Download INFORMATION TECHNOLOGY – SIM CLASS FINANCE 824

INFORMATION
TECHNOLOGY
FINANCE 824 – SIM CLASS
WINTER 2010
Weston Conway
Daniel Kujawa
Ronald Jewsikow
Maria Malguarnera
Steven Muszynski
Agenda
• Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Overview – Information Technology
• Information technology segment is made
up of 811 companies.
• Info Tech is the largest sector in the S+P
500 which comes out to 19.06%
• Info Tech is 18.06% of SIM’s holding
• Apple
• Intel
• Corning
• Oracle
4.8%
4.1%
4.0%
5.3%
Overview – Information Technology
• In terms of market capitalization, three of
the largest five companies are in the
information technology sector.
• 2. Apple Inc.
• 4. Microsoft
• 5. IBM
@ 319.22 B
@ 233.33 B
@ 203.75 B
Sector Weight
Telecom,
2.92%
Utilities,
3.26%
Energy,
12.70%
Materials,
3.65%
Telecom,
4.30%
Utilities,
2.32%
Materials,
Energy,
3.23%
11.54%
Industrials,
11.15%
Info Tech,
18.97%
Info Tech,
21.51%
Financials,
16.13%
Cons. Disc,
10.30%
Health
Care,
10.70%
S&P 500
Cons
Staples,
10.21%
Industrials,
11.08%
Financials,
11.74%
Health
Care,
13.19%
SIM
Cons.
Disc,
9.31%
Cons
Staples,
9.04%
Industries Within Information Technology
• There are 16 different industries
• The biggest few are:
• Systems software
• Computer Hardware
• IT Consulting
• Internet Software
Key Companies
Market Cap
Apple Inc.
319.22 B
Microsoft Inc.
233.33 B
IBM
203.75 B
Google
195.38 B
Oracle
164.81 B
Cisco Systems
122.22 B
Intel Corp
120.93 B
Siemens AG
111.05 B
Hewlett-Packard
103.89 B
Qualcomm
90.78 B
Sector Performance
Info Tech
S&P 500
Quarter to Date
5.25%
4.32%
Year to Date
5.25%
4.32%
Business Analysis
• Sector Growth depends on
• Business Spending
• Innovation
• Product Adoption
• Continued Margin Improvement
• Cyclical sector
• Economic expansions bring more business and
consumer spending.
• Becoming more of a need than a want
Growth Opportunities
• Some sectors more mature
• Emerging market, clean tech, and
virtualization
• Potential growth drivers
• Governments continue to subsidize clean technology
Porter’s Five Forces
• Bargaining Power of Suppliers –Low
• No significantly large supplying firms, switching costs are low
for the industry
• Bargaining Power of Buyers –Low
• Not many significant substitutes
• Many buyers relative to the companies in the sector
• Industry Rivalry –High
• Innovation is crucial for success, leading to company
competition to have the best product available
Porter’s Five Forces
• Threat of New Entrants –Low
• High barriers to entry – Large R&D costs due to push
for innovation
• Few large competitors in each industry within the sector
• Threat of Substitutes –Moderate
• Alternative products constantly produced
Life – Cycle
Information Technology
Economic Analysis
8
600.0000
R =.79
6
500.0000
4
400.0000
2
0
300.0000
"GDP"
-2
200.0000
-4
100.0000
-6
-8
11/01/2005
0.0000
11/01/2006
11/01/2007
11/01/2008
11/01/2009
11/01/2010
Real GDP vs. Information Technology
"Information
Technology"
Economic Analysis
600.0000
140.0000
R =.44
