Information Technology Sector
Presentation By:
Lauren Irwin
David Klink
Zachary Kramer
Steve Meechan
Jie Meng
Agenda
•
•
•
•
•
•
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation
Recommendation
Overview
S&P 500 by Sector
10.71%
3.04%
3.67%
3.39% 10.69%
18.20%
12.71%
11.10%
14.76%
11.73%
Cons Disc
Cons Staples
Energy
Financials
Health Care
Industrials
Info Tech
Materials
Telecom Svc
Utilities
As of July 14, 2011
Source: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
Sector
Market Cap
Energy
1,519,244.02
Materials
439,069.81
Industrials
1,326,284.14
Cons Disc
1,277,817.12
Cons Staples
1,280,016.64
Health Care
1,401,420.16
Financials
1,763,772.85
Info Tech
2,174,726.78
Telecom Svc
363,863.30
Utilities
404,565.98
Overview
Sector Performance
Source: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
Overview
SIM Portfolio
Sector
S&P 500
Weight
SIM Weight
+/-
Consumer Discretionary
10.69%
10.56%
-.13%
Consumer Staples
10.80%
8.48%
-2.32%
Energy
12.65%
10.45%
-2.19%
Financials
15.22%
13.39%
-1.83%
Health Care
11.66%
10.76%
-.89%
Industrials
11.03%
11.03%
-.01%
Information Technology
17.97%
22.35%
4.38%
Materials
3.60%
3.14%
-.45%
Telecommunication Services
3.07%
4.42%
1.35%
Utilities
3.33%
2.37%
-.96%
Cash
0.00%
2.81%
2.81%
Dividend Receivables
0.00%
.25%
.25%
Overview
Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?sector=45&tab=learn
Sector Outlook
Positives:
• Decent growth prospects for the Technology sector,
reflecting a continuing corporate refresh cycle for
PCs
• Significant spending related to mobile and cloud
computing
Negatives:
• Adverse impact of tablets on the consumer PC
market
• Adverse effect of Japan
earthquake/tsunami/nuclear crisis on supplies of
key components
• Dollar's recent strength in a sector whose companies
often generate considerable overseas revenues
Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?sector=45&tab=learn
Industries within sector
• Application Software
• Communications
Equipment
• Computer Storage and
Peripherals
• Computer Hardware
• Electronic Component
• Electronic Equipment
• Electronic MNFRG SVC
• Home Entertainment
Software
• Internet Software and
Services
• IT Consulting and Services
• Office Electronics
• Semiconductor Equipment
• Semiconductors
• Services-Data PROC
• Systems Software
• Technology Distribution
Business Analysis
Demand:
Products have a short life cycle, always moving to the next new
product, competitive industries within sector
Classification of Business cycle
• Information Technology is cyclical
▫ Important need to all business
▫ Can be volatile
External Factors
• Global business and very sensitive to global economy
User and Geography
• Ever increasing number of people consumer of technology – young,
adult, business, casual, etc
• Most users in North America, Europe and Asia
Business Analysis
Supply:
• Increasing capacity
▫ Demand growth in high-end electronics
▫ Industries are recovered better than expected
from the March earthquake and tsunami in Japan
like semiconductor industry
▫ Global chips sales rose 1% in May from a year ago
▫ Intel doubled their budget of capital spending
Business Analysis
Profitability and Pricing(risks)
• Strong competition
▫ Increasing competitors
▫ Dominating leaders in each industry (like Intel in
semiconductor industry)
• Changeable environment
▫ Highly depended on R&D
▫ Innovation may change the whole industry
• Consumers demand
• Threat of substitutions
Business Analysis
Profitability and Pricing(opportunity)
• Economic cycle
▫ The whole economy is recovering from the
recession
• High profit margin
• R&D makes a difference
• Acquirement of high-tech products
▫ Integration of world increases
▫ Big potential market in the world like China and
India
Business Analysis
Profitability Outlook
Industry
Earnings expectation
Semiconductors
Increase
Software
Increase
Storage
Netural
Consulting Service
Increase
