Information Technology Sector
Presentation
Presented By:
Bernard Baah
Michael Bowen
Phuong Viet Bui
Simin Chen
Kyle Evans
Tyler Gilbert
Overview – Key Stats
•
•
•
•
•
•
•
•
Total Market Cap: 3.9 trillion
P/E TTM: 26.53%
Return on Equity TTM: 26.33%
Dividend Yield (Last 4 Qtrs): 1.75%
Long Term D/E (Most recent Qtr Ann): 31.01
Price/Tangible Book: 2.93
Dividend Growth Rate: 18.8%
EPS Growth: 55.68%
Source:http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/
Overview – Relative
Performance
Size of sector as a percent of the
S&P 500: 18.1%
S&P 500 Weight
Cash, 0.00%
Dividend
Telecommun
Receivables,
ication
0.00%
Utilities,
Services,
Consumer
3.19%
3.05%
Discretionary
, 10.45%
Materials,
3.70%
Consumer
Staples,
10.22%
Information
Technology,
18.10%
Energy,
13.27%
Utilities,
2.26%
Telecommun
ication
Services,
4.27%
SIM Weight
Dividend
Receivables,
0.04%
Consumer
Discretionary
Cash, 2.68%
, 10.20%
Materials,
3.08%
Information
Technology,
22.51%
Industrials,
11.26%
Health
Care,
10.98%
Financials,
15.78%
Industrials,
Health
11.39%
Care,
10.22%
Consumer
Staples,
7.87%
Energy,
11.30%
Financials,
14.19%
Overview – YTD Performance
YTD Performance
Price Change
MKT Val
AAPL
8.55%
1,045,522.50
GLW
8.39%
887,090.00
HPQ
-4.11%
889,049.00
INTC
10.08%
845,542.00
GOOG
-8.40%
645,436.00
MA
23.10%
654,472.00
Info Tech
6.25%
S&P 500
8.43%
Wt Avg
6.23%
Overview: Sector Outlook
• Potential for growth in emerging markets
• Healthier global economy, and strong demand for tablets and smart
phones could boost sector growth
• 2011 operating EPS expected to be 17% compared to 15% for the
S&P 500
• Projected 5yr EPS growth rate of 1.0X is below broader market’s
PEG of 1.3X
• We expect sector to go from underperforming to slightly
outperforming the S&P 500 by the end of 2011.
Industries Within the 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
10 Largest Companies in The
Sector
Symbol
Name
LastSale
MarketCap
IPOyear
AAPL
350.13
322.6
1980
IBM
Apple Inc.
International Business
Machines Corporation
170.58
208.0
n/a
MSFT
Microsoft Corporation
25.92
217.8
1986
ORCL
Oracle Corporation
35.96
181.7
1986
GOOG
Google Inc.
544.1
136.5
2004
INTC
Intel Corporation
23.15
127.0
1971
CSCO
17.52
96.9
1990
57.09
93.8
1991
HPQ
Cisco Systems, Inc.
QUALCOMM
Incorporated
Hewlett-Packard
Company
40.37
87.4
n/a
EMC
EMC Corporation
28.34
58.5
n/a
QCOM
Sector Performance YTD:
6.25%
IT
S&P | Indices | Equity | Americas
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-lScreen clipping taken: 5/1/2011, 11:35 PM
Sector Performance YTD:
6.25%
Sector Performance QTD:
2.92%
Demand Analysis
Phase of the life cycle
•Internet, Software & services: Growth
•PC & Semiconductors: Mature
Business Cycle Classification
Cyclical – sensitive to the macro-economy.
User & geography
•Business & consumers ( young generation)
•Geography: Asia-Pacific (Japan)
Americas
Europe
Demand Analysis
External Factors
•Corporate Spending: business significantly increase
technology investments that they postponed during the
recession;
•R&D: Constantly changing and improving with new
technology.
•Government: Regulation and government spending;
•Social Changes: New trends in demand, such as the trends for
mobile phone related software and tablets (Ipad);
•Globalization: Outsourcing and potential in emerging markets
(BRIC).
