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Where We Are and Where We Should Be
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1. Information Technology & Telecommunications Services Sarah Ronning
Nikhil Sadhu
Rajeev Ponnusamy
Bryan Schmehl
Tim Hatfield
Geoffrey Shaver
2. We will quantify these at the end.We will quantify these at the end.
3. IT & Telecom Sectors(as of 9/23/03) Information Technology
18.07% of S&P 500
12.42% of SIM
Telecommunication Services
3.40% of S&P 500
3.34% of SIM
Combo
21.47% of S&P 500
15.76% of SIM IT is currently underweighted in SIM
Telecom is too but not nearly as much
IT is currently underweighted in SIM
Telecom is too but not nearly as much
4. IT Industries Application Software
Communications Equip.
Comp. Storage/Peripherals
Computer Hardware
Electronic Equip.
Electronic Manufacturing Services
Home Entertainment Software
Internet Software & Services IT Consulting & Services
Office Electronics
Semiconductors
Semiconductor Equipment
Data Processing Services
Systems Software
5. Info Tech Sector 83 companies in this sector
Largest companies:
Microsoft $280.61 B
Intel $220.72 B
IBM $155.77 B
Cisco $158.83 B SIM Portfolio:
Microsoft 6.17%
Intel 3.31%
IBM 2.93%
S&P 500
Microsoft 3.37%
Intel 1.98%
IBM 1.66%
Cisco 1.56%
6. Telecom. Services Industries Integrated Telecommunication Services
9 companies within this industry
3 biggest players from this sector are in this industry Wireless Telecommunication Services
3 companies within this industry
7. Telecom Sector 12 companies in this sector
Largest companies:
Verizon $89.33 B
SBC Comm. $78.17 B
BellSouth $47.64 B SIM Portfolio:
Alltel 1.38%
Verizon 0.86%
Nextel 1.1%
S&P 500
Verizon 0.96%
SBC 0.79%
BellSouth 0.47%
Alltel 0.15%
Nextel 0.22%
8. Business Analysis - Demand Phase of Life Cycle – Telecom
Wireless, Broadband, Advanced data and IP products: Pioneer-Growth
Wireline (fixed residential and business phone lines): Mature-Decline
9. Business Analysis - Demand Phase of Life Cycle – IT Industries
Computers & Peripherals, Semiconductors, Communications and Electronic Equipment: Mature
Software, IT Consulting & Services: Growth
10. Business Analysis - Demand Classification by Business Cycle
Telecom:
Wireless: Growth
Wireline: Business (Cyclical), Residential (Defensive)
IT Industry:
Hardware: Cyclical
Software and Services: Growth
11. Business Analysis - Demand External Factors
Technological Factors: New innovations in IT and wireless technology keep demand up
Government: Telecom is regulated. Government spending high last 3 years
Social: Population more mobile. Willing to accept new technology
Demographics: younger people driving demand of cell phones, broadband etc
Globalization: Outsourcing will hurt US IT Services. New markets for IT/Telecom in BRIC
12. Business Analysis - Demand How are projections impacted by US/Foreign economy
US economy in growth phase (GDP 7.2% in Q3)
Turnaround in IT in US
Overcapacity in Telecom in US in 1990’s
Majority of growth for US Telecom companies will come from BRIC (Brazil, Russia, India, China)
13. Business Analysis - Supply Capacity - Telecom
Excess capacity in 1990’s. Bubble burst in 2000
Consolidation, plant closure etc has improved capacity situation since 2000
Still some overcapacity in US. Demand down (except wireless)
Manufacturing of telecom equipment being outsourced to specialty manufactures outside US (Flextronics, Samina)
14. Business Analysis - Supply Capacity-IT
Utilization improved since last year- increased demand
High tech production up 15.1% over the last year
Production of computers, office equipment increased 20.5% in Q3 and semiconductor output grew 52.6%.
