Information Technology - Fisher College of Business

Report
Business Finance 4228/7225
Advanced Investment Analysis
The Stock Market
Summer 2013 Sector Team
Neil Patel
Jeffrey Mulac
Srinath Potlapalli
Overview
SIM vs S&P 500
IT Sector Weight
As of 5/31/2013
S&P500
Information Technology
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecom
Utilities
5.16%
3.35%
2.69%
As of June 30,2013
0%
11.97%
9.17%
15.65%
10.98%
10.71%
IT sector constitutes 18%
of the total S&P500 Weight
and contains 70 companies
19.34%
10.99%
Max market cap: $371,780.10m
Min market cap:
$2,915.10m
Mean Market Cap: $39,179.75m
Med Market Cap: $13,139.98m
SIM
Information Technology
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecom
Utilities
Cash
3.15%
3.27%
1.49%
3.19%
11.78%
17.30%
11.06%
11.48%
9.73%
11.41%
15.96%
IT Sector – Industry
Classification
Broadly Classified into
• Application Software - MS Office, Accounting and Financial Software,
CAD/CAM/CAE Software, ERP Software etc.
• Communications Equipment – Telephone, Radio, Pager, Intercom and Automated
Voice Answering System etc.
• Computer Hardware – Computer CPU, Monitor, Keyboard, Mouse, Monitor, Printer
and Wireless Router etc.
• Semiconductor Equipment – Laser Scanning, Microscope Systems, X-ray and
CT Inspection.
• Semiconductors – Microprocessors, SOC, Ics and Transistors.
• System Software – MS Windows OS, Linux OS, RDBMS, Mobile Device OS,
Antivirus Software.
Five Largest IT Companies
Company
Industry
Market
Cap
Apple Inc
Hardware/Electronic
Equipment
$391.81b AAPL/$417.42
Google Inc
Internet Software &
Services
$296.43b GOOG/$893.49
Microsoft Corp
Systems Software/
Application Software
$285.69b MSFT/$34.21
IBM Corp
IT Consulting & Services
$216.14b IBM/$194.93
Oracle Corp
System Software/
Application Software
$144.43b ORCL/$31.19
As of July 05 2013, IT sector has performed
+ 7.68% YTD
+ 2.09% QTD
Ticker/Share Price
Share price and market cap as of
Jul 5,2013
Business Analysis
Business Analysis
Phase of the life cycle (Information Technology):
•
•
•
•
•
Inception around Word War II(1946).
Significant growth followed in1980’s. Corporate IT Expansion took off in 1990’s.
IT sector is highly cyclical. Nevertheless this sector adds value to the businesses and
consumers alike and attracts significant investment allocations from Corporations
and Government.
We consider IT sector is in Growth to Mature phase.
IT Sector remains ahead of Market in terms of Risk and Return premium.
Information
Technology
IT Sector is mature but constantly
growing with innovation
Business Analysis
Industry
Classification by Business Cycle
Communication
Equipment
Growth but cyclical and irregular. Manufacturing is impacted by foreign markets.
Computer Hardware
PC Hardware industry is in mature phase and is declining .
Smartphone/Mobile devices/Tablets industry is in growth phase and is cyclical.
Server hardware is in growth due to demand in cloud computing and data centers.
Systems Software
Growing with big data and cloud markets as drivers.
IT Consulting and
Services
Mature and cyclical. It’s a globally driven industry.
Internet Software and
Service
High growth and cyclical.
Semiconductor
Equipment
Mature and cyclical.
Semiconductors
Mature and cyclical.
Business Analysis
•
External factors: Global demand and business cycles, business process
outsourcing, government regulations, market volatility, corporate spending, consumer
spending and economic trends such as interest rates.
•
The user and geography: Corporations and government sector, varied consumer
demographics, developed economies, emerging markets.
•
Input/output analysis: Significantly interlinked global economic system. IT sector
can be significantly impacted by global resource supply and global product demand.
IT industries such as hardware and semiconductors that are heavily dependent on
global manufacturing resources are impacted.
•
New capacity and global supply: Capacity demand in - server/cloud markets,
online retailing, Internet software services, wireless networks. Global supply
concentrated in manufacturing, software human resources and knowledge capital,
manufacture of mobile device/smartphone sector.
Business Analysis
Profitability and Pricing
Higher profit margins are due to :
•
•
•
•
Growing sector of mobile devices, tablets and smartphones.