•Other factors: Japan’s earthquake, positive or negative?
- Less revenue: Japan consists of 10% Intel revenue
- but less competition from Japanese rivals.
Supply Analysis
•Increasing capacity especially in hardware
manufacturing industries to meet the expected
higher demand.
-- Intel Corp. estimated in Q1 2011 release the expected capital spending in
2011 financial year as $10.2 billion, much higher than 2010 $5.2 billion and
2009 $4.5billion;
-- Apple Inc. 2011 Q1 PPE Acquisition $1.8 billion compared with 2010 Q1
$0.65 billion.
•Influence from Japan Earthquake:
US Info Tech sector are dependent on a complex network of suppliers,
subcontractors and integrators around the world. -- Texas Instruments' plant
in Miho, northeast of Tokyo, suffered "substantial damage" and won't be until
May when partial production resumes.
Business Analysis
• Competitive Environment
– Large number of competitors
– Industry concentration
• Strong leaders in each industry
– Varying start up costs
• Buyouts are common - YouTube
– Consumer interest is fickle
• RIM
– Constant threat of substitution & theft
• Grows over time due to obsolescence
Business Analysis
Business Analysis
• Profitability
– High profit margins
– Innovation is key
• Research & development
– Opportunity for growth
• Global internet access
• China & India make up
– Governmental regulations
• Google Fiber
37% of world population
Economic Analysis
•
•
•
•
•
•
•
Retail Sales: E-Shopping & Mail Order – 10 month lead
Capital Spending: Software – 1 month lead
Capital Spending: Info Processing – 1 month lead
Capital Spending: Comm. Equipment – 4 month lead
Global Semiconductor Bookings – 3 month lead
Consumer Spending – 1 month lead
Federal Funds Rate – 1 month lead
Regression with lead
Regression without lead
Economic Summary
• No silver bullets to forecast Tech Sector in
terms of Economic variables
• Pertinent Economic variables have an
upward trend
Financial Analysis
• Sale growth rate of Information Tech Sector
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Mar
23.39
24.22
27.98
31.77
33.46
36.43
39.93
34.51
39.50
46.33
49.64
Jun
24.74
24.30
28.60
32.24
34.47
37.45
41.62
35.16
42.29
46.94
50.92
Sep
24.41
25.09
29.31
33.56
35.34
38.94
40.99
37.02
44.10
48.70
-
Dec
26.20
28.58
32.55
36.69
38.00
42.30
38.95
42.23
48.10
53.09
-
Yr.
98.74
102.19
118.44
134.26
141.28
155.03
161.50
148.93
173.99
190.82
206.98
3%
16%
13%
-8%
17%
10%
Yr. to Yr.
Source: Thomson Reuters Baseline
5%
10%
4%
8%
Financial Analysis
• Sale growth rates of major companies
2002
Apple (AAPL)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
7%
8%
33%
68%
39%
27%
53%
14%
52%
58%
20%
Microsoft (MSFT)
12%
13%
14%
8%
11%
15%
18%
-3%
7%
12%
6%
Google (GOOG)
