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Information Technology

Information Technology. Greg Price Greg Shaskus Min Shen Matt Sims Chris Stuart. Recommendation. 100 bps increase in SIM allocation for IT resulting in 227 bps overweight Support: Sector Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis.

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Information Technology

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  1. Information Technology Greg Price Greg Shaskus Min Shen Matt Sims Chris Stuart

  2. Recommendation • 100 bps increase in SIM allocation for IT resulting in 227 bps overweight Support: • Sector Size and Composition • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis

  3. Sector Overview • Largest Weight • 16 Industries • Highly Cyclical • Revenues up 8% last quarter • EPS up 56% last quarter • Estimated 63% increase in earnings this quarter Source: Standard and Poors

  4. SIM Sector Allocation • Currently 127 Basis points overweight S&P 500

  5. Industries • By Market Cap:

  6. Industry Performance • By revenue growth:

  7. Industry Performance • By earnings per share growth:

  8. Industries: Summary • Attractive industries: • Semiconductor Equipment • Data Services • IT Consulting • Computer Hardware (HPQ, NCR) • Semiconductors (INTC) • Communications Equipment (RIMM) • Industries to Avoid: • Home Entertainment Software • Systems Software (ORCL) • Electronic Equipment • Electronic Manufacturing

  9. Largest Companies • 10 largest companies in S&P 500:

  10. Sector Performance

  11. Business Analysis • Sector growth depends on • Innovation • Technological advancement • Cost reduction • Highly diverse with companies in growth and mature phases • Few dominant players in each industry within the sector • Dependence on cutting edge technology leads to enormous R&D costs • R&D spending is 2.5 times of the automotive industry and more than 3 times of the pharmaceutical industry • R&D costs largest barrier to entry • Huge threat of substitutes and piracy

  12. Business Analysis (cont.) • Highly cyclical sector with large impact on SIM • Tends to have large growth during market recoveries • Can be highly volatile • Affected by customer and corporate spending • Signals point that both are increasing • Intel’s most recent earnings forecast signals a rebound in corporate IT spending • The iPad sold over 1 million units in just 28 days

  13. Business Analysis (cont.) • Growth potential in the smart phone and tablet market • Apple, Google, and RIM dominate the market making it difficult for other companies to be successful • Increased competition will decrease prices and result in lower margins • Growth potential in India, China, and Africa • As penetration rates approach 90% in developed regions companies look for new opportunities

  14. Business Analysis (cont.) • Other growth opportunities • Microsoft Office 2010 to be released in June • IT Solution Services • Risks of W-recession or unstable recovery • Last Thursday and Friday was a perfect example • Tech stocks were hit hard • Many lost all of their gains for the year

  15. Business Analysis Summary • Long-term • IT growth opportunities outweigh risks • Demand will continue to increase • IT becoming a business staple with massive growth potential • Short-term • Corporate spending/profits continue to increase • GDP growth

  16. Stovall’s guide to S&P Sector Rotation

  17. Stovall’s Sector Rotation • IT generally does well where business is down, unemployment is up, GDP is down, interest rates are falling and consumer expectations are down. • Fundamentals of companies can be influenced greatly by the surrounding economy • Business Cycle is used to understand the present position of the cycle and to predict what areas of the economy will be stronger in the future. • Strategy is to buy into a sector that is about to take off and sell at the peak.

  18. Capital Spending V. IT Sector

  19. Federal Funds Rate V. IT Sector

  20. Velocity of Money V. IT Sector

  21. Consumer Confidence V. IT Sector

  22. Consumer Spending V. IT Sector

  23. Employment V. IT Sector

  24. Real GDP V. IT Sector

  25. Market Pyramid

  26. Railroad: Total International Traffic

  27. Revenue (Indexed)

  28. EBITDA Margin Sector Relative to S&P 500

  29. Net Profit Margin Relative to S&P 500 Sector

  30. EPS Growth (yr over yr) Sector Relative to S&P 500

  31. Return on Equity Sector Relative to S&P 500

  32. Financial Analysis • Strong overall performance • Growth potential within sector • EPS projections • Sector rotation

  33. Sector Valuation: Info Tech (22 years) Green= Cheap Red= Expensive

  34. Sector Valuation: Info Tech (22 years) Green= Cheap Red= Expensive

  35. Sector Valuation: Info Tech (5 years) Green= Cheap Red= Expensive

  36. Sector Valuation: Info Tech (5 years) Green= Cheap Red= Expensive

  37. Industry Valuation: Computer Hardware (HPQ, NCR) Green= Cheap Red= Expensive

  38. Industry Valuation: Computer Hardware (HPQ, NCR) Green= Cheap Red= Expensive

  39. Industry Valuation: Semiconductor (INTC) Green= Cheap Red= Expensive

  40. Industry Valuation: Semiconductor (INTC) Green= Cheap Red= Expensive

  41. Industry Valuation: Systems Software (ORCL) Green= Cheap Red= Expensive

  42. Industry Valuation: Systems Software (ORCL) Green= Cheap Red= Expensive

  43. Industry Valuation:Communications Equipment (RIMM) Green= Cheap Red= Expensive

  44. Industry Valuation:Communications Equipment (RIMM) Green= Cheap Red= Expensive

  45. Conclusions Based on Valuation: • Sector as a whole and most industries within are currently undervalued; • Economy likely to pick up, upside potential in this sector.

  46. Recommendation • 100 bps increase in weight to 227 bps overweight • Top-line growth prospects: Office electronics, Data Services, Electronic Equipment, Semiconductor Equipment industries • Current phase of business cycle favors investment in the IT sector • Sector as a whole and the industries are currently undervalued

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