IT Sector Presentation Spring 2006 Divya Mirchandani Jake Monk Sameem Lutfi Pat McAuley Suk-Ho Lee.
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Transcript of IT Sector Presentation Spring 2006 Divya Mirchandani Jake Monk Sameem Lutfi Pat McAuley Suk-Ho Lee.
IT Sector PresentationSpring 2006
Divya Mirchandani
Jake Monk
Sameem Lutfi
Pat McAuley
Suk-Ho Lee
Agenda
• Size and Composition
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Size
• Size of the Sector– $1.88 Trillion
• Percentage of S&P 500– 15.29%
• Percentage of Current Holdings– 16.83%
Industries in IT Sector
Industry Market Cap Industry Market Cap
Application Software 463.6B Multimedia & Graphics Software 36.2B
Business Software & Services 195.3B Networking & Communication Devices 153.0B
Communication Equipment 433.1B Personal Computers 121.1B
Computer Based Systems 15.3B Printed Circuit Boards 32.7B
Computer Peripherals 40.1B Processing Systems & Products 50.9B
Data Storage Devices 72.7B Scientific & Technical Instruments 121.7B
Diversified Communication Services 180.7B Security Software & Services 18.2B
Diversified Computer Systems 247.5B Semiconductor - Broad Line 277.4B
Diversified Electronics 117.5B Semiconductor - Integrated Circuits 163.5B
Healthcare Information Services 10.7B Semiconductor - Specialized 77.4B
Information & Delivery Services 20.9B Semiconductor Equipment & Materials 100.4B
Information Technology Services 65.8B Semiconductor- Memory Chips 35.5B
Internet Information Providers 186.4B Technical & System Software 63.2B
Internet Service Providers 7.4B Telecom Services - Domestic 337.2B
Internet Software & Services 160.3B Telecom Services - Foreign 754.1B
Long Distance Carriers 945.8M Wireless Communications 604.6B
Largest Companies in the Sector• 1. Microsoft (MSFT) - $251.0B• 2. Vodafone Group (VOD) - $152.0B• 3. Cisco Systems (CSCO) – $128.9B• 4. International Business Machines (IBM) - $127.5B• 5. Google (GOOG) - $118.6B• 6. China Mobile Hong Kong (CHL) - $115.4B• 7. Intel (INTC) - $114.7B• 8. AT&T (T) - $101.5B• 9. Verizon Communications (VZ) - $96.0B• 10. Nokia (NOK) - $92.6B
Performace
• YTD– Sector: 3.17%– S&P 500: 6.21%
• QTD– Sector: (0.81%)– S&P 500: 2.39%
Business Analysis
• Currently between growth and mature depending on industry within sector
• Changes are fast, when shift occurs, companies can find themselves in hardship if they did not adjust accordingly
Business Analysis
• Hardware sales in U.S. have lulled, especially in P.C. market
• Viability of hardware portion coming from emerging markets
• Software and services portion of the sector, U.S. economy not as much a factor as companies are constantly upgrading software to increase efficiency
Business Analysis
• Profitability– Hardware in high supply, almost a commodity– Competition is stiff driving prices and margins
down
• Industry players– Generally dominated by a few big companies– Niche companies can exist– Copycat industry
Business Analysis
• Ease of Entry: Difficult– Due to high start up costs– The need for intellectual capital– High cost of capital
• Power of suppliers: Weak– Many suppliers– Inputs for end product are generally simple
• Power of buyers: Strong– Breadth of tech choices for productivity
Business Analysis
• Threat of Substitutes: Medium– Varies from industry to industry– Hardware is generally high– Application specific devices low
• Competition: Intense– Intense rivalry for selling products at lower prices– Some companies make most profit on sale of
accesories
Regression Analysis: SP-45 vs. SP5A• Significantly high
Correlation with the Market, as represented by the SP-500.– R-Square = 0.78– T-stat = 14.18– P-Value = 7.51E-20
Regression Analysis: SP-45 vs. SP5A (t-1)
• No significant relationship when you incorporate a 1 month lag factor. Relationship strongest when we run the contemporaneous regression.
CPI (Computers) vs. SP45 (Total Return)
• No significant Relationship– Low R-square– Relatively low t-stat and Coefficient
Economic Analysis(SP-45 vs. GDP)
• Very low correlation with most economic indicators.• Sector functions fairly independent of economic
indicators such as Interest Rates, Inflation, Unemployment.
• However, highly correlated with the GDP and S&P 500
Income Statement Analysis
Net Income Ratios
Revenue AnalysisS&P INFO TECH. SECTOR COMPOSITE ADJ M-Wtd (SP-45)StockVal® DATE 05-05-2006
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
REVENUES ($BIL)
1212
1313
1515
1717
1919
2121
2323
2626
2929
32
36
40
4%
8%
12%
16%
NPM
TAX7 8 6 7 5 5 6 8 10 9 10 10 11 13 7 5 8 10 11
33 33 32 29 59 35 30 35 36 35 36 43 35 34 26 22 23 31 29
FYEDec
Growth & MarginsProspective Growth & Margin Check StockVal ®
M-Wtd (SP-45)Price 24.940 05/05/06 Earnings Adjustments
Percent Change Actual Year Profit Momentum %
Quarter Revenue REV RPS EARN EPS EPS Ago Margin % SF REV EPS
Jun 04 7,858.9 14 14 76 77 0.20 0.11 10.3 0 +13 +55
Sep 04 7,771.3 11 12 43 44 0.20 0.14 10.5 0 +10 +34
Dec 04 8,545.2 7 10 21 24 0.25 0.20 11.5 0 +7 +25
Mar 05 8,140.5 7 11 12 15 0.21 0.19 10.4 0 +7 +13
Jun 05 8,288.0 5 9 14 19 0.24 0.20 11.2 0 +5 +17
Sep 05 8,225.2 6 9 13 17 0.24 0.20 11.2 0 +6 +15
Dec 05 8,787.8 3 8 10 16 0.29 0.25 12.4 -1 +3 +17
Mar 06 8,679.7 7 9 15 17 0.25 0.21 11.2 0 +6 +15
T4Q 33,980.7 5 9 13 17 1.01 11.5
Jun 06 E 13 14 0.27 0.24 +13
Sep 06 E 18 19 0.28 0.24 +17
Dec 06 E 21 19 0.34 0.29 +20
Mar 07 E 24 24 0.31 0.25 +21
F4Q E 19 19 1.20
Point-to-Point Growth Rates (%) Long-Term Growth Rate Estimates (%)
Years REV RPS EARN EPS Median Estimate 14.0%
1 5 9 13 17 Number of Estimates 11
3 8 10 34 37 Standard Deviation 5
5 1 3 1 3 Default GRE Estimate 11.0%
10 5 6 7 8 Analyst GRE Estimate 11.0%
15 6 7 10 11
20 5 3 7 4 Expected Report Date
Balance Sheet Analysis
Cash Flow Analysis
Valuation Analysis
Valuation Analysis
Valuation Analysis
Valuation Analysis
Recommendations
• Recap– Percentage of S&P 500,15.29%– Percentage of Current Holdings, 16.83%
• With performance of IT sector this quarter, Percentage of Current Holdings should decrease closer to S&P weighting – 14.5%