Information Technology SectorPresentation By:Lauren IrwinDavid KlinkZachary KramerSteve MeechanJie Meng

Agenda

• Overview• Business Analysis• Economic Analysis• Financial Analysis• Valuation• Recommendation

OverviewSector Market Cap

Energy 1,519,244.02

Materials 439,069.81

Industrials 1,326,284.14

Cons Disc 1,277,817.12

Cons Staples 1,280,016.64

Health Care 1,401,420.16

Financials 1,763,772.85

Info Tech 2,174,726.78

Telecom Svc 363,863.30

Utilities 404,565.98

10.69%

10.71%

12.71%

14.76%

11.73%

11.10%

18.20%

3.67%

3.04%3.39%

S&P 500 by Sector

Cons DiscCons StaplesEnergyFinancialsHealth CareIndustrialsInfo TechMaterialsTelecom SvcUtilities

As of July 14, 2011

Source: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Overview Sector Performance

Source: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Overview

Sector S&P 500 Weight

SIM Weight +/-

Consumer Discretionary 10.69% 10.56% -.13%

Consumer Staples 10.80% 8.48% -2.32%

Energy 12.65% 10.45% -2.19%

Financials 15.22% 13.39% -1.83%

Health Care 11.66% 10.76% -.89%

Industrials 11.03% 11.03% -.01%

Information Technology 17.97% 22.35% 4.38%

Materials 3.60% 3.14% -.45%

Telecommunication Services 3.07% 4.42% 1.35%

Utilities 3.33% 2.37% -.96%

Cash 0.00% 2.81% 2.81%

Dividend Receivables 0.00% .25% .25%

SIM Portfolio

Overview

Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?sector=45&tab=learn

Sector OutlookPositives:• Decent growth prospects for the Technology sector,

reflecting a continuing corporate refresh cycle for PCs

• Significant spending related to mobile and cloud computing

Negatives:• Adverse impact of tablets on the consumer PC

market• Adverse effect of Japan

earthquake/tsunami/nuclear crisis on supplies of key components

• Dollar's recent strength in a sector whose companies often generate considerable overseas revenues

Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?sector=45&tab=learn

Industries within sector• Application Software • Communications

Equipment• Computer Storage and

Peripherals• Computer Hardware• Electronic Component• Electronic Equipment• Electronic MNFRG SVC• Home Entertainment

Software

• Internet Software and Services

• IT Consulting and Services• Office Electronics• Semiconductor Equipment• Semiconductors• Services-Data PROC• Systems Software• Technology Distribution

Business AnalysisDemand:Products have a short life cycle, always moving to the next new

product, competitive industries within sectorClassification of Business cycle• Information Technology is cyclical

▫ Important need to all business▫ Can be volatile

External Factors• Global business and very sensitive to global economyUser and Geography• Ever increasing number of people consumer of technology – young,

adult, business, casual, etc• Most users in North America, Europe and Asia

Supply:• Increasing capacity ▫ Demand growth in high-end electronics▫ Industries are recovered better than expected

from the March earthquake and tsunami in Japan like semiconductor industry

▫ Global chips sales rose 1% in May from a year ago▫ Intel doubled their budget of capital spending

Business Analysis

Profitability and Pricing(risks)• Strong competition▫ Increasing competitors▫ Dominating leaders in each industry (like Intel in

semiconductor industry)• Changeable environment▫ Highly depended on R&D▫ Innovation may change the whole industry

• Consumers demand • Threat of substitutions

Business Analysis

Profitability and Pricing(opportunity)• Economic cycle▫ The whole economy is recovering from the

recession• High profit margin• R&D makes a difference• Acquirement of high-tech products▫ Integration of world increases▫ Big potential market in the world like China and

India

Business Analysis

Profitability OutlookIndustry Earnings expectation Reasons

Semiconductors Increase

demand for tablets and ereaders grows; demand for industrial processors connected to renewable energy grows; the electronic systems grows

Software Increaseinternet use increases; acquisition & merge; function expansion

Storage Netural Short capacity; decrease in price

Consulting Service IncreaseBPO; demand from businesses, nonprofit institutions, and government agencies for outside advice grows