N/A
N/A
N/A
92%
73%
56%
31%
9%
24%
-6%
20%
IBM (IBM)
-2%
10%
8%
-5%
0%
8%
5%
-8%
4%
6%
4%
Cisco (CSCO)
-15%
0%
17%
13%
15%
23%
13%
-9%
11%
9%
11%
HP (HPQ)
-11%
1%
9%
8%
6%
14%
13%
-3%
10%
3%
4%
Oracle (ORCL)
-12%
-2%
7%
16%
22%
26%
24%
4%
15%
33%
9%
1%
13%
14%
13%
-9%
8%
-2%
-7%
24%
22%
5%
-8%
12%
12%
14%
8%
7%
5%
-11%
7%
Intel (INTC)
S&P500
Financial Analysis
• EPS of Information Tech Sector
Source: Thomson Reuters Baseline
Financial Analysis
• EPS of major companies
2002
Apple (AAPL)
Microsoft
(MSFT)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
222%
-39%
270%
292%
57%
27%
73%
34%
67%
62%
15%
-25%
20%
52%
3%
-2%
17%
26%
-10%
24%
22%
8%
N/A
N/A
N/A
222%
91%
47%
25%
19%
28%
15%
16%
IBM (IBM)
-14%
10%
17%
5%
14%
18%
25%
12%
16%
14%
11%
Cisco (CSCO)
-5%
51%
29%
21%
20%
22%
16%
-13%
19%
-1%
11%
HP (HPQ)
-2%
46%
15%
20%
38%
32%
24%
7%
19%
14%
9%
Oracle (ORCL)
-8%
7%
14%
36%
19%
26%
27%
11%
16%
30%
10%
Intel (INTC)
-2%
69%
37%
23%
-41%
40%
-23%
27%
75%
11%
5%
7%
15%
21%
14%
16%
-2%
-20%
-5%
33%
10%
8%
Google (GOOG)
S&P500
Financial Analysis
• Return on Equity
30.0%
25.0%
20.0%
15.0%
IT Sector
S&P500
10.0%
5.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Financial Analysis
EBITDA margins
Net profit margins
18.0%
30.0%
16.0%
25.0%
14.0%
12.0%
20.0%
IT Sector
15.0%
S&P500
10.0%
8.0%
6.0%
10.0%
4.0%
5.0%
2.0%
0.0%
0.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2002200320042005200620072008200920102011
EBITDA margins
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Apple (AAPL)
3.7%
3.4%
6.5%
14.3%
15.8%
22.7%
22.7%
29.8%
30.0%
30.1%
44.4%
50.2%
36.3%
43.9%
43.3%
42.1%
42.8%
38.3%
44.6%
43.8%
N/A
N/A
25.1%
39.7%
43.2%
40.0%
33.7%
41.9%
41.6%
44.9%
IBM (IBM)
14.8%
17.6%
17.7%
19.3%
20.3%
20.6%
22.0%
24.6%
25.0%
24.3%
Cisco (CSCO)
24.7%
35.0%
38.3%
36.5%
31.9%
32.2%
31.2%
27.2%
30.1%
31.7%
1.9%
7.4%
8.2%
6.8%
10.4%
11.4%
11.7%
13.0%
12.9%
14.6%
Oracle (ORCL)
39.2%
39.8%
41.4%
39.1%
40.2%
41.4%
43.3%
44.9%
42.0%
49.8%
Intel (INTC)
36.0%
41.7%
44.9%
44.4%
33.9%
36.5%
32.8%
30.6%
47.4%
46.7%
S&P500
21.5%
21.4%
21.4%
23.0%
23.9%
25.6%
19.1%
17.2%
18.7%
20.6%
Microsoft (MSFT)
Google (GOOG)
HP (HPQ)
Financial Analysis
• Cash flow per share
Financial Analysis
• Cash from Operations
(million $)
2001
Apple (AAPL)
Microsoft (MSFT)
Google (GOOG)
IBM (IBM)
Cisco (CSCO)
HP (HPQ)
Oracle (ORCL)
185
24,073
Intel (INTC)
31
2002
2003
2004
90
289
19,037
21,612
155
395
2005
2006
2007
2008
2009
2010
934
2,535
2,220
5,470
9,596
10,159
18,595
17,796
14,404
16,605
14,626
15,797
14,509
13,442
977
2,459
3,581
5,775
7,853
9,316
11,081
14,265
13,066
14,407
15,323
14,874
15,006
16,088
18,812
20,773
19,549
6,392
6,587
5,240
7,121
7,568
7,899
10,104
12,089
9,897
10,173
2,561
5,444
6,057
