Information Technology Sector Finance 724/824 SIM Class Autumn 2009 A Presentation By: Scott McGrath John Morgan Denise Morrison Agenda • • • • • Sector Information Business Analysis Performance / Economic Indicators Valuation Recommendation S & P 500 By Sector Utilities, 3.65% Consumer Discretionary, 9.19% Healthcare, 12.54% Consumer Staples, 11.78% Financials, 14.59% Telecom, 3.02% Energy, 12.39% IT 19.09% Industrials, 10.29% Materials, 3.46% Info Technology Sector is Currently Overweight by 288 Basis Points SIM Portfolio By Sector Utilities, 3.19% Consumer Discretionary, 7.51% Healthcare, 13.13% Consumer Staples, 12.23% Financials, 6.59% Telecom, 3.51% Energy, 12.80% IT 21.97% Industrials, 11.97% Materials, 4.52% Info Technology Sector is Currently Overweight by 288 Basis Points Information Technology • Largest sector in S&P 500 – Both by weighting and market cap – Highest performing sector YTD Market Cap (in $Mill) QTD YTD Info Tech 1,830,673 4.95% 51.96% Financials 1,411,209 -0.87% 18.15% Helat Care 1,200,285 3.14% 11.25% Energy 1,177,157 7.73% 14.13% Cons Staples 1,124,491 4.33% 11.32% Industrials 1,000,311 3.61% 15.97% Cons Desc 896,499 4.35% 33.34% Utilities 347,528 0.05% 0.73% Materials 335,484 2.60% 39.39% Telecom 290,830 -1.72% -4.72% Sector SIM Info Technology Stocks Industry Application Software Computer Hardware Internet Software & Services IT Consulting & Services Computer Storage Equipment Electron Instruments Networking Equipment Office Electronics Semiconductors Systems Software SIM Stocks IBM, Hewlett-Packard, NCR Intel Microsoft, Oracle Information Technology: Industry Performance S&P 500 DOW JONES 30 NASDAQ 100 INFO TECH SECTOR: IT CONSULTING & SVC ELECTRONIC MNFRG SVC INTRNET SOFTWR & SVC COMPU STORAGE/PERIPH COMPUTER HARDWARE TECHNOLOGY DISTRIB ELECTRONIC COMPONENT APPLICATION SOFTWARE COMMUNICATIONS EQUIP SEMICONDUCTORS SYSTEMS SOFTWARE ELECTRONIC EQUIPMENT SERVICES-DATA PROC SEMICONDUCTOR EQUIP HOME ENTMT SOFTWARE OFFICE ELECTRONICS QTD YTD 2008 1.20 3.20 0.70 18.40 14.20 42.80 -38.49 -33.84 -41.89 11.20 -1.10 6.50 0.40 3.50 -0.80 2.40 4.80 -0.10 -4.20 7.50 -3.30 4.80 -9.30 -0.30 2.50 138.10 69.60 68.10 65.40 64.80 51.60 50.90 50.60 44.10 38.10 37.20 34.50 28.30 27.10 18.50 -0.50 -52.64 -54.79 -54.59 -44.67 -40.59 -46.28 -48.29 -45.33 -40.58 -46.92 -38.29 -57.46 -31.14 -60.28 -72.54 -50.77 Market Cap: $Billions Largest Companies 1) Microsoft 2) Apple 3) Google 4) IBM 5) Cisco Systems 6) Hewlett-Packard 7) Oracle 8) Intel Market Cap (Billions) 253.7 173.8 173.7 161.4 138.0 115.8 106.8 105.7 Only other Info Technology stock we own is NCR with a market cap of 1.6 Billion Business Analysis- Info Technology • Sector growth depends primarily on technological advancement and innovation. – Unpredictable: what is hot today may be obsolete in 6 months • Dependence on cutting edge technology leads to enormous R&D costs – These R&D costs are the largest barrier to entry Business Analysis (cont.) • Cyclical Sector with large impact on S&P500 – Tends to follow market cycles, can be highly volatile – Can be a leading indicator during recovery, growth periods • Largely impacted by Corporate and Consumer Spending – Current Corporate/Consumer spending is down– mixed reviews on when this starts to recover – Some analysis suggests IT spending takes 7-9 quarters following the trough in the cycle (Q209) to return to consistent YOY growth Business Analysis (cont.) • Information Technology Life Cycle – primarily impacted by the life cycle of PCs – PCs’ typical life-span = 3-5 yrs (physically longer, however obsolete) • Demand – largely affected by developed countries, growth potential in under-developed countries – 60% of all PCs owned by 15% of the world-wide population1 • LOTS of untapped demand – Increasing handheld device demand/infrastructure • Tel-com sector expanding infrastructure and increased cell phone capabilities desired 1: www.garnter.com (June 23, 2008) Business Analysis (cont.) • Growth Opportunities – US Healthcare reform (Electronic Patient records) – Windows 7/Office 2010/Snow Leopard – Increased Corporate Spending/ Profits (following recovery, where / when will money be spent?) – Stimulus Package (everyone wins, right?) – New Technology from Afghanistan/Iraq (like GPS from 1st Iraq war) – Asia / India / Emerging Markets development(exploding demand?) • Growth Risks – Regulations (China, Iran, North Korea, etc) – Double-dip recession or unstable recovery or long, slow growth – Tax Effects 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 innovation globally • Short-term – Corporate Spending/Profits rebound? – GDP growth Info Technology S & P 500 vs. Info Technology QTD 7.0000 6.0000 6% 5.0000 4.0000 4% 3.0000 2.0000 SPX 1.0000 0.0000 -1.0000 S & P 500 vs. Info Technology YTD 50.0000 42% 40.0000 30.0000 20.0000 14% 10.0000 0.0000 -10.0000 SPX -20.0000 -30.0000 Jan -40.0000 Mar May July Aug Nov Info Tech Sector vs. US GDP Growth– 3 year time frame Info Tech Sector vs. US Corp Profits-- 3 year time frame Info tech vs. US Consumer Confidence- 3 years Key Drivers • • • • GDP (very cyclical) Globalization Corporate Profits Consumer Confidence– need strong economy with consumer participation Valuation: Info Tech Sector Absolute Basis High Low Median Current P/Trailing E 74.6 11.1 25 20.5 P/Forward E 64.7 12.1 21.8 17.3 P/B 15.1 2.3 4 4 P/S 6.7 1.3 2.6 2.3 P/CF 45.8 8 15.5 12.9 Green= Cheap Red= Expensive Valuation: Info Tech Sector Relative to SP 500 High Low Median Current P/Trailing E 2.6 .91 1.4 1.1 P/Forward E 2.7 .98 1.4 1.1 P/B 3 .9 1.4 1.8 P/S 3 1.5 1.8 2.1 P/CF 2.6 1 1.4 1.2 Green= Cheap Red= Expensive Valuation: Computer Hardware Absolute Basis High Low Median Current P/Trailing E 49.2 10.4 22.8 17.4 P/Forward E 45.6 10.8 19.5 15.4 P/B 11.2 3 4.3 5.3 P/S 3.3 .9 1.5 1.6 P/CF 29.2 7.1 13.6 11.9 Valuation: Computer Hardware Relative to SP 500 High Low Median Current P/Trailing E 1.8 .87 1.2 .98 P/Forward E 1.9 .81 1.2 .92 P/B 2.5 1.2 1.5 2.4 P/S 1.5 .8 1 1.4 P/CF 1.7 .9 1.2 1.1 Valuation: Semiconductors Absolute Basis High Low Median Current P/Trailing E 135.8 11.6 27.5 47.1 P/Forward E 422.1 12.9 24.4 17.2 P/B 13.8 1.8 3.6 3.0 P/S 13.0 1.6 4.0 2.8 P/CF 37.3 6.4 14.0 14.9 Valuation: Semiconductors Relative to SP 500 High Low Median Current P/Trailing E 5.6 .8 1.5 2.7 P/Forward E 34.7 .6 1.4 1.0 P/B 2.6 .9 1.3 1.4 P/S 5.8 1.9 2.7 2.6 P/CF 2.4 .9 1.3 1.4 Valuation: Systems Software Absolute Basis High Low Median Current P/Trailing E 75.6 9.4 23.2 15.9 P/Forward E 35.1 9.8 20.1 15.5 P/B 26.6 3.0 5.2 4.7 P/S 21.8 2.2 7.2 3.5 P/CF 65.6 8.2 18.2 13.1 Valuation: Systems Software Relative to SP 500 High Low Median Current P/Trailing E 2.5 .83 1.3 .90 P/Forward E 1.7 .78 1.2 .92 P/B 5.2 1.3 1.9 2.20 P/S 9.7 2.8 4.6 3.20 P/CF 3.7 1.1 1.7 1.20 Recommendation • Long Term: – Info Tech will be sector leader amongst S&P • Short Term: – Have enjoyed strong outperformance – Rebound in economy/spending may take time Recommendation Lower our weight of the info technology sector by 250 basis points • Why? – Currently overweight by 288 basis points – Info Tech sector is up 42% YTD compared to 14% for the S&P 500 • GDP Growth forecasted 2% – 2.5% for years to come puts some pressure on IT growth • Majority of growth s/t likely to come from smaller companies (we don’t own) Recommendation – Use proceeds to possibly bring financials sector to S&P 500 level weight? – Being in-line with S&P 500 index still has Info Tech at a 19% allocation