PC & Enterprise Hardware DecreaseExcess capacity; low demand; slow upgrade cycle

Business Analysis

Economic Indicators

Economic Indicators

Economic Indicators

Economic Indicators

Economic Indicators

Economic Indicators

Economic Indicators

EPS and EPS Growth

Current : 30.15 2013e : 34.67Median : 16.16

Current : 37.6%2013e : 11.1%Median : 13.7%

Financial Analysis

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Recent QTR

Apple -33% 7% 8% 33% 68% 39% 24% 35% 32% 52% 83%

Corning -14% -50% -2% 25% 19% 13% 13% 2% -9% 23% 24%

Cisco 18% -15% 0% 17% 13% 15% 23% 13% -9% 11% 5%

HP -7% 25% 29% 9% 9% 6% 14% 14% -3% 10% 3%

IBM -3% -5% 10% 8% -5% 0% 8% 5% -8% 4% 8%

Intel -21% 1% 13% 14% 14% -9% 8% -2% -7% 24% 25%

Microsoft 10% 12% 13% 14% 8% 11% 15% 18% -3% 7% 13%

Oracle -11% -2% 7% 16% 22% 25% 25% 4% 15% 13%

Google 352% 409% 234% 118% 92% 73% 56% 31% 9% 24% 27%

Revenue Growth – Major Companies

Financial Analysis

Sector Net Profit Margin

Financial Analysis

Net Profit Margin Relative to S&P 500

Financial Analysis

Sector Net Profit Margin

• Greater than 10% since mid-2004▫ Only 3 other sectors have managed to top 10%

over the same time period• Currently 16.7%▫ Financials currently 13.4% (only other sector

above 10%)• Consistent growth over the last 10 years• EBITDA Margin has been growing over the same

time period as well (currently 27.7%)▫ 1.4 relative to S&P 500

Financial Analysis

Major Company Operating Margins

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 TTM

Apple -6% 0% 4% 12% 13% 18% 19% 27% 28% 29%

Corning -96% -86% -21% -38% 13% 16% 18% 26% 7% 27% 27%

Cisco -9% 15% 26% 29% 30% 25% 25% 24% 20% 23% 20%

HP 3% -2% 4% 5% 4% 7% 8% 9% 9% 9% 9%

IBM 11% 8% 11% 11% 10% 13% 14% 15% 18% 18% 19%

Intel 9% 16% 25% 30% 31% 16% 21% 24% 16% 36% 35%

Microsoft 46% 42% 41% 25% 37% 37% 36% 37% 35% 39% 39%

Oracle 37% 36% 38% 34% 33% 33% 35% 36% 34% 34% 34%

Google 13% 42% 23% 20% 33% 34% 31% 30% 35% 35% 33%

Financial Analysis

Sector ROE Relative to S&P 500

Financial Analysis

Free Cash Flow – Major Companies2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 TTM

Apple ($47) ($85) $125 $758 $2,275 $1,563 $4,484 $8,397 $9,015 $16,590 $23,283

Corning ($364) ($621) ($233) $152 $386 $621 $810 $207 $1,187 $2,828 $2,399

Cisco $4,121 $3,946 $4,523 $6,508 $6,876 $7,127 $8,853 $10,821 $8,892 $9,165 $9,248

HP $1,034 $3,734 $4,062 $2,962 $6,033 $8,817 $6,575 $11,601 $9,684 $7,789 $9,068

IBM $8,605 $8,313 $10,014 $10,955 $11,072 $9,841 $10,584 $14,641 $17,326 $15,364 $14,562

Intel $1,345 $4,426 $7,859 $9,276 $9,005 $4,841 $7,625 $5,729 $6,655 $11,485 $9,624

Microsoft $12,319 $13,739 $14,906 $13,517 $15,793 $12,826 $15,532 $18,430 $15,918 $22,096 $24,185

Oracle $2,965 $2,732 $2,988 $3,364 $4,305 $5,201 $7,159 $7,726 $8,451 $10,764 $10,764

Google $118 $219 $658 $1,621 $1,678 $3,373 $5,494 $8,506 $7,063 $7,000

Financial Analysis

Valuation

• Technology Sector▫ P/E = 20.5▫ P/B = 6.3▫ P/CF = 37.8▫ P/S = 2.3▫ PEG = 1.43▫ Revenue Growth = 12.0%▫ EPS Growth = 31.6%

Metrics

Technology Sector vs. S&P 500

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0.5

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1.5

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2.5

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3.5

4

4.5

P/E P/B P/CF P/S Revenue Growth EPS Growth

Sector vs. S&P 500

S&P 500

Technology Sector

Valuation

Sector Valuation Metrics Over TimeInformation Technology P/E and P/S

Valuation

Sector Valuation Metrics Over TimeTelecomm P/E and P/S

Valuation

Valuation

P/E P/B P/CF Price / Sales Ratio PEG RatioApplication Software 18.3 11.6 24.0 3.63 1.25Business Software & Services 40.0 10.4 276.4 3.16 2.02Communication Equipment 24.5 5.2 -1617.7 1.95 1.06Computer Based Systems 12.2 3.5 -177.4 1.21 1.42Computer Peripherals 119.5 2.3 -39.8 4.75 0.67Data Storage Devices 22.3 5.9 34.8 1.29 0.38Diversified Communication Services 16.0 -9.1 31.7 2.03 0.39Diversified Computer Systems 18.5 -46.9 61.5 1.67 1.09Diversified Electronics 14.9 2.0 -262.7 2.01 0.38Healthcare Information Services 47.3 30.7 90.2 3.72 0.54Information & Delivery Services 30.5 -4.1 -100.3 3.26 3.15Information Technology Services 23.4 7.7 85.5 2.34 1.41Internet Information Providers 35.0 5.5 132.1 4.06 0.93Internet Service Providers 27.3 4.4 -43.9 2.19 0.14Internet Software & Services 89.9 9.2 146.0 646.97 1.22Long Distance Carriers 15.4 5.4 27.9 1.49 0.36