Data center servers and Cloud computing software markets.
Software Services such as big data and BI Analytics.
Mergers and Acquisitions activities.
Pressure on profits and pricing power due to:
•
•
•
•
•
•
•
Maturity in Semiconductor industry and electronic components, goods and services.
Conglomerates. Ex: HP.
Volatility of demand in emerging markets.
IP rights infringement in global IT industry.
Competition and price pressure from foreign manufacturing goods and software services.
Higher R&D costs and manufacturing costs .
IT consolidation.
Business Analysis
Porters Five Force Analysis
Industry
Barriers
to entry
Threat of
Substitutes
Buyer
Power
Supplier
Power
Rivalry
Application
software
Low
High
Medium
Low
High
Communications
equipment
High
Low
High
Medium
High
Computer
Hardware
High
High
Medium
Medium
High
Semiconductor
Equipment
High
High
High
Low
High
Semiconductors
High
Medium
Medium
Low
Low
System Software
Medium
Medium
Medium
Low
High
Economic Analysis
CPI Index
Real GDP
Disposable Income
Durables
Computer Spending
Capital Spending
S&P 500
Key Drivers
•
•
•
•
Real GDP
Durables
Capital Spending
Consumer Spending
Financial Analysis
Information Technology Sector
5 yr historical growth = 8%
Last Qtr = 4%
Last 12 Mths = 5%
Q1 2012 to Q1 2013 = 4.4%
Steady growth Qtr to Qtr and YoY
Information Technology Sector
5 yr historical growth = 18%
Last Qtr = (1%)
Last 12 Mths = 3%
Long term Future Growth = 13%
Q1 2012 to Q1 2013 = (1.1%)
Cyclical sector, positive outlook
Information Technology Sector
Margins Relative to S&P 500
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
EBITDA
Net Margin
ROE
2003
1
1.1
1
2004
1
1.3
1
2005
0.9
1.3
1.1
2006
0.9
1.2
0.9
2007
0.8
1.4
1.1
2008
1.2
1.8
1.5
2009
1.4
1.9
1.8
2010
1.5
1.9
1.7
2011
1.4
1.8
1.6
2012
1.4
1.8
1.6
2013
1.4
1.8
1.5
Computer Hardware (AAPL)
Margins Relative to Sector
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
EBITDA
Net Margin
ROE
2003
0.6
0.7
1.1
2004
0.6
0.6
1
2005
0.6
0.6
1.1
2006
0.6
0.7
1.1
2007
0.6
0.7
1.3
2008
0.7
0.7
1.4
2009
0.7
0.8
1.6
2010
0.6
0.7
1.2
2011
0.7
0.9
1.3
2012
0.8
0.9
1.5
2013
0.8
0.9
1.3
Internet Software & Svcs (GOOG)
Margins Relative to Sector
2.5
2
1.5
1
0.5
0
EBITDA
Net Margin
ROE
2003
1.3
1.6
0.6
2004
1.1
1.3
0.5
2005
1.4
1.2
0.6
2006
1.7
1.6
0.8
2007
2.3
1.6
0.9
2008
1.6
1.6
0.8
2009
1.9
1.6
0.9
2010
1.5
1.4
0.7
2011
1.5
1.4
0.7
2012
1.3
1.2
0.7
2013
1.3
1.2
0.7
IT Consulting Services (IBM)
Margins Relative to Sector
3
2.5
2
1.5
1
0.5
0
-0.5
-1
EBITDA
Net Margin
ROE
2003
0.6
0.5
1.1
2004
0.5
0.2
0.9
2005
0.4
0
0.1
2006
0.3
-0.6
0
2007
0.2
0.2
0.6
2008
0.9
0.4
1.1
2009
0.5
0.9
1.2
2010
0.8
0.9
2.2
2011
0.8
0.8
2.2
2012
0.8
0.8
2.3
2013
0.8
0.8
2.7
System Software (MSFT & ORCL)
Margins Relative to Sector
3.5
3
2.5
2
1.5
1
0.5
0
EBITDA
Net Margin
ROE
2003
2.4
3.3
1.3
2004
2.3
2.8
1.2
2005
2.1
2.3
1.4
2006
2
1.9
1.3
2007
2
2
1.6
2008
1.9
1.9
1.6
2009
1.8
1.8
1.7
2010
1.6
1.5
1.4
2011
1.6
1.5
1.4
2012
1.6
1.6
1.2
2013
1.7
1.6
1.3
Industry Comparison