PC & Enterprise Hardware
Decrease
Reasons
demand for tablets and ereaders grows;
demand for industrial processors connected to
renewable energy grows; the electronic
systems grows
internet use increases; acquisition & merge;
function expansion
Short capacity; decrease in price
BPO; demand from businesses, nonprofit
institutions, and government agencies for
outside advice grows
Excess capacity; low demand; slow upgrade
cycle
Economic Indicators
Economic Indicators
Economic Indicators
Economic Indicators
Economic Indicators
Economic Indicators
Economic Indicators
Financial Analysis
EPS and EPS Growth
Current : 30.15
2013e : 34.67
Median : 16.16
Current : 37.6%
2013e : 11.1%
Median : 13.7%
Financial Analysis
Revenue Growth – Major Companies
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Recent QTR
Apple
-33%
7%
8%
33%
68%
39%
24%
35%
32%
52%
83%
Corning
-14%
-50%
-2%
25%
19%
13%
13%
2%
-9%
23%
24%
Cisco
18%
-15%
0%
17%
13%
15%
23%
13%
-9%
11%
5%
HP
-7%
25%
29%
9%
9%
6%
14%
14%
-3%
10%
3%
IBM
-3%
-5%
10%
8%
-5%
0%
8%
5%
-8%
4%
8%
Intel
-21%
1%
13%
14%
14%
-9%
8%
-2%
-7%
24%
25%
Microsoft
10%
12%
13%
14%
8%
11%
15%
18%
-3%
7%
13%
-11%
-2%
7%
16%
22%
25%
25%
4%
15%
13%
409%
234%
118%
92%
73%
56%
31%
9%
24%
27%
Oracle
Google
352%
Financial Analysis
Sector Net Profit Margin
Financial Analysis
Net Profit Margin Relative to S&P 500
Financial Analysis
Sector Net Profit Margin
• Greater than 10% since mid-2004
▫ Only 3 other sectors have managed to top 10%
over the same time period
• Currently 16.7%
▫ Financials currently 13.4% (only other sector
above 10%)
• Consistent growth over the last 10 years
• EBITDA Margin has been growing over the same
time period as well (currently 27.7%)
▫ 1.4 relative to S&P 500
Financial Analysis
Major Company Operating Margins
2001
2002
Apple
-6%
0%
Corning
-96%
-86%
Cisco
-9%
HP
2003
2004
2005
2006
2007
2008
2009
2010
TTM
4%
12%
13%
18%
19%
27%
28%
29%
-21%
-38%
13%
16%
18%
26%
7%
27%
27%
15%
26%
29%
30%
25%
25%
24%
20%
23%
20%
3%
-2%
4%
5%
4%
7%
8%
9%
9%
9%
9%
IBM
11%
8%
11%
11%
10%
13%
14%
15%
18%
18%
19%
Intel
9%
16%
25%
30%
31%
16%
21%
24%
16%
36%
35%
Microsoft
46%
42%
41%
25%
37%
37%
36%
37%
35%
39%
39%
Oracle
37%
36%
38%
34%
33%
33%
35%
36%
34%
34%
34%
Google
13%
42%
23%
20%
33%
34%
31%
30%
35%
35%
33%
Financial Analysis
Sector ROE Relative to S&P 500
Financial Analysis
Free Cash Flow – Major Companies
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
TTM
Apple
($47)
($85)
$125
$758
$2,275
$1,563
$4,484
$8,397
$9,015
$16,590
$23,283
Corning
($364)
($621)
($233)
$152
$386
$621
$810
$207
$1,187
$2,828
$2,399
Cisco
$4,121
$3,946
$4,523
$6,508
$6,876
$7,127
$8,853
$10,821
$8,892
$9,165
$9,248
HP
$1,034
$3,734
$4,062
$2,962
$6,033
$8,817
$6,575
$11,601
$9,684
$7,789
$9,068
IBM
$8,605
$8,313
$10,014
$10,955
$11,072
$9,841
$10,584
$14,641
$17,326
$15,364
$14,562
Intel
$1,345
$4,426
$7,859
$9,276
$9,005
$4,841
$7,625
$5,729
$6,655
$11,485
$9,624
Microsoft
$12,319
$13,739
$14,906
$13,517
$15,793
$12,826
$15,532
$18,430
$15,918
$22,096
$24,185
Oracle
$2,965
$2,732
$2,988
$3,364
$4,305
$5,201
$7,159
$7,726
$8,451
$10,764
$10,764
$118
$219
$658
$1,621
$1,678
$3,373
$5,494
$8,506
$7,063
$7,000
Google
Valuation
Metrics
• Technology Sector
▫
▫
▫
▫
▫
▫
▫
P/E = 20.5
P/B = 6.3
P/CF = 37.8
P/S = 2.3
PEG = 1.43
Revenue Growth = 12.0%
EPS Growth = 31.6%
Valuation
Technology Sector vs. S&P 500
Sector vs. S&P 500
4.5
4
3.5
3
2.5
S&P 500
2
Technology Sector
1.5
1
0.5
0
P/E
P/B
P/CF
P/S
Revenue Growth
EPS Growth
Valuation
Sector Valuation Metrics Over Time
Information Technology P/E and P/S
Valuation
Sector Valuation Metrics Over Time
Telecomm P/E and P/S
Valuation
Metrics
Application Software
Business Software & Services
Communication Equipment
Computer Based Systems
Computer Peripherals
Data Storage Devices
Diversified Communication Services
Diversified Computer Systems
Diversified Electronics
