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Information Technology Sector. Finance 724/824 SIM Class Autumn 2009. Scott McGrath John Morgan Denise Morrison. A Presentation By:. Agenda. Sector Information Business Analysis Performance / Economic Indicators Valuation Recommendation. S & P 500 By Sector.
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Information Technology Sector Finance 724/824SIM Class Autumn 2009 Scott McGrath John Morgan Denise Morrison A Presentation By:
Agenda • Sector Information • Business Analysis • Performance / Economic Indicators • Valuation • Recommendation
S & P 500 By Sector Info Technology Sector is Currently Overweight by 288 Basis Points
SIM Portfolio By Sector 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
SIM Info Technology Stocks IndustrySIM Stocks Application Software Computer Hardware IBM, Hewlett-Packard, NCR Internet Software & Services IT Consulting & Services Computer Storage Equipment Electron Instruments Networking Equipment Office Electronics Semiconductors Intel Systems Software Microsoft, Oracle
Market Cap: $Billions Largest CompaniesMarket Cap (Billions) 1) Microsoft 253.7 2) Apple 173.8 3) Google 173.7 4) IBM 161.4 5) Cisco Systems 138.0 6) Hewlett-Packard 115.8 7) Oracle 106.8 8) Intel 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
Key Drivers • GDP (very cyclical) • Globalization • Corporate Profits • Consumer Confidence– need strong economy with consumer participation
Valuation: Info Tech Sector Green= Cheap Red= Expensive
Valuation: Info Tech Sector Green= Cheap Red= Expensive
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