Information Technology
Sector Stocks
June 1st, 2010
Greg Price
Greg Shaskus
Min Shen
Matt Sims
Chris Stuart
S & P 500 Sector Weights (as of 4/30/2010)
Sector
Current Index
Weight
Current SIM
Weight
Consumer Discretionary
10.55%
10.44%
Consumer Staples
10.91%
11.71%
Energy
11.18%
9.76%
Financials
16.47%
11.41%
Health Care
11.55%
14.63%
Industrials
10.76%
13.10%
Information Technology
18.91%
20.18%
Materials
3.45%
1.64%
Telecommunication Services
2.73%
3.70%
Utilities
3.48%
2.10%
IT Recap
• Currently 127bps overweight
• Class voted to increase our position by
100bps
– Result is that the IT Sector will be 227bps
overweight
Sector Holdings
Current Holdings
Recommended Holdings
Hewlett Packard Co.
4.98%
Hewlett Packard Co.
4.98%
Intel Corp.
4.30%
Intel Corp.
4.80%
NCR Corp.
2.65%
NCR Corp.
2.65%
Oracle Corp.
4.88%
Oracle Corp.
4.88%
Research In Motion
3.38%
Research In Motion
0.00%
Lecroy
4.38%
Total Weight
20.18%
Total Weight
21.18%
Intel—Buy
• Intel is the world’s largest semiconductor
chip maker
• Offers products for personal computers,
servers, and mobile devices
• Two major growth opportunities:
– Asia
– “Smart” market
• Buy 50 bps
– 430 bps480 bps
Global Internet Traffic
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2008
2009
2010
2011
Petabytes Per Month
2012
2013
Financial Analysis
Revenue
EPS
$50,000
25%
$45,000
20%
$40,000
15%
$35,000
$30,000
10%
$25,000
5%
$20,000
0%
$15,000
-5%
$10,000
2.50
100%
80%
2.00
60%
1.50
40%
1.00
20%
0%
0.50
-20%
-10%
$5,000
$-
-15%
2005
2006
2007
2008
Revenue (mlns)
2009
2010
2011
y-o-y %Chg.
2012
0.00
-40%
2005
2006
2007
2008
EPS
2009
2010
% Chg.
2011
2012
Financial Analysis—Margins & ROE y-o-y
Chg.
15%
10%
5%
0%
2006
2007
2008
2009
2010
-5%
-10%
-15%
EBITDA Margin
Net Profit Margin
Return on Equity
Valuation—Multiples
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
67.5
16.9
15.3
33.5
43.8
High
1.2
2.5
1.6
3.2
1.4
Low
0.32
0.07
0.8
0.9
0.5
Low
7.0
1.6
1.8
5.4
6.6
Median Current
0.81
0.55
0.84
0.93
1.1
0.9
1.4
1
1
0.7
Median
18.0
4.1
3.7
10.0
12.6
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Current
11.0
3.0
2.7
7.0
8.8
Target
Multiple
17.0
4.0
3.5
10.0
12.6
High
2.7
2.9
2.9
7.5
2.6
Low
0.55
0.8
1
1.9
0.7
Target
Metric/Share
1.70
7.42
7.94
2.97
2.40
Mean
Median
Median
1.1
1.2
1.4
3.4
1.2
Current
0.86
0.82
1.3
2.7
0.9
Implied
Target Price Upside (%)
$
28.90
35%
$
29.68
39%
$
27.79
30%
$
29.70
39%
$
30.24
41%
$
29.26
37%
$
29.68
39%
Valuation—Comparable Companies
Company
Intel
AMD
Broadcomm
IBM
Qualcomm
TI
Mean (excl. Intel)
Median (excl. Intel)
Price
20.91
8.40
32.67
125.42
35.89
24.57
P/Trail
14.0x
NM
17.5x
12.2x
15.0x
14.3x
14.8x
14.7x
P/Forward
11.0x
18.6x
13.4x
10.9x
15.3x
10.3x
13.7x
13.4x
P/CF
8.8x
13.8x
15.7x
8.9x
12.9x
10.0x
12.3x
12.9x
Comparable Public Companies Valuation
(in millions of $ except per share amounts)
LTM EBITDA
$ 16,290
EBITDA Mult. (+10% prem.)