Net Margin
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
Comp Hdwre
Intnt Soft & Serv
IT Consult
Sys Software
2003
0.7
1.6
0.5
3.3
2004
0.6
1.3
0.2
2.8
2005
0.6
1.2
0
2.3
2006
0.7
1.6
-0.6
1.9
2007
0.7
1.6
0.2
2
2008
0.7
1.6
0.4
1.9
2009
0.8
1.6
0.9
1.8
2010
0.7
1.4
0.9
1.5
2011
0.9
1.4
0.8
1.5
2012
0.9
1.2
0.8
1.6
2013
0.9
1.2
0.8
1.6
Industry Comparison
EBITDA
3
2.5
2
1.5
1
0.5
0
Comp Hdwre
Intnt Soft & Serv
IT Consult
Sys Software
2003
0.6
1.3
0.6
2.4
2004
0.6
1.1
0.5
2.3
2005
0.6
1.4
0.4
2.1
2006
0.6
1.7
0.3
2
2007
0.6
2.3
0.2
2
2008
0.7
1.6
0.9
1.9
2009
0.7
1.9
0.5
1.8
2010
0.6
1.5
0.8
1.6
2011
0.7
1.5
0.8
1.6
2012
0.8
1.3
0.8
1.6
2013
0.8
1.3
0.8
1.7
Industry Comparison
ROE
3
2.5
2
1.5
1
0.5
0
Comp Hdwre
Intnt Soft & Serv
IT Consult
Sys Software
2003
1.1
0.6
1.1
1.3
2004
1
0.5
0.9
1.2
2005
1.1
0.6
0.1
1.4
2006
1.1
0.8
0
1.3
2007
1.3
0.9
0.6
1.6
2008
1.4
0.8
1.1
1.6
2009
1.6
0.9
1.2
1.7
2010
1.2
0.7
2.2
1.4
2011
1.3
0.7
2.2
1.4
2012
1.5
0.7
2.3
1.2
2013
1.3
0.7
2.7
1.3
Valuation Analysis
Absolute Valuation
IT Sector
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
41.5
30.8
4.8
3.3
17.9
Low
Median Current
11.1
19.1
14.0
11.3
17.1
13.3
2.3
3.8
3.2
1.3
2.4
2.3
8.2
13.1
10.6
• IT sector is undervalued compared to its historical valuation
• P/E ratios are leaning towards historical lows
Relative Valuation
IT Sector
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.1
1.6
1.8
2.1
1.6
Low
Median Current
0.9
1.2
0.9
0.9
1.2
0.9
1.2
1.5
1.4
1.5
1.8
1.6
1.0
1.2
1.1
• IT sector is undervalued compared to the market when looking at P/E
• IT sector is lower than its historical median for every ratio (relatively at
historical lows for P/E)
Valuation
Current
Absolute Basis
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
S&P 500 IT Sector
15.3
14.5
2.4
1.4
10.1
14.0
13.3
3.2
2.3
10.6
Apple Microsoft
Google
IBM
Oracle
Computer Systems Internet Software IT Consulting Application
Hardware Software
& Services
& Services Software
10.3
12.3
21.1
13.0
12.7
10.8
11.6
18.5
11.8
11.8
3.4
3.5
4.0
10.6
3.2
2.4
3.9
5.3
2.2
4.3
9.1
10.7
16.9
10.2
10.3
• Differences between large companies within sector
• Apple undervalued?
• Google overvalued?
Recommendation
Recommendation
• Overweight IT Sector in SIM portfolio by 100-200bps
above S&P 500 weightage
• Positives:
– IT Sector is underperforming the market by 7-8% YTD (buying
opportunities)
– Continued growth in the future
– Improving economic conditions in the U.S.
• Risks:
– Slowing growth in developing countries (mainly China and India)
– Economic condition of Europe
– Projected slowdown of government spending in U.S.
Recommendation
• Overweight:
– Application and systems software (big data software growing in
demand)
– Hardware (mobile sales continue to grow)
– Internet software and services (cloud computing)
• Underweight:
– PC semiconductors and equipment (decreasing demand)
– PC hardware (decreasing demand)
– IT consulting & services
Questions?

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