5,088
8,028
11,353
9,615
14,591
13,379
11,922
2,179
3,243
3,023
3,177
3,552
4,541
5,520
7,402
8,255
8,681
8,654
9,129
11,515
13,119
14,823
10,620
12,625
10,926
11,170
16,692
• Free Cash Flow per Share
($/share)
Apple (AAPL)
Microsoft (MSFT)
Google (GOOG)
2001
2002
(0.07)
1.14
N/A
2003
2004
2005
2006
2007
2008
2009
(0.12)
0.17
0.97
2.72
1.83
5.14
9.45
9.94
17.99
1.28
1.30
1.09
(1.90)
0.92
1.25
1.58
1.29
2.02
2.33
5.48
5.43
10.77
17.44
26.77
21.98
N/A
N/A
2010
IBM (IBM)
4.05
3.90
4.93
5.53
5.71
5.41
6.09
8.47
10.60
9.46
Cisco (CSCO)
0.56
0.54
0.65
0.97
1.09
1.18
1.45
1.84
1.54
1.62
HP (HPQ)
0.21
0.96
1.01
0.68
1.80
2.90
2.22
4.47
3.77
3.18
Oracle (ORCL)
0.33
0.55
0.52
0.58
0.65
0.82
1.02
1.39
1.49
1.48
Intel (INTC)
0.12
0.59
1.13
1.32
1.19
0.44
0.86
0.47
0.64
1.45
Financial Analysis
• Cash in Balance Sheets
(million $)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Apple (AAPL)
2,310
2,252
3,396
2,969
3,491
6,392
9,352
11,875
5,263
11,261
Microsoft (MSFT)
3,922
3,016
6,438
15,982
4,851
6,714
6,111
10,339
6,076
5,505
427
3,877
3,545
6,082
8,657
10,198
13,630
Google (GOOG)
N/A
58
149
IBM (IBM)
6,330
5,382
7,290
10,053
12,568
8,022
14,991
12,741
12,183
10,661
Cisco (CSCO)
4,873
9,484
3,925
3,722
4,742
3,297
3,728
5,191
5,718
4,581
HP (HPQ)
4,197
11,192
14,188
12,663
13,911
16,400
11,293
10,153
13,279
10,929
Oracle (ORCL)
4,449
3,095
4,737
4,138
3,894
6,659
6,218
8,262
8,995
9,914
Intel (INTC)
7,970
7,404
7,971
8,407
7,324
6,598
7,370
3,350
3,987
5,498
• Cash and Short term investments
(million $)
2001
2002
2003
2004
2005
2006
2007
2008
2009
4,336
4,337
4,566
5,464
8,261
10,173
15,386
24,490
23,464
25,620
Microsoft (MSFT)
31,600
38,642
49,048
60,592
37,751
34,161
23,411
23,662
31,447
36,788
Google (GOOG)
N/A
147
335
2,132
8,034
11,244
14,219
15,855
24,485
34,975
Apple (AAPL)
2010
IBM (IBM)
6,393
5,975
7,647
10,570
13,686
10,656
16,146
12,907
13,974
11,651
Cisco (CSCO)
6,907
12,656
8,485
8,669
6,969
17,814
22,266
26,235
35,001
39,861
HP (HPQ)
4,336
11,429
14,591
12,974
13,929
16,422
11,445
10,246
13,334
10,934
Oracle (ORCL)
5,887
5,841
6,519
8,587
4,802
7,605
7,020
11,043
12,624
18,469
11,550
12,587
16,164
17,172
12,772
10,002
15,426
11,843
13,920
21,885
Intel (INTC)
Valuation – Price Multiples
Industry: Electronic Components (ELCOM)
Absolute Basis
High
Low
Median
Current
P/Trailing E
47.70
9.20
36.80
11.50
P/Forward E (2008)
19.30
8.60
11.70
11.70
P/B (2008)
4.60
1.90
2.30
2.00
P/S
5.10
1.70
3.80
4.20
17.00
6.40
9.40
9.20
P/CF (2008)
Relative to SP500
High
Low
Median
Current
P/Trailing E
2.80
0.67
2.00
0.73
P/Forward E (2008)
1.40
0.67
0.82
0.82
P/B (2008)
1.70
0.70
1.00
0.90
P/S
4.00
1.10
2.60
3.10
P/CF (2008)
1.70
0.70
1.00
0.90
• P/Trailing E and P/B not far off lows.