9.6x
Implied EV
$ 156,384
Less: Net Debt
$
2,606
Equity Value
$ 158,990
Fully-Diluted Shares O/S (mln)
5,681
Target Share Price
$
28
EV/EBITDA
6.5x
6.8x
13.2x
7.5x
9.0x
7.1x
8.7x
7.5x
Valuation—DCF
Analyst: Gregory Shaskus
5/23/2010
Terminal Discount Rate =
Terminal FCF Growth =
10.5%
5.0%
(in USD Millions)
Year
2010E
Revenue
42,855
% Grow th
2011E
47,569
11.0%
Operating Income
13,671
14,699
2012E
48,996
2013E
51,936
3.0%
14,160
2014E
55,052
6.0%
6.0%
15,061
15,415
Operating Margin
31.9%
30.9%
28.9%
29.0%
28.0%
Interest Income
759
842
867
919
974
Interest % of Sales
1.8%
1.8%
1.8%
1.8%
1.8%
Taxes
4,420
Tax Rate
31.0%
Net Income
9,838
% Grow th
4,928
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
10,592
11,913
13.3%
2.7%
6,752
7,157
1.8%
4,564
31.0%
12,225
2.6%
7,586
16,392
26.0%
25.0%
1,095
1,161
1.8%
1.8%
4,646
4,722
31.0%
12,531
31.0%
12,831
2.5%
2.4%
8,041
8,524
69,502
73,324
6.0%
16,680
16,865
24.0%
1,230
76,991
5.5%
5.0%
16,938
23.0%
22.0%
1,298
1.8%
4,790
1,363
1.8%
1.8%
4,826
31.0%
13,121
13,337
2.3%
9,035
4,828
31.0%
31.0%
13,472
1.6%
9,532
1.0%
10,009
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
(960)
(471)
(143)
(493)
(523)
(554)
(588)
(623)
(660)
(697)
(731)
-2.2%
-1.0%
-0.3%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
68,050
89,620
157,671
7.30%
12.4
16.0
6.4
8.3
6,184
13.0%
10,120
6,859
6,752
14.0%
9,601
7,157
13.0%
13.0%
11,103
-5.1%
11,390
15.6%
2.6%
21.42
27.75
29.6%
2,382
4,988
0.88
7,586
13.0%
11,670
2.5%
8,041
8,524
13.0%
11,944
13.0%
12,208
2.3%
2.2%
43%
57%
100%
9,035
9,532
13.0%
12,461
12,640
2.1%
-1.0%
10,009
13.0%
13.0%
12,741
1.4%
Terminal Value
0.8%
243,236
Free Cash Yield
11.5
14.9
5.7
7.4
11.9
15.4
5.8
7.6
5,681
$
$
1,033
16,083
6.0%
2020E
13.0%
14.0%
Shares Outstanding
11,597
-3.4%
6,369
31.0%
27.0%
65,568
6.0%
2019E
13.0%
8,877
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
10,233
4,476
31.0%
15,756
61,856
2018E
13.0%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
4,384
31.0%
6.0%
2017E
13.0%
11.5%
Free Cash Flow
6,184
4,598
58,355
2016E
11.5%
4,928
Capex % of sales
Debt
Cash
Cash/share
31.0%
7.7%
Add Depreciation/Amort
Current Price
Implied equity value/share
Upside/(Downside) to DCF
4,759
2015E
4.0%
Terminal 4.5%
Growth = 5.0%
5.5%
6.0%
$
$
$
$
$
9.5%
29.64
31.45
33.65
36.40
39.94
$
$
$
$
$
Target Share Price
Discount Rate =
10.0%
10.5%
11.0%
27.24 $ 25.20 $ 23.45
28.68 $ 26.37 $ 24.41
30.41 $ 27.75 $ 25.54
32.52 $ 29.41 $ 26.87
35.16 $ 31.44 $ 28.46
$
$
$
$
$
11.5%
21.93
22.74
23.66
24.74
26.02
5.24%
Terminal P/E
18.1
Terminal EV/EBITDA
8.9
4.0%
Terminal 4.5%
Growth = 5.0%
5.5%
6.0%
Upside/(Downside) from Current Price
Discount Rate =
9.5%
10.0%
10.5%
11.0%
11.5%
38%
27%
18%
9%
2%
47%
34%
23%
14%
6%
57%
42%
30%
19%
10%
70%
52%
37%
25%
15%
86%
64%
47%
33%
21%
Recommendation—Buy
Valuation Summary
• Equal weight for all three
valuation methods yields
a target share price of
$28.00 (rounded)
• 34% upside potential
(incl. 3.0% div.)
