.56
1.63
1.59
1.36
1.37
35.60
50.80
36.70
45.00
40.80
40.70
1.68
2.34
1.62
1.88
1.48
1.47
15.40
17.40
18.60
17.50
17.20
18.40
0.82
0.86
0.83
0.94
0.66
0.70
5.11
7.44
8.91
9.91
11.36
13.29
EBITDA Margin
Relative to Info
Tech
ROE
Relative to Info
Tech
Cash Flow per
Share
•
•
Margins are higher in comparison with the sector
ROE is lower relative to the sector
Information Technology Sector
Financial Analysis – Semiconductors



Intel (INTC.I)
Revenues: latest Quarter (Jun 11) up 11%
Earnings: latest Quarter up 1%
Information Technology Sector
Financial Analysis – Semiconductors
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
10/31/2011
Net Profit Margin
15.06
13.35
10.11
11.53
21.69
21.25
Relative to Info
Tech
1.34
1.09
0.85
0.89
1.32
1.25
33.70
28.30
31.10
25.60
39.60
37.00
1.59
1.30
1.38
1.07
1.44
1.34
16.30
12.20
15.10
6.40
27.10
25.10
0.87
0.60
0.67
0.34
1.04
0.96
28.58
25.69
29.54
19.99
39.72
43.15
EBITDA Margin
Relative to Info
Tech
ROE
Relative to Info
Tech
Cash Flow per Share
•
•
EBITDA Margin is higher in comparison with the sector
ROE lags behind the sector
Information Technology Sector
Information Tech Valuation
Currently 428.31
Information Technology Sector
Info Tech VS S&P 500 Returns
IT Sector, 24%
S&P 500, -6%
Information Technology Sector
Information Technology Sector Multiples
Absolute Basis
High
Low
Median
Current
P/Trailing E
25
11.1
17.7
12.8
P/Forward E
22.4
11.3
16.3
12.1
P/B
4.8
2.3
3.8
3.0
P/S
3.0
1.3
2.4
2.2
P/CF
17.7
8.2
11.5
10.2
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.5
.91
1.1
1.0
P/Forward E
1.4
.91
1.1
.99
P/B
1.8
1.3
1.6
1.5
P/S
2.1
1.7
1.8
1.9
P/CF
1.6
1.1
1.2
1.2
Information Technology Sector
Sector Multiples on an Absolute Basis
Industry P/Forward Earnings
Absolute Basis
High
Low
Median
Current
Computer Hardware
25
11.1
17.7
12.8
Internet Software Serv.
37.8
13.7
19.7
13.7
Systems Software
20.3
8.7
13.7
9.5
IT Consulting
181.5
11.1
18.8
14.3
Price/Sales
Absolute Basis
High
Low
Median
Current
Computer Hardware
25
11.1
17.7
12.8
Internet Software Serv.
8.8
2.8
4.7
4.3
Systems Software
7
2.4
4.1
3.2
IT Consulting
4.4
.4
1.4
2.1
Information Technology Sector
Sector Multiples Relative to S&P 500
Industry P/Forward Earnings
Relative S&P 500
High
Low
Median
Current
Computer Hardware
1.3
.78
1.0
.82
Internet Software Serv.
2.4
1.1
1.4
1.2
Systems Software
1.3
0.78
0.95
0.87
IT Consulting
11.6
0.85
1.3
1.1
Price/Sales
Relative S&P 500
High
Low
Median
Current
Computer Hardware
1.5
.9
1.3
1.3
Internet Software Serv.
5.6
3.1
4.1
3.5
Systems Software
3.6
2.4
3.1
2.6
IT Consulting
3.8
0.2
1.3
1.8
Information Technology Sector
Technical Analysis - MACD
Information Technology Sector
Concluding Thoughts
 We




believe the Sector is currently undervalued
The sector is currently priced at a premium relative
to the S&P 500
Current year growth of 22% and a 2012 growth of
18% show the strength of this sector compared to
the S&P 500, and a long term future growth rate of
14%
Most recent quarter outperformed estimates by 9%
Multiples increasing from recession, and we expect
to them to return to median levels
Information Technology Sector
Recommendation
 Sector


Great growth in sector and LT growth rates at 14%
Global shift towards more reliance
 Sector


Opportunities
Risks
Price wars between large companies
Location concerns and government regulations
 Sector
is currently undervalued
 Current SIM holding weight: 21.51%
 Stay at current weight or increase a maximum of
50 basis points
Information Technology Sector