• Relative to SP500, P/Trailing E, P/Forward E,
P/B and P/CF priced at a discount.
Valuation – Price Multiples
Industry: Hardware (CMPTR)
Absolute Basis
High
Low
Median
Current
P/Trailing E
33.20
10.40
20.80
14.50
P/Forward E
34.40
10.80
18.50
11.80
P/B
6.40
3.00
4.30
3.90
P/S
1.90
0.90
1.50
1.70
P/CF
19.20
7.10
12.80
11.00
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.40
0.87
1.20
0.92
P/Forward E
1.40
0.81
1.10
0.82
P/B
2.60
1.20
1.50
1.70
P/S
1.50
0.80
1.00
1.20
P/CF
1.50
0.90
1.20
1.10
• All multiples currently below 10 year median.
• P/Trailing E and P/Forward E sold at a discount
relative the broader index.
Valuation – Price Multiples
Industry: Software & Services (ITSOF)
Absolute Basis
High
Low
Median
Current
P/Trailing E
173.90
14.10
43.80
19.60
P/Forward E
355.60
13.70
37.10
17.20
P/B
11.30
1.80
6.30
3.20
P/S
24.40
2.80
7.60
4.40
P/CF
92.00
10.80
32.50
15.10
Relative to SP500
High
Low
Median
Current
P/Trailing E
9.00
1.20
2.70
1.20
P/Forward E
14.60
1.10
2.40
1.20
P/B
3.60
0.50
2.00
1.40
P/S
15.50
2.80
4.90
3.20
P/CF
8.10
1.30
2.90
1.50
• All multiples well off 10 year median, not too far
from 10 year lows.
• Relative to the SP500, current multiples are
near 10 years lows.
Valuation – Price Multiples
Industry: Semiconductors (SEMIC)
Absolute Basis
High
Low
Median
Current
P/Trailing E
135.80
11.00
24.00
12.90
P/Forward E
422.10
9.10
22.30
12.40
P/B
5.30
1.80
3.40
3.10
P/S
7.30
1.60
3.70
2.80
P/CF
31.20
6.40
12.60
9.00
Relative to SP500
High
Low
Median
Current
P/Trailing E
5.60
0.79
1.40
0.82
P/Forward E
34.70
0.73
1.40
0.87
P/B
1.70
0.90
1.30
1.30
P/S
4.70
1.90
2.60
2.10
P/CF
2.40
0.80
1.20
0.90
• Similar to other industries, current multiples are
below 10 year medians, closer to 10 year lows.
• Relative to the index, both P/E measures are
discounted, while others are at or below
median.
Valuation – Price Multiples
Sector: Information Technology (SPHTI)
Absolute Basis
High
Low
Median
Current
P/Trailing E
64.90
11.10
23.00
15.00
P/Forward E
61.40
11.60
20.80
13.70
4.80
2.30
3.90
3.60
P/S
3.30
1.30
2.50
2.50
P/CF
25.30
8.20
14.70
11.30
P/B
Relative to SP500
High
Low
Median
Current
P/Trailing E
2.60
0.91
1.40
0.96
P/Forward E
2.50
0.93
1.30
0.96
P/B
1.80
0.90
1.40
1.50
P/S
2.10
1.50
1.80
1.80
P/CF
2.00
1.10
1.40
1.10
• Sector as a hole is cheaper than median value
over past 10 years.
• Current valuations for P/E are discounted
relative to the market. Other measures are at or
around median value.
Valuation – Trend
Price to Forward Earnings – 10 year
Valuation – Technical Analysis
Relative Strength Index (RSI) = 65
Valuation – Technical Analysis
MACD (12 Day EMA – 26 Day EMA): Just crossed 0 line
Recommendation
• Positive outlook for sector
– Recovering economy
– Uptick in retail sales
– Rising business spending
REDUCE WEIGHT BY:
150 Basis Points
• Downward pressures
– Fuel and commodity prices
– Tepid recovery from recession
– Economic uncertainty
• Currently 4.67% overweight