15. Business Analysis – Five Forces Analysis
16. Business Analysis – Five Forces Analysis
17. Business Analysis – Five Forces Analysis
18. Business Analysis – Five Forces Analysis
19. Business Analysis – Five Forces Analysis
20. Business Analysis – Industry Concentration
21. Business Analysis - Profitability Outlook
22. Business Analysis – Profitability & Pricing Profitability & Pricing Analysis
Hardware: Low demand and low concentration leads to a price war – except for certain specialized products, can’t make high profits
Software: Increased demand and increased spending favors the innovators – some light here
Wireless: Change in demographics favors the service providers targeting the young population – sector closer to the mature phase, but still growing
Landline: Sector in the decline phase – not much hope here
Telecom Equipment: Low demand and low concentration leads to a price war – established history and scale economy could favor the lucky few
23. Financials – Telecomm Growth
24. Financials – IT Growth
25. Financials – IS Analysis Telecommunication
26. Financials – IS Analysis Summary
Growth slightly increasing in IT and remains flat/decreasing in Telecom.
IT is currently trading above its average mean price/sales ratio, while Telecom is well below its average.
EPS and NI have been increasing over the past two quarters. Telecom has experienced decreasing results
27. Financials – BS Analysis Telecommunication
28. Financials – BS Analysis
29. Financials – CF Analysis Telecommunication
30. Financials – CF Analysis Summary
Both IT and Telecom are gaining all of their Cash Flow from operations
Cash Flows from Investing and Financing remain negative for both sectors and has worsened over the last quarter, especially on the Telecom side
31. Financials – ROE Analysis Telecommunication
32. Financials – DuPont Analytics Telecommunication
33. Financials – ROE/Ratio Analysis Summary
Both Telecom and IT ROE is below the relative S&P500 average and have seen increasing ROE rates over the past year
Telecom ROE has flattened lately
P/E Ratio decreasing relative to S&P for Telecom and increasing for IT (Both still below averages)
Sales / Assets increasing for Telecom and decreasing slightly for IT (DuPont)
34. Financials – ROE/Ratio Analysis Summary
Growth mainly being generated by Sales
Observing decreasing profit margins
EBT / EBIT interest burden increasing
Liquidity Ratios
Quick Ratio – Stable for both sectors
Current Ratio – Stable for both sectors
35. Valuation Analysis – P/E Ratio Telecommunication
36. Valuation Analysis – IT P/S
37. Valuation Analysis – Telecom P/S
38. Valuation Analysis – P/B
39. Valuation Analysis – P/EBITDA
40. Valuation Analysis – Telecom Price Momentum
41. Valuation Analysis – IT Price Momentum
42. Valuation - Summary Low P/E ratio relative to the S&P 500, and is on a downward trend
P/S is low
P/B is low and is going lower
P/EBITDA is well below normal
High P/E ration relative to the S&P 500.
P/S is well above its normal.
P/B is around its mean but seems to be on an upward trend
P/EBITDA is near its long-term mean
43. In Conclusion… Recent Performance (as of 11/14/03)
S&P 500
YTD +19.38%
QTD +5.46%
IT
YTD +41.30%
QTD +8.65%
Telecom
YTD –6.33%
QTD +1.86%
No reason to think it will change in the near future
44. Major Risks High % placed in IT leaves us open to downside if markets decline
However S&P 500 has high % in IT
A lot of gains have already been missed
Not as much risk in Telecom
Not much on upside either
45. Confidence in Recommendation IT spending expected to increase through next year
IT has upward momentum
e.g. Intel has strong recent upward momentum
Telecom still has overcapacity
e.g. Local Number Portability will cause price wars between wireless carriers
e.g. VoIP growth will erode profits
46. Final Recommendations Telecom – Underweight
-0.45% weight
2.95% of SIM
IT – Overweight
+0.73% weight
18.8% of SIM
Combo – Overweight
+0.28% weight
21.75% of SIM