500.0000
120.0000
100.0000
400.0000
80.0000
300.0000
60.0000
Information Technology
Consumer Confidence
200.0000
40.0000
100.0000
0.0000
20.0000
0.0000
Consumer Confidence vs. Information Tech
Economic Analysis
500.0000
10
450.0000
400.0000
R =.79
5
350.0000
300.0000
0
250.0000
Information Technology
200.0000
-5
150.0000
100.0000
-10
50.0000
0.0000
-15
Durables vs. Information Tech
Durables
Economic Analysis
500.0000
40
450.0000
R =.53
30
400.0000
350.0000
300.0000
20
10
250.0000
200.0000
150.0000
Information Technology
0
Capital Spending: Computers &
Periphials
-10
100.0000
-20
50.0000
0.0000
-30
Computers & Periphs vs. Information Tech
Key Drivers for Success
• Real GDP
• Consumer Confidence
• Durables
• Global Semiconductor Bookings
Financial Analysis
• Margins
• Consistently growing
but not as high vs. S&P
500 as the 5 yr high
• Cash flows
• Generating free cash
flows
Financial Analysis
Financial Analysis
Sector Revenue & Earnings Growth
Financial Analysis
Computer Hardware Revenue & Earnings Growth
Financial Analysis
Semiconductor Revenue & Earnings Growth
Financial Analysis
Systems Software Revenue & Earnings Growth
Financial Analysis
Earnings Growth
Apple
Intel
Oracle
Financial Analysis
Earnings Growth
Apple
Intel
Oracle
Financial Analysis-Performance
EPS
2010
2009
2008
Info Tech
36%
0%
1%
Computer
Hardware
22%
12%
12%
Semiconductor
136%
5%
-23%
Software
Systems
7%
2%
9%
Apple
51%
67%
34%
Intel
75%
27%
-23%
Oracle
16%
11%
27%
S&P 500
Financial Analysis-Performance
Revenue
2010
S&P 500
2009
2008
-11%
5%
Info Tech
13%
-8%
4%
16
22%
-1%
11%
Semiconductor
28%
-8%
2%
Software
Systems
8%
-2%
3%
Apple
52%
14%
53%
Intel
24%
-7%
-2%
Oracle
15%
4%
24%
Valuation Analysis - Sector
Absolute Basis
High
Low
Median
Current
P/Trailing E
64.9
11.1
23.3
15.8
P/Forward E
61.4
11.6
20.9
14.1
P/B
6.5
2.3
3.9
3.6
P/S
4.2
1.3
2.5
2.5
P/CF
31.6
8.2
14.9
11.6
Relative to
SP500
P/Trailing E
High
Low
Median
Current
2.6
.91
1.4
1.0
P/Forward E
2.5
.93
1.3
.99
P/B
1.8
.9
1.4
1.6
P/S
2.1
1.5
1.8
1.9
P/CF
2.1
1.1
1.4
1.2
Valuation Analysis – Industry
Absolute Basis
P/E
High
Low
Median
Current
Semi-Conductor
Industry
32.9
12
19.7
15.1
Financial Services
21.4
12.0
16.5
15.7
Computer Hardware
20.8
10.8
15.6
13.3
Computer Software
20.3
9.8
14.9
13.0
Hardware
19.3
8.6
11.7
12.9
High
Low
Median
Current
Semi-Conductor
Industry
Financial Service
1.4
.84
1.2
1.1
1.4
0.84
1.1
1.1
Computer Hardware
1.3
0.81
1.1
0.91
Computer Software
1.3
0.78
1.0
0.89
Hardware
1.4
0.67
0.83
0.88
Relative to
SP500 P/E
Valuation Analysis – Company
Absolute Basis
P/E
High
Low
Median
Current
Intel
2.1
.82
1.2
1
MasterCard
2.2
0.96
1.3
1.0
Apple
39.2
14.3
25.8
14.8
Oracle
19.1
10.6
14.6
15.3
Corning
25.9
7.7
13.9
11.3
Relative to
SP500 P/E
High
Low
Median
Current
Intel
MasterCard
2.2
2.2
.96
0.96
1.3
1.3
1.1
1.0
Apple
2.7
1.0
1.7
1.0
Oracle
1.2
0.81
1.0
1.0
Corning
1.6
0.57
0.99
0.77
Technical Analysis
Recommendation
• Increase by 100 basis points
• Expanding margins, ROE, etc.
• Significant Growth Opportunities