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Finance 724/824 Winter 2010 Information Technology Sector Stock Recommendation

Finance 724/824 Winter 2010 Information Technology Sector Stock Recommendation. Team Members: Hanh Bui Vamsi Namburi Hang Nguyen Tejaswi Ponnada Jonathan Schick. Agenda. Recap of Sector Presentation Stock Recommendation: Sell Buy Q&A. Recap Recommendation Sell Buy Q&A . Weight.

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Finance 724/824 Winter 2010 Information Technology Sector Stock Recommendation

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  1. Finance 724/824Winter 2010Information Technology SectorStock Recommendation Team Members: Hanh Bui VamsiNamburi Hang Nguyen TejaswiPonnada Jonathan Schick

  2. Agenda • Recap of Sector Presentation • Stock Recommendation: • Sell • Buy • Q&A Recap Recommendation Sell Buy Q&A

  3. Recap Recommendation Sell Buy Q&A Weight

  4. Recap Recommendation Sell Buy Q&A Recap • As of 02/28/2010, IT is overweight by 90bp • S&P500: 18.77 % • SIM: 19.67 % • Class voted: to increase 26bp

  5. Recap Recommendation Sell Buy Q&A Recommendation • Sell 430bp of IBM • Buy 350bp of RIMM • Buy 50bp of HPQ • Buy 56bp of INTC

  6. Current and Proposed Weights Recap Recommendation Sell Buy Q&A

  7. Recap Recommendation Sell Buy Q&A Research In Motion Life On Blackberry

  8. Recap Recommendation Sell Buy Q&A Background • Canadian company founded in 1984 • Leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide global communications market. • Primary revenue driver: BlackBerry wireless solution • Traditional B2B focus: sales to carriers and services revenues from infrastructure access fee paid by carrier/distributor.

  9. Recap Recommendation Sell Buy Q&A Competitive Advantage • International expansion • Increasing carrier customer base in NAM with 63% revenues generated in United States. • Expect sales to increase in Europe and Asia (China). • Device portfolio • Segmented by multiple price points and feature sets versus Apple’s premium web/application experience offered at a high-end price point.

  10. Recap Recommendation Sell Buy Q&A Competitive Advantage • Innovation • BlackBerry Bold (RIM’s first HSDPA smart phone) • BlackBerry Storm (RIM’s first touch-screen with smart phone with the award-winning SurePress technology) • BlackBerry Pearl Flip (RIM’s first “clam-shell” smartphone) • BlackBerry Curve 8350i (iDen-based smart phone with Push-to-Talk) • BlackBerry Curve 8900 (based on a next generation platform) 2009 R&D expenditure of $684.7 million with 5000 employees and 2 new centers in U.S. and Germany

  11. Competitive Advantage • Unique industry position • The only company to provide network infrastructure as part of an optimized enterprise solution • Vertically integrated and provides both hardware and software (UI, bundled applications) and related services. • Yields strong gross and operating margins with recurring revenue. Recap Recommendation Sell Buy Q&A

  12. Recap Recommendation Sell Buy Q&A Risks • Competition • Intense competition: Google’s Nexus One, Motorola Droid and HTC Eris • Apple moving toward non-exclusive distribution strategy • Well-positioned within existing enterprise accounts but increased competition by Apple, Microsoft, Android and other platforms • International exposure • U.S. sales account for 63% of total revenue, any changes in competitive, economic or regulatory environment could affect sales.

  13. Recap Recommendation Sell Buy Q&A Risks • Increased B2C focus • Consumers demand low security requirements and are unwilling to pay price premium for RIM features • Consumer focus on Internet browsing and “apps” and currently RIM offers sub-par browsing and apps experience. Future success depends on strengthening these offerings • Increased Capital expenditure • Capital spending increased from $350M in fiscal 2008 to $834M in 2009 • Expect to increase- due to new products and “outsourcing” of fundamental research via spending on IP rights

  14. Revenue Growth Recap Recommendation Sell Buy Q&A

  15. EPS Recap Recommendation Sell Buy Q&A

  16. 3 month performance Recap Recommendation Sell Buy Q&A

  17. 1 year performance Recap Recommendation Sell Buy Q&A

  18. 5 year performance Recap Recommendation Sell Buy Q&A

  19. Recap Recommendation Sell Buy Q&A Valuation

  20. Recap Recommendation Sell Buy Q&A Price Target • Current price: $73.39 • Multiples Average: $92.84 • DCF Target Price: $110.10 • 50% Multiples + 50% DCF = $101.47 or 38.2% upside

  21. DCF

  22. HP – Buy 50 basis points • Best performing IT company this month in SIM at 7.9% • Continues to grow through acquisitions • EDS 2008 • 3com 2009 • Becoming the first full service provider • Revised guidance upward for 2010 • Revenues of $121.5-$122.5B vs $118-$119B • EPS of $4.37-$4.44 vs $4.25-$4.35 Recap Recommendation Sell Buy Q&A

  23. DCF

  24. Sensitivity Analysis Recap Recommendation Sell Buy Q&A

  25. Valuation - multiples Recap Recommendation Sell Buy Q&A

  26. Valuation - multiples Price for multiples - $60.53 DCF Target Price - $66.58 50% multiples, 50% DCF - $63.55 or 22.21% Recap Recommendation Sell Buy Q&A

  27. Intel- Buy 56bp • Market Cap: $113.4bn • World largest semiconductor chip maker, market share of over 70% • 80% international sales • 2009 Q4 revenue jumped 28% year-over-year • Benefit from IT spending rebound Recap Recommendation Sell Buy Q&A

  28. DCF

  29. Sensitivity Analysis Recap Recommendation Sell Buy Q&A

  30. Valuation • Current price: $20.79 • Multiples Average: $26.91 • DCF Target Price: $27.58 • 50% Multiples + 50% DCF = $27or 31% upside Recap Recommendation Sell Buy Q&A

  31. Sell IBM • International Business Machines – core focus on providing IT strategy and consulting services to business domains • Competition in all business lines from offshore companies • Increasing dollar value a concern for their revenue from offshore consulting • No sign of potential breakthrough technologies (growing through acquisitions) Recap Recommendation Sell Buy Q&A

  32. Financial Valuations Price Target from Valuation: $135.28 Recap Recommendation Sell Buy Q&A

  33. DCF

  34. Sensitivity Analysis Price Target from DCF: $143.08 Overall Price (50% from both DCF and Valuation) : 0.5*143.08+0.5*135.08 = $139.08 Recap Recommendation Sell Buy Q&A

  35. Stocks Analyzed • Researched stocks in Telecom Sector with focus on low-medium market caps and growth potential

  36. Recap Recommendation Sell Buy Q&A Recommendation • Sell 430bp of IBM • Buy 350bp of RIMM • Buy 50bp of HPQ • Buy 56bp of INTC

  37. Q&A

  38. NCR Discount Rate: 13.2% Terminal FCF Growth: 5% Current : $13.06 DCF Target: $18.14 Upside: 39%

  39. NCR

  40. Oracle Discount Rate 12% Terminal Growth 4% Current $24.76 Price Target $32.84 Upside 33.1%

  41. Oracle

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