Information Technology Sector - Max M. Fisher … products at an advanced rate ... Growing Mobile Market ... Information Technology Sector. Recommendation

Information Technology SectorKevin KrayTrimon LamsonCaitlin LeddySimon LustenbergerMichael MarandoMatthew McFadden

Fall 2011

Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendations

Information Technology Sector

General Overview Largest Sector in the S&P 500

Total Market Cap = $3.7 Trillion

SIM Portfolio currently holds 6 sector companies

Sector Performance:


IT Sector S&P 500YTD 6.17% 2.18%QTD 13.57% 13.58%

IT Sector in SIM portfolio is currently 207 basis points above S&P 500

Consumer Discretionary

10.65%

Consumer Staples11.68%

Energy11.63%

Financials13.59%Health Care

12.14%

Industrials10.27%

Information Technology

19.44%

Materials3.36%

Telecom. Services,

3.29%

Utilities3.97%

Cash0% Dividend

Receivables0%

S&P 500 Weight

Consumer Discretionary

8.28%

Consumer Staples12.44%

Energy11.97%

Financials, 9.91%

Health Care12.47%

Industrials8.66%

Information Technology

21.51%

Materials3.05%

Telecom. Services

4.48%Utilities2.84%

Cash4.29%

Dividend Receivables

0.10%

SIM Weight


There are 16 Industries within the Sector Application Software Communications

Equipment Computer Hardware Computer Storage and

Peripherals Electronic Component Electronic Equipment Electronic MNFRG SVC Home Entertainment

Software

IT Consulting and Services

Internet Software and Services

Office Electronics Semiconductor

Equipment Semiconductors Services-Data PROC Systems Software Technology Distribution


10 Largest Companies in the SectorCompany Ticker Market Cap Stock Price*Apple, Inc. AAPL 376.36B 404.95

Microsoft Corporation

MSFT 226.96B 26.98

IBM IBM 220.93B 187.45

Google, Inc. GOOG 194.38B 600.14

Oracle Corporation

ORCL 169.95B 33.69

Intel Corp INTC 131.17B 24.98

Samsung Electronics Co Ltd

SSNLF 119.76B 422.50

Cisco Systems Inc. CSCO 99.91B 18.56

Qualcomm, Inc. QCOM 89.41B 53.23

Sap AG ADR SAP 76.74B 62.54


*As of October 28, 2011

Five Forces Analysis Barriers to Entry: High – Capacity constraints are

the largest driver of this note: product development barriers are relatively

low Supplier Power: Low to Medium – Many options

for large companies to choose from. However, capacity constraints lead to some power for companies like Intel


Five Forces Continued Buyer Power: Depends – Retail buyers have low

power (demand for products drives this). Competition within industries gives some companies power (i.e. Apple buying chips)

Substitutes: High – ex. Many different types of smart phones. However, brand equity and capacity help to mitigate this threat

Competition: Medium – Fierce competition within industries is mitigated by product differentiation (price wars) and capacity constraints, limiting the number of combatants


Life Cycle Highly Cyclical Moore’s Law Product Life Cycles Getting Shorter

both due to, and causing a need for, rapid innovation

Can be Volatile luxury items for individuals, slow demand for

businesses in down economies


Life Cycle Continued Products:

PC’s & Semiconductors: Mature Mobile Products: Growth

Services: Growth

shift to cloud based services, more adoption of technology services in general


Business Cycle Demand Drivers

Innovation Increased Global Adoption Global Economic Growth Competition Global Shift Towards Reliance on Technology Status


External Factors Global Recession

Slowed demand for tech products in 2009. As recovery happens, tech sector is a leader

Increased global adoption of technology Younger generations around the world adopting

tech products at an advanced rate Europe?


User/Geography User:

Younger Generation Businesses/Institutions One last hurrah for Baby Boomers?

Adoption of tech products by the baby boomer generation could have large effects on demand

Geography: Increasingly Global as More Nations Become

Developed Emerging Markets Pose Huge Potential


Sector Profitability High Margins

Premium pricing driven by demand helps bottom line performance for end consumer product manufacturers (as well as pass through pricing)

Volume needs help keep top line revenue strong for input suppliers (Intel, ARM)

Cost reduction across the sector helps to widen margins


Sector Profitability Continued Growing Mobile Market Shift Towards Cloud Based Services

Lowering fixed costs for many, leading to increased availability of capital for spending

Shifting of risk from individual entities to cloud based service providers should help to maintain premium pricing



Real GDP vs. Sector

CPI vs. Sector


Real Consumer Spending vs. Sector


Consumer Spending: Computers & Software vs. Sector


Capital Spending: Communication Equipment vs. Sector


Real Capital Spending: Equipment & Software vs. Sector


Economic Analysis – S&P 500 vs. Sector


Negative Revenue growth in 2009 15% up from Q2 2010 to Q2 2011 Growth rates are projected to be positive for 2011/2012


