Team Members: Hanh Bui
Vamsi NamburiHang Nguyen
Tejaswi PonnadaJonathan Schick
• General Information• Business Analysis• Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation
Agenda
• 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%
General Information
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
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
Industries (as percentage of S&P 500)
Information Technology Industries 18.80% SIM
Computer Hardware 5.03% IBM, HP
Systems Software 3.69%
Communication Equipment 2.51%
Semiconductors 2.19% INTEL
Internet Software and Services 1.90%
Services- Data Procedure 1.37%
Computer Storage/ peripheral 0.67%
Application Software 0.50% Oracle
Electronic Component 0.37%
Semiconductor Equipment 0.29%
IT Consulting and Services 0.20% NCR
Electronic Equipment 0.15%
Office Electronics 0.08%
Electronic Manufacturing Services 0.06%
Home Entertainment Sofware 0.06%
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
• 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
Major Industries
Largest Companies (by Market Cap- B)
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Performance(as of Feb 22, 2010)
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Index Name Daily Annualized (as of Jan 21, 2010)
1 Day MTD QTD YTD 1 Year 3 year 5 Year
TOTAL RETURNS
S&P 500 (TR) -0.10% 3.38% -0.34% -0.34% 33.14% -7.24% 18.00%
PRICE RETURNS
S&P 500 -0.10% 3.18% -0.64% -0.64% 30.03% -9.28% -1.89%
PRICE RETURNS BY SECTOR
Energy -1.32% 2.66% -1.96% -1.96% 9.74% -2.80% 6.73%
Materials -0.47% 6.31% -2.90% -2.90% 43% -6.91% 0.56%
Industrials 0.06% 4.84% 3.57% 3.57% 32.64% -9.78% -3.15%
Cons Disc -0.13% 4.31% 1.23% 1.23% 50.70% -9.84% -3.11%
Cons Staples -0.15% 3.25% 1.96% 1.96% 18.93% -0.30% 2.49%
Health Care -0.08% 0.29% 0.71% 0.71% 19.10% -3.15% 1.41%
Financials 1.14% 3.09% 1.57% 1.57% 53.98% -27.39% -13.82%
Info Tech -0.28% 4.55% -4.28% -4.28% 51.05% -2.12% 1.68%
Telecom Svc -0.26% -0.45% -9.73% -9.73% 4.64% -13.38% -2.71%
Utilities -0.65% -0.09% -5.19% -5.19% 2.19% -6.92% 0.77%
• 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
Business Analysis
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
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
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
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
• Monopoly Characteristics in Short Run • Premium Pricing during launch. Prices fall
down as other firms catch up.
MC=MR
Monopoly Price
Monopoly Gain
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Economic Analysis
Examples
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Info Technology
Business Cycle
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
World Wide User Spending(Billions of US Dollars)
Region 2007 2008 2009 2010 2010 (%)United States 929 957.2 932.1 958.3 2.8%Canada 74 77.7 71.3 74.7 4.7%Latin America 222 250.7 236.4 257.1 8.8%Western Europe 872 906 811.9 836.1 3%Eastern Europe 148 170.2 142.6 140.5 -1.5%Middle East & Africa 192 205.7 205.7 217.1 5.6%Japan 273 301.3 306.7 304.5 -0.7%Asia Pacific 472 503.6 490.9 515.6 5%
Total 3,156 3,372.2 3,197.6 3,304 3.3%
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Source: http://www.gartner.com/it/page.jsp?id=1209913
Key Factors• 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
YTD & 1 Year Variations
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Employment vs. Technology
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
R=0.46
Capital Spending vs. TechnologyR=0.67
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Technology
Consumer Confidence vs. TechnologyR=0.65
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Consumer Spending vs. TechnologyR=0.68
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Velocity Of Money vs. TechnologyR=0.67
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Federal Funds Rate vs. TechnologyR=0.67
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Real GDP vs. TechnologyR=0.35
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
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
Source: http://www.readwriteweb.com
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Financial Analysis
Absolute margin High Low Median Current
EBITDA 25.3 18.8 21.4 25.3
Net profit 12.2 5.0 11.1 11.5
ROE 22.5 9.8 18.7 20.8
Financial Analysis
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Margin ~ SP500 High Low Median Current
EBITDA 1.4 .8 1.0 1.4
Net profit 1.8 .8 1.3 1.8
ROE 1.8 .6 1.1 1.7
Financial Analysis
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
EPS High Low Median Current
Absolute value 24.97 4.98 15.21 16.75
Relative to SP500 40.80 -43.00 0.00 1.10
Financial Analysis
Current 16.75
Expected 24.97
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Absolute Basis High Low Median Current
P/Trailing E 74.6 11.1 24.3 20.3
P/Forward E 64.7 12.1 21.6 15.0
P/B 15.1 2.3 4.0 3.5
P/S 6.7 1.3 2.6 2.3
P/CF 40.8 8.2 15.5 12.4
Relative to S&P 500 High Low Median Current
P/Trailing E 2.6 .91 1.4 1.1
P/Forward E 2.7 .98 1.4 1.1
P/B 3.0 .9 1.4 1.7
P/S 3.0 1.5 1.8 2.0
P/CF 2.5 1.1 1.4 1.2
Valuation Analysis
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Price / Earnings Trailing
Relative to S&P
High 2.6
Low .91
Median 1.4
Current 1.1
Absolute
High 74.6
Low 11.1
Median 24.2
Current 20.4
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Price / Earnings Forward
Relative to S&P
High 2.7
Low .98
Median 1.4
Current 1.1
Absolute
High 64.7
Low 12.1
Median 21.5
Current 15.0
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Price / Book
Relative to S&P
High 3.0
Low .9
Median 1.4
Current 1.7
Absolute
High 15.1
Low 2.3
Median 4.0
Current 3.6
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Price / Sales
Relative to S&P
High 3.0
Low 1.5
Median 1.8
Current 2.1
Absolute
High 6.7
Low 1.3
Median 2.6
Current 2.3
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Price / CF
Relative to S&P
High 2.5
Low 1.5
Median 1.4
Current 1.3
Absolute
High 40.8
Low 8.2
Median 15.5
Current 12.5
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Technical Analysis
•Broke 50 day moving average in January •In an upward trend
Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis
Positive
• 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
Negative
• Uncertainty in the economy• GDP expectations unclear
RecommendationCurrently we are 24 basis points above S&P and we recommend to INCREASE by 26 Basis Points
Q&A