Healthcare Information Services
Information & Delivery Services
Information Technology Services
Internet Information Providers
Internet Service Providers
Internet Software & Services
Long Distance Carriers
P/E
18.3
40.0
24.5
12.2
119.5
22.3
16.0
18.5
14.9
47.3
30.5
23.4
35.0
27.3
89.9
15.4
P/B
11.6
10.4
5.2
3.5
2.3
5.9
-9.1
-46.9
2.0
30.7
-4.1
7.7
5.5
4.4
9.2
5.4
P/CF
24.0
276.4
-1617.7
-177.4
-39.8
34.8
31.7
61.5
-262.7
90.2
-100.3
85.5
132.1
-43.9
146.0
27.9
Price / Sales Ratio PEG Ratio
3.63
1.25
3.16
2.02
1.95
1.06
1.21
1.42
4.75
0.67
1.29
0.38
2.03
0.39
1.67
1.09
2.01
0.38
3.72
0.54
3.26
3.15
2.34
1.41
4.06
0.93
2.19
0.14
646.97
1.22
1.49
0.36
Valuation
Metrics
P/E
Multimedia & Graphics Software
247.3
Networking & Communication Devices 17.8
Personal Computers
19.2
Printed Circuit Boards
22.4
Processing Systems & Products
47.0
Scientific & Technical Instruments
28.3
Security Software & Services
21.4
Semiconductor - Broad Line
11.8
Semiconductor - Integrated Circuits
15.5
Semiconductor - Specialized
31.8
Semiconductor Equipment & Materials 14.4
Semiconductor- Memory Chips
14.2
Technical & System Software
41.6
Telecom Services - Domestic
13.6
Telecom Services - Foreign
12.7
Wireless Communications
13.6
P/B
6.2
4.1
6.1
2.3
3.7
5.9
20.0
3.8
3.5
4.2
2.7
2.3
9.7
-4.6
6.5
3.5
P/CF
247.3
23.6
25.7
46.5
49.4
203.7
63.0
-28.9
-243.0
119.8
31.4
83.1
148.9
905.0
30.6
29.0
Price / Sales Ratio PEG Ratio
2.41
0.33
3.43
0.39
2.08
0.14
0.88
0.32
1.45
0.25
2.09
1.1
4.79
1.02
2.7
0.11
2.87
0.29
3.4
0.05
3.74
0.46
2.3
0.14
3.54
1.29
1.63
0.56
1.17
10.79
1.86
1.49
Valuation
Metrics
• 3 biggest industries within the overall
technology sector:
▫ Information Technology Services (66.0%)
▫ Wireless Communications (16.3%)
▫ Computer Based Systems (13.2%)
Valuation
IT Services
• Tata Consultancy , TCS, Infosys, Wipro
▫
▫
▫
▫
▫
▫
▫
P/E = 23.4
P/B = 7.7
P/CF = 85.5
P/S = 2.34
PEG = 1.41
Revenue Growth = 11.8%
EPS Growth = 37.2%
Valuation
IT Services vs. Overall Sector
Valuation Metrics
1.4
1.2
1
0.8
Sector Average
Information Technology Services
0.6
0.4
0.2
0
P/E
P/B
Price / Sales Ratio
PEG Ratio
Revenue Growth
Valuation
Computer-Based Systems
• IBM, HCL, Psion, Acer
▫
▫
▫
▫
▫
▫
P/E = 12.2
P /B = 3.5
P/S = 1.21
PEG = 1.42
Revenue Growth = 9.2%
EPS Growth = -32.6%
Valuation
Computer-Based Systems vs. Overall Sector
Valuation Metrics
1.2
1
0.8
0.6
Sector Average
Computer Based Systems
0.4
0.2
0
P/E
P/B
Price / Sales Ratio
PEG Ratio
Revenue Growth
Valuation
Wireless
• Vodafone, Telefonica, Bharti Airtel
▫
▫
▫
▫
▫
▫
▫
P/E = 13.6
P/B = 3.5
P/CF = 29.0
P/S = 1.86
PEG = 1.49
Revenue Growth = 10.8%
EPS Growth = 30.7&
Valuation
Wireless vs. Overall Sector
Valuation Metrics
1.2
1
0.8
0.6
Sector Average
Wireless Communications
0.4
0.2
0
P/E
P/B
Price / Sales Ratio
PEG Ratio
Revenue Growth
Valuation
Technical Analysis
Information Technology
Valuation
Technical Analysis
Telecommunications
Recommendation
Porter’s Five Forces Analysis
Low because of the presence of
• Threat of new entrants:
dominating leaders and the cost of R&D
• Buyer Power:
consumers
High – no strong loyalty and many options for
• Substitutes:
Low to non-existent
• Supplier Power:
Low, due to the nature of the product
inputs, easily attainable from multiple sources
• Competition:
High, extremely competitive industry with
constant push for the new product and short product life-cycles
Recommendation
• Economic outlook is slowly getting better,
• IT is continually taking a more important role in
businesses
• Companies that are entrenched and have a
strong competitive position can take advantage
of IT and be in a good position going forward
• IT businesses need to keep investing heavily in
R&D to remain at the top
• Biggest risk is overall economic risk, no real
worry of regulatory action
Recommendation
• Overall Favorable outlook on IT
• Cyclical sector
• This group rates this sector as:
Over-weighted