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Finance 724/824 Winter 2010 Sector Presentation Information Technology

Finance 724/824 Winter 2010 Sector Presentation Information Technology. Team Members: Hanh Bui Vamsi Namburi Hang Nguyen Tejaswi Ponnada Jonathan Schick. Agenda. General Information Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation.

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Finance 724/824 Winter 2010 Sector Presentation Information Technology

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

  2. Agenda • General Information • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation

  3. General Information • Market Cap: 114.8 B • 15 industries • Largest weight • Highly cyclical • Performance in S&P 500 • Annualized: 51.05% (2nd) • YTD: -4.01% • MTD: 4.85% Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  4. Weight • SIM over weighed by 24 basis points • Among SIM Fund’s Top Holdings, 4 from IT: Oracle, IBM, HP and Intel Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  5. Industries (as percentage of S&P 500) Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  6. Major Industries • Computer Hardware: (IBM, Dell, Apple) • Companies that design and manufacture peripheral devices, storage systems etc • Generated total revenues of $411 billion in 2008, representing a CAGR of 4.8% for the period spanning 2004-2008. • Systems Software: (Oracle, Microsoft, SAP, Adobe) • Companies that make Device drivers, Operating Systems, servers etc. • Demand for Open-Source and On-Demand Software • Communication Equipment: (Nokia, Siemens, Ericsson) • Companies engaged in making telephones, modems, wireless, decoders • Product ecosystem consists of – Board and chassis market, middleware, Applications/Service Software. • Semiconductor Industry: (Intel, AMD) • Computing market drives semiconductor sales. • APAC region (excluding Japan) accounts for 53% of total semiconductor sales. Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  7. Largest Companies (by Market Cap- B) Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  8. Performance(as of Feb 22, 2010) Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  9. Business Analysis • Primary drivers are innovation, cost reduction, customer service and breakthrough technologies • Dominated by Computer Hardware and System Software industries (r=0.74) followed by Communication Equipment and Semiconductors • Highly diverse with companies in growth, mature phase • High economies of scale and so marginal costs are minimal • Rebalance between Customer Retention and Customer Acquisition Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  10. Technology drives the world! • Technology is now a need to be competitive in any sector • All domains within a company use technology as a key driver • Company spending on IT forecast to increase 3.3% • Few dominant players in each industry within the sector • Dependence on cutting edge technology leads to enormous R&D costs. Huge R&D costs means high barriers to entry • Few industries are exceptions • Huge threat of substitutes and piracy • No serious threat of new entrants Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  11. Growth Indicators • Highly cyclical sector with large impact on SIM • Potential for huge growth during market recovery phases • Largely impacted by Customer and Corporate Spending • Average life cycle for products falling rapidly • Business Intelligence Solutions • Innovative products Examples: Apple’s iPad, Google’s Nexus Apple iPad Google Nexus Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  12. Keeping up with the Growth • Huge growth potential in developing economies • Personal laptops, iPhones vastly used • Cell Phone usage growing at 10 million per month in India • First mover advantage is the key to grab market share • Huge threat of substitutes from major competitors with minor enhancements • Technology gets cheaper and outmoded • Keeping with the rapidly changing Customer needs and opportunities – Cell Phones used as PC’s to store music, photos, memory etc. Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  13. 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 • Depends on Consumer Spending • GDP growth Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  14. Economic Analysis • Monopoly Characteristics in Short Run • Premium Pricing during launch. Prices fall down as other firms catch up. Monopoly Gain Monopoly Price MC=MR Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  15. Examples Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  16. Business Cycle Info Technology Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  17. World Wide User Spending(Billions of US Dollars) Source: http://www.gartner.com/it/page.jsp?id=1209913 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  18. KeyFactors • B2B category (Oracle, SAP, IBM, HP) depends on Company Budget Allocations and GDP growth • Companies spend forecasted to increase 3.3% in 2010 • B2C (Dell, Apple, HP) depends mainly on Consumer Confidence and Consumer Spending • Lot of untapped potential in developing economies Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  19. YTD & 1 Year Variations Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  20. Employment vs. Technology R=0.46 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  21. Capital Spending vs. Technology R=0.67 Technology Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  22. Consumer Confidence vs. Technology R=0.65 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  23. Consumer Spending vs. Technology R=0.68 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  24. Velocity Of Money vs. Technology R=0.67 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  25. Federal Funds Rate vs. Technology R=0.67 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  26. Real GDP vs. Technology R=0.35 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  27. Economic Analysis Summary • GDP (very cyclical) • Globalization • Corporate Profits • Consumer Confidence– need strong economy with consumer participation Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  28. Financial Analysis Source: http://www.readwriteweb.com Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  29. Financial Analysis Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  30. Financial Analysis Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  31. Financial Analysis Expected 24.97 Current 16.75 Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  32. Valuation Analysis Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  33. Price / Earnings Trailing Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  34. Price / Earnings Forward Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  35. Price / Book Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  36. Price / Sales Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  37. Price / CF Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  38. Technical Analysis • Broke 50 day moving average in January • In an upward trend Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis

  39. Recommendation Currently we are 24 basis points above S&P and we recommend to INCREASE by 26 Basis Points Positive Negative Uncertainty in the economy GDP expectations unclear • Consumer Spending is growing in Global Markets • Last Year returns of 51% • Companies spending more on R&D (Buzz and iPad’s) • Target Prices show upside potential • IT spending is forecasted to increase 3.3% in 2010 vs. 5.2% decline in 2009

  40. Q&A

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