Information Technology
Sector Presentation
Phani Pamarthi
Amar Patel
Donald Pogan
John Sarver
August 4th, 2010
Sector Information
S&P 500 By Sector
Sector
Market Cap (Millions)
Info Tech $1,911,497.56
Financials $1,682,174.64
Health Care $1,155,833.93
Cons Staples $1,150,886.42
Energy $1,122,139.12
Industrials $1,082,001.38
Cons Disc $1,037,965.75
Utilities $374,671.27
Materials $363,003.05
Telecom Svc $308,328.75
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Sector Information
SIM Portfolio
Sector
S&P 500 Weight SIM Weight +/‐
Consumer Discretionary
10.20%
10.21%
0.01%
Consumer Staples
11.41%
11.66%
0.25%
Energy
10.87%
9.50%
‐1.37%
Financials
16.45%
12.23%
‐4.22%
Health Care
11.37%
12.78%
1.41%
Industrials
10.64%
12.99%
2.35%
Information Technology
18.79%
17.44%
‐1.35%
Materials
3.55%
1.64%
‐1.91%
Telecommunication Services
3.03%
3.93%
0.90%
Utilities
3.69%
2.35%
‐1.34%
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Sector Information
Industries
•
•
•
•
•
•
•
•
•
•
•
Software & Programming – Oracle
Semiconductors – Intel
Communications Equipment Computer Services – NCR
Computer Hardware – Apple
Electronic Instruments & Controls
Computer Peripherals – HP
Scientific & Technical Instruments
Computer Storage Devices
Office Equipment
Computer Networks
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Sector Information
Top 10 Companies in S&P (Market Cap)
Company
Exxon Mobil Corp Apple Inc. Microsoft Corp Procter & Gamble General Electric Co Intl Business Machines Corp JP Morgan Chase & Co Johnson & Johnson AT&T Inc Chevron Corp Symbol XOM AAPL MSFT PG GE IBM JPM JNJ T CVX Sector Price ($)
Energy 61.94
Information Technology 261.85
Information Technology 26.33
Consumer Staples 62.06
Industrials 16.41
Information Technology 130.76
Financials 41.64
Health Care 58.72
Telecommunication Services 26.59
Energy 77.8
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Sector Information
Returns by Sector
Sector
Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecom Svc Utilities QTD 11.82%
15.21%
12.49%
10%
7.07%
3.24%
9.35%
9.36%
10.09%
9.49%
YTD
‐2.90%
‐0.56%
10.31%
7.49%
2.52%
‐6.84%
4.76%
‐2.68%
‐2.01%
‐0.60%
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Business Analysis
• Sector growth depends on – Innovation
– Technological advancement
– Cost reduction
• Highly cyclical sector with large impact on SIM
– Tends to have large growth during market recoveries
– Can be highly volatile
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Business Analysis – Cont.
• Companies in growth and mature phases
• Huge growth potential in developing economies
– India
– China
• Largely impacted by Corporate and Consumer Spending
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Business Analysis
Porter’s 5 Forces
• Threat of New Entrants – Low
– High barriers to entry – Dependence on innovation means high R&D costs
– Few dominant players in each industry within the sector
• Threat of Substitutes – Moderate
– Reverse engineering
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Business Analysis
Porter’s 5 Forces – cont.
• Bargaining Power of Suppliers – Low
– Depends on the size of the purchasing firm
• Bargaining Power of Buyers – Low
– Not many substitutes
– Many buyers and few major players
• Industry Rivalry – High
– When technological advancement is a key success factor
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Business Analysis
Summary
• Long Term
– IT Growth opportunities outweigh risks
– Demand will undoubtedly increase long term
– IT becoming a business staple with massive growth potential globally
• Short‐term
– Depends on consumer spending
– GDP growth
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Info Technology
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Economic Analysis Annualized Performance Data
15.00%
10.00%
5.00%
S & P
Info Tech
0.00%
1‐year
3‐year
5‐year
‐5.00%
‐10.00%
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Economic Analysis
Real GDP vs. Info Tech Sector
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
US Consumer Confidence vs. Info Tech
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
Consumer Spending vs. Info Tech
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
Capital Spending vs. Info Tech
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
Global Semiconductor Bookings vs. Info Tech
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
Exports: Computers vs. Info Tech
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Economic Analysis
Key Drivers
•
•
•
•
•
•
GDP (very cyclical)
Consumer Confidence
Consumer Spending
Capital Spending
Global Semiconductor Bookings
Exports: Computers
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Financial Analysis
Sector Revenue Growths
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Sector Earnings Growths
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Computer Hardware Revenue Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Computer Hardware Earnings Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Systems Software Revenue Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Systems Software Earnings Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Semiconductors Revenue Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Semiconductors Earnings Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Apple Revenue Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Apple Earnings Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Oracle Revenue Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
Oracle Earnings Growth
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Financial Analysis
• Cash Flow Per Share
– $29.98 per share
– Generating free cash flows
• Margins
– Ten year highs
• Research and Development
– Major part of sector
– Average 12‐15% of sales
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Valuation Analysis
Sector Comparison
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
25.0
22.4
4.8
3.0
17.7
Low
11.1
12.1
2.3
1.3
8.2
Median
20.2
18.4
3.9
2.4
14.0
Current
15.8
12.8
3.5
2.3
11.6
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.5
1.4
1.8
2.1
1.6
Low
0.91
0.94
1.2
1.5
1.1
Median
1.2
1.3
1.5
1.8
1.3
Current
1.1
0.95
1.7
2.0
1.3
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Valuation Analysis
Computer Hardware
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
49.1
45.6
11.2
3.3
29.9
Low
10.4
10.8
3.0
0.9
7.1
Median
21.6
18.8
4.3
1.5
13.3
Current
15.5
13.2
5.0
1.6
11.3
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.8
1.9
2.6
1.5
1.7
Low
0.87
0.81
1.2
0.8
0.9
Median
1.2
1.2
1.5
1.0
1.2
Current
1
0.96
2.4
1.4
1.2
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Valuation Analysis
Systems Software
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
23.5
20.3
6.8
6.9
19.2
Low
9.4
9.8
3.0
2.2
8.2
Median
17.9
17.0
4.7
4.6
14.2
Current
13.4
11.8
4.1
3.2
10.9
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.4
1.3
2.4
4.5
1.7
Low
0.83
0.8
1.3
2.8
1.0
Median
1.4
1.1
2.0
3.2
1.4
Current
0.91
0.9
2.1
2.9
1.2
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Valuation Analysis
Semiconductors
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
135.8
422.0
13.8
13.0
37.3
Low
11.6
10.3
1.8
1.6
6.4
Median
24.9
23.0
3.5
3.8
13.0
Current
16.6
10.4
2.9
2.7
9.7
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
5.6
34.7
2.6
5.8
2.4
Low
0.8
0.6
0.9
1.9
0.9
Median
1.4
1.4
1.3
2.6
1.3
Current
1.1
0.75
1.4
2.3
1.1
Sector Information | Business| Economic | Financial| Valuation | Recommendation
Valuation Analysis
Technical Analysis
Information Technology Sector with 200 and 50 day moving average
The 200 day moving average has crossed over the 50.
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Valuation Analysis
Recommendation
BUY 200 BASIS POINTS
Currently underweight compared to SP500
Strong potential – UNDERVALUED SECTOR – UNDERVALUED INDUSTRIES
Target Prices show strong upside
RIGHT THE WRONG OF LAST QUARTER:
‐ IT was overweight by 127 bps going into the quarter
‐ The IT group recommended BUYING 100 more bps
‐ Now 135 bps underweight (???)
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