Buy 50 bps
• Catalysts:
– Growth of the Internet
– Growth opportunities in
Asia
– Expansion into “smart”
market
• Risks:
– Prolonged economic
downturn
– Unsmooth shift into “smart”
market
Research In Motion
• Designs, manufacturers, and markets innovative
wireless solutions for a global mobile
communication market (aka Blackberry)
– Its popularity was based on the convenience of its
mobile email system and its cost compared to
competitors
• Debut of new 6.0 Operating System next quarter
• Rumors about entering the Tablet PC market
• Sell all BP’s of RIM
Discounted Cash Flow Model
Sensitivity Analysis
Target Share Price
Terminal Growth Rate
Dicscount Rate
10.00%
10.50%
11.00%
11.50%
4.00%
73.33
66.71
61.06
56.19
4.50%
78.19
70.66
64.31
58.89
5.00%
84.02
75.32
68.1
62.01
5.50%
91.14
80.92
72.58
65.65
Upside/Downside
Terminal Growth Rate
Discount Rate
10.00%
10.50%
11.00%
11.50%
4.00%
23.60%
12.50%
2.90%
-5.30%
4.50%
31.80%
19.10%
8.40%
-0.70%
5.00%
41.60%
27.00%
14.80%
4.50%
5.50%
53.60%
36.40%
22.40%
10.70%
Valuations
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target E, S,
B, etc/Share
Your Target
Price
P/Forward
E
928.6
10.8
31.8
10.9
12
5.39
64.68
P/S
186.3
2.2
8.7
2.2
3
24
72
P/B
40
0.8
6.1
4.3
4
13..79
55.16
P/EBITDA
443.2
7.21
68.41
8.56
10
6.93
69.3
P/CF
616.8
10
60.3
10.8
12
5.49
65.9
Risks for RIM
• Increase in competition in Smartphone market
with i-phone and android phones
– Starting to lose market share as of Q1 2010
compared to Q1 2009
– Growing popularity of more advanced Smartphones
(applications)
• Strategy to increase global expansion
– Received 35% of Revenue last year from outside of
North America
– Uncertainty in Foreign Currency
• Limited potential for Upside with a several
realistic risks
Lecroy—Buy
• Operates in Test and Measurement industry
• Products are used to design, develop, and manufacture electronic
equipment
• Develops, manufactures, sells, and licenses highperformance oscilloscopes and global communication
protocol analyzers
– Oscilloscopes are tools used to measure and analyze
electronic signals (volts)
– Protocol analyzers are tools used to analyze
communication between two electronic devices
– Lecroy’s products are used in the computer,
semiconductor, data storage, communications, consumer
electronics, automotive/industrial, and defense industries
• Buy 438 bps
Buy Rationale
• Growth in the Test and Measurement market
– Improvements in electronic systems performance
• Driven by advances in semiconductor technology
– Growth in electronics market
– Emerging technologies and standards
• Lecroy offers essential analysis tools for electronic
equipment designers and engineers
• Potential acquisition target
• Trading at a discount
Financial Analysis
Revenue
EPS
180
160
140
120
40%
1.20
30%
1.00
20%
0.80
10%
0.60
0%
0.40
-10%
0.20
-20%
0.00
150%
100%
50%
100
80
60
40
20
0
2005
2006
2007
2008
Revenue (mlns)
2009
2010
y-o-y %Chg.
2011
0%
-50%
-100%
2005
2006
2007
EPS
2008
2009
y-o-y %Chg.
2010
2011
Financial Analysis—Margins & ROE
Valuation
Relative to Sector
P/Forward E
P/S
P/EBITDA
P/CF
High
1.1
0.6
1.1
0.9
P/Forward E
P/S
P/EBITDA
P/CF
Low
0.5
0.1
0.2
0.1
High
927.0
2.3
62.4
531.5
Median
0.7
0.3
0.7
0.5
Low
9.2
0.1
1.3
1.1
P/Forward E
P/S
P/EBITDA
P/CF
Current
0.7
0.2
0.5
0.5
Median
17.0
0.9
9.0
9.6
JDS
18.4
2.1
9.37
10
Relative to Industry
P/Forward E
P/S
P/EBITDA
P/CF
Current
9.2
0.5
4.4
5.6
Agilent
15.4
2.4
NM
18.6
Target
13.0
0.7
7.6
6.7
Lecroy
9.2
0.5
4.4
5.6
High
1.3
0.9
1.2
0.8
Target Metric/Share
0.4
12.0
1.2
0.9
Target
Low
0.5
0.1
0.1
0.1
Median
0.7
0.3
0.6
0.4
Target Price
$
5.07
$
8.40
$
9.12
$
5.98
$
7.14
Current
0.6
0.2
0.1
0.3
Recommendation—Buy
Valuation Summary
• Target Price of $7.00
derived from absolute
valuation
• 40% upside from current
price of $5.00
Buy438 bps
• Catalysts:
– Growth in electronics
markets
– Improvements in
technology
– New technological
standards
• Risks
– Prolonged economic
downturn
– Competition
• Lecroy is much smaller
than its competitors
Questions
Hewlett Packard
Fundamental Drivers:
• Focus on offering a complete solution for all of a
company’s IT needs
• Transforming from a purely infrastructure
company to a services and infrastructure
company
• Aggressive approach to winning business from
rivals
• Sales in the Brazil, Russia, India, and China
regions
Hewlett Packard Co.
• Current stock price of $45.58
• Target price of $60 which is a 32% upside
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
Median
Current
Target
Multiple
Target E, S,
B,etc/Share
Target Price
(E x F)
A.
B.
C.
D.
E.
F.
G.
37.90
3.00
6.90
49.79
29.10
5.70
.40
.80
2.72
3.80
13.20
1.00
2.30
8.51
10.50
9.70
.90
2.60
6.21
7.30
12.5
1.0
2.5
8.0
9.5
4.49
50.76
17.57
7.36
6.26
56.13
50.76
43.93
58.88
59.47
Hewlett Packard DCF
Target = $65.97
Hewlett Packard Sum-of-the-Parts
Target = $58.83