Metrics

Metrics

P/E P/B P/CF Price / Sales Ratio PEG RatioMultimedia & Graphics Software 247.3 6.2 247.3 2.41 0.33Networking & Communication Devices 17.8 4.1 23.6 3.43 0.39Personal Computers 19.2 6.1 25.7 2.08 0.14Printed Circuit Boards 22.4 2.3 46.5 0.88 0.32Processing Systems & Products 47.0 3.7 49.4 1.45 0.25Scientific & Technical Instruments 28.3 5.9 203.7 2.09 1.1Security Software & Services 21.4 20.0 63.0 4.79 1.02Semiconductor - Broad Line 11.8 3.8 -28.9 2.7 0.11Semiconductor - Integrated Circuits 15.5 3.5 -243.0 2.87 0.29Semiconductor - Specialized 31.8 4.2 119.8 3.4 0.05Semiconductor Equipment & Materials 14.4 2.7 31.4 3.74 0.46Semiconductor- Memory Chips 14.2 2.3 83.1 2.3 0.14Technical & System Software 41.6 9.7 148.9 3.54 1.29Telecom Services - Domestic 13.6 -4.6 905.0 1.63 0.56Telecom Services - Foreign 12.7 6.5 30.6 1.17 10.79Wireless Communications 13.6 3.5 29.0 1.86 1.49

Valuation

Metrics

• 3 biggest industries within the overall technology sector:▫ Information Technology Services (66.0%)▫ Wireless Communications (16.3%)▫ Computer Based Systems (13.2%)

Valuation

IT Services

• Tata Consultancy , TCS, Infosys, Wipro▫ P/E = 23.4▫ P/B = 7.7▫ P/CF = 85.5▫ P/S = 2.34▫ PEG = 1.41▫ Revenue Growth = 11.8%▫ EPS Growth = 37.2%

Valuation

IT Services vs. Overall Sector

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0.2

0.4

0.6

0.8

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1.2

1.4

P/E P/B Price / Sales Ratio PEG Ratio Revenue Growth

Valuation Metrics

Sector Average

Information Technology Services

Valuation

Computer-Based Systems

• IBM, HCL, Psion, Acer▫ P/E = 12.2▫ P /B = 3.5▫ P/S = 1.21▫ PEG = 1.42▫ Revenue Growth = 9.2%▫ EPS Growth = -32.6%

Valuation

Computer-Based Systems vs. Overall Sector

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0.2

0.4

0.6

0.8

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1.2

P/E P/B Price / Sales Ratio PEG Ratio Revenue Growth

Valuation Metrics

Sector Average

Computer Based Systems

Valuation

Wireless

• Vodafone, Telefonica, Bharti Airtel▫ P/E = 13.6▫ P/B = 3.5▫ P/CF = 29.0▫ P/S = 1.86▫ PEG = 1.49▫ Revenue Growth = 10.8%▫ EPS Growth = 30.7&

Valuation

Wireless vs. Overall Sector

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0.2

0.4

0.6

0.8

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1.2

P/E P/B Price / Sales Ratio PEG Ratio Revenue Growth

Valuation Metrics

Sector Average

Wireless Communications

Valuation

Technical AnalysisInformation Technology

Valuation

Technical AnalysisTelecommunications

Valuation

RecommendationPorter’s Five Forces Analysis

• Threat of new entrants: Low because of the presence of dominating leaders and the cost of R&D

• Buyer Power: High – no strong loyalty and many options for consumers

• Substitutes: Low to non-existent

• Supplier Power: Low, due to the nature of the product inputs, easily attainable from multiple sources

• Competition: High, extremely competitive industry with constant push for the new product and short product life-cycles

Recommendation• Economic outlook is slowly getting better,• IT is continually taking a more important role in

businesses• Companies that are entrenched and have a

strong competitive position can take advantage of IT and be in a good position going forward

• IT businesses need to keep investing heavily in R&D to remain at the top

• Biggest risk is overall economic risk, no real worry of regulatory action

• Overall Favorable outlook on IT• Cyclical sector• This group rates this sector as:

Over-weighted

Recommendation