Financial Analysis – Information Technology

EPS in Info Tech have increased on an annual basis Growth rates are projected to be positive for 2011/2012



12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011

Net Profit Margin 11.27 12.20 11.84 12.90 16.43 16.94

Relative to S&P 500 1.21 1.43 1.83 1.86 1.91 1.83

EBITDA Margin 21.20 21.70 22.60 24.00 27.50 27.60

Relative to S&P 500 0.89 0.85 1.18 1.40 1.47 1.39

ROE 18.80 20.20 22.50 18.70 26.00 26.20

Relative to S&P 500 0.90 1.13 1.50 1.78 1.70 1.62

Equity Risk Premium 4.61 5.75 9.23 7.44 8.02 9.30

Cash Flow per Share 22.21 24.90 27.91 25.23 34.99 40.08


• Margins are growing but benchmark has caught up• ROE and Equity Risk Premium are increasing• High Cash Flow per Share growth since 2009


Financial Analysis – Computer Hardware

Apple (AAPL.I) & HP (HPQ.I) Revenues: latest Quarter (Jun 11) up 25% Earnings: latest Quarter up 68%


Financial Analysis – Computer Hardware

• Margins are lower in comparison with the sector• ROE is higher relative to the sector

12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011


Relative to Info Tech 0.65 0.70 0.73 0.77 0.70 0.77

EBITDA Margin 12.90 14.00 14.80 17.10 17.10 19.50


ROE 21.50 26.60 30.70 30.50 30.60 35.90




Financial Analysis – Internet Software & Services

Google (GOOG.I) Revenues: latest Quarter (Jun 11) up 18% Earnings: latest Quarter up 32%


Financial Analysis – Internet Software & Services

• Margins are higher in comparison with the sector• ROE is lower relative to the sector

12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011



EBITDA Margin 35.60 50.80 36.70 45.00 40.80 40.70


ROE 15.40 17.40 18.60 17.50 17.20 18.40




Financial Analysis – Semiconductors

Intel (INTC.I) Revenues: latest Quarter (Jun 11) up 11% Earnings: latest Quarter up 1%


Financial Analysis – Semiconductors

• EBITDA Margin is higher in comparison with the sector• ROE lags behind the sector

12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 10/31/2011



EBITDA Margin 33.70 28.30 31.10 25.60 39.60 37.00


ROE 16.30 12.20 15.10 6.40 27.10 25.10




Information Tech Valuation


Currently 428.31

Info Tech VS S&P 500 Returns

S&P 500, -6%

IT Sector, 24%


Absolute Basis High Low Median Current

P/Trailing E 25 11.1 17.7 12.8

P/Forward E 22.4 11.3 16.3 12.1

P/B 4.8 2.3 3.8 3.0

P/S 3.0 1.3 2.4 2.2

P/CF 17.7 8.2 11.5 10.2

Relative to SP500 High Low Median Current

P/Trailing E 1.5 .91 1.1 1.0

P/Forward E 1.4 .91 1.1 .99

P/B 1.8 1.3 1.6 1.5

P/S 2.1 1.7 1.8 1.9

P/CF 1.6 1.1 1.2 1.2

Information Technology Sector Multiples



Computer Hardware 25 11.1 17.7 12.8

Internet Software Serv. 37.8 13.7 19.7 13.7

Systems Software 20.3 8.7 13.7 9.5

IT Consulting 181.5 11.1 18.8 14.3

Industry P/Forward Earnings


Computer Hardware 25 11.1 17.7 12.8


Systems Software 7 2.4 4.1 3.2

IT Consulting 4.4 .4 1.4 2.1

Price/Sales


Sector Multiples on an Absolute Basis

Relative S&P 500 High Low Median Current

Computer Hardware 1.3 .78 1.0 .82



IT Consulting 11.6 0.85 1.3 1.1

Industry P/Forward Earnings

Relative S&P 500 High Low Median Current

Computer Hardware 1.5 .9 1.3 1.3



IT Consulting 3.8 0.2 1.3 1.8

Price/Sales


Sector Multiples Relative to S&P 500

Technical Analysis - MACD


Concluding Thoughts We believe the Sector is currently undervalued

The sector is currently priced at a premium relative to the S&P 500

Current year growth of 22% and a 2012 growth of 18% show the strength of this sector compared to the S&P 500, and a long term future growth rate of 14%

Most recent quarter outperformed estimates by 9% Multiples increasing from recession, and we expect

to them to return to median levels


Recommendation Sector Opportunities

Great growth in sector and LT growth rates at 14% Global shift towards more reliance

Sector Risks Price wars between large companies Location concerns and government regulations

Sector is currently undervalued Current SIM holding weight: 21.51% Stay at current weight or increase a maximum of

50 basis points


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Information Technology Sector - Max M. Fisher … products at an advanced rate ... Growing Mobile Market ... Information Technology Sector. Recommendation