Information Technology Sector

Scott McGrath John Morgan Denise MorrisonA Presentation By:

Finance 724/824SIM Class

Autumn 2009

Agenda

• Sector Information

• Business Analysis

• Performance / Economic Indicators

• Valuation

• Recommendation

Info Technology Sector is Currently Overweight by 288 Basis Points

S & P 500 By Sector

Info Technology Sector is Currently Overweight by 288 Basis Points

SIM Portfolio By Sector

Information Technology

• Largest sector in S&P 500– Both by weighting and market cap– Highest performing sector YTD

SectorMarket Cap

(in $Mill) QTD YTDInfo Tech 1,830,673 4.95% 51.96%

Financials 1,411,209 -0.87% 18.15%

Helat Care 1,200,285 3.14% 11.25%

Energy 1,177,157 7.73% 14.13%

Cons Staples 1,124,491 4.33% 11.32%

Industrials 1,000,311 3.61% 15.97%

Cons Desc 896,499 4.35% 33.34%

Utilities 347,528 0.05% 0.73%

Materials 335,484 2.60% 39.39%

Telecom 290,830 -1.72% -4.72%

Industry SIM StocksApplication SoftwareComputer Hardware IBM, Hewlett-Packard, NCRInternet Software & ServicesIT Consulting & ServicesComputer Storage EquipmentElectron InstrumentsNetworking EquipmentOffice ElectronicsSemiconductors IntelSystems Software Microsoft, Oracle

SIM Info Technology Stocks

Information Technology:Industry Performance

  QTD YTD 2008

S&P 500 1.20 18.40 -38.49DOW JONES 30 3.20 14.20 -33.84NASDAQ 100 0.70 42.80 -41.89

 INFO TECH SECTOR:  IT CONSULTING & SVC 11.20 138.10 -52.64ELECTRONIC MNFRG SVC -1.10 69.60 -54.79INTRNET SOFTWR & SVC 6.50 68.10 -54.59COMPU STORAGE/PERIPH 0.40 65.40 -44.67COMPUTER HARDWARE 3.50 64.80 -40.59TECHNOLOGY DISTRIB -0.80 51.60 -46.28ELECTRONIC COMPONENT 2.40 50.90 -48.29APPLICATION SOFTWARE 4.80 50.60 -45.33COMMUNICATIONS EQUIP -0.10 44.10 -40.58SEMICONDUCTORS -4.20 38.10 -46.92SYSTEMS SOFTWARE 7.50 37.20 -38.29ELECTRONIC EQUIPMENT -3.30 34.50 -57.46SERVICES-DATA PROC 4.80 28.30 -31.14SEMICONDUCTOR EQUIP -9.30 27.10 -60.28HOME ENTMT SOFTWARE -0.30 18.50 -72.54OFFICE ELECTRONICS 2.50 -0.50 -50.77

Market Cap: $Billions Largest Companies Market Cap (Billions)

1) Microsoft 253.72) Apple 173.83) Google 173.74) IBM 161.45) Cisco Systems 138.06) Hewlett-Packard 115.87) Oracle 106.88) Intel 105.7

Only other Info Technology stock we own is NCR with a market cap of 1.6 Billion

Business Analysis- Info Technology• Sector growth depends primarily on

technological advancement and innovation.– Unpredictable: what is hot today may be

obsolete in 6 months

• Dependence on cutting edge technology leads to enormous R&D costs– These R&D costs are the largest barrier to

entry

Business Analysis (cont.)

• Cyclical Sector with large impact on S&P500– Tends to follow market cycles, can be highly volatile– Can be a leading indicator during recovery, growth periods

• Largely impacted by Corporate and Consumer Spending– Current Corporate/Consumer spending is down– mixed reviews

on when this starts to recover– Some analysis suggests IT spending takes 7-9 quarters

following the trough in the cycle (Q209) to return to consistent YOY growth

Business Analysis (cont.)

• Information Technology Life Cycle – primarily impacted by the life cycle of PCs– PCs’ typical life-span = 3-5 yrs (physically longer, however obsolete)

• Demand – largely affected by developed countries, growth potential in under-developed countries– 60% of all PCs owned by 15% of the world-wide population1

• LOTS of untapped demand

– Increasing handheld device demand/infrastructure• Tel-com sector expanding infrastructure and increased cell phone

capabilities desired

1: www.garnter.com (June 23, 2008)

Business Analysis (cont.)• Growth OpportunitiesOpportunities

– US Healthcare reform (Electronic Patient records)

– Windows 7/Office 2010/Snow Leopard

– Increased Corporate Spending/ Profits (following recovery, where / when will money be spent?)

– Stimulus Package (everyone wins, right?)

– New Technology from Afghanistan/Iraq (like GPS from 1st Iraq war)

– Asia / India / Emerging Markets development(exploding demand?)

• Growth RisksRisks– Regulations (China, Iran, North Korea, etc)

– Double-dip recession or unstable recovery or long, slow growth

– Tax Effects

Business Analysis Summary

• Long Term– IT Growth Opportunities outweigh risks– Demand will undoubtedly increase long term– IT becoming a business staple with massive

growth potential innovation globally

• Short-term– Corporate Spending/Profits rebound?– GDP growth

Info Technology

S & P 500 vs. Info Technology QTD

6%

S & P 500 vs. Info Technology YTD

Info Tech Sector vs. US GDP Growth– 3 year time

frame

Info Tech Sector vs. US Corp Profits-- 3 year time

frame

Info tech vs. US Consumer Confidence- 3 years

Key Drivers

• GDP (very cyclical)

• Globalization

• Corporate Profits

• Consumer Confidence– need strong economy with consumer participation

Absolute Basis High Low Median Current

P/Trailing E 74.6 11.1 25 20.5

P/Forward E 64.7 12.1 21.8 17.3

P/B 15.1 2.3 4 4

P/S 6.7 1.3 2.6 2.3

P/CF 45.8 8 15.5 12.9

Valuation: Info Tech Sector

Green= CheapRed= Expensive

Relative to SP 500

High Low Median Current

P/Trailing E 2.6 .91 1.4 1.1

P/Forward E 2.7 .98 1.4 1.1

P/B 3 .9 1.4 1.8

P/S 3 1.5 1.8 2.1

P/CF 2.6 1 1.4 1.2

Valuation: Info Tech Sector

Green= CheapRed= Expensive

Absolute Basis

High Low Median Current

P/Trailing E 49.2 10.4 22.8 17.4

P/Forward E 45.6 10.8 19.5 15.4

P/B 11.2 3 4.3 5.3

P/S 3.3 .9 1.5 1.6

P/CF 29.2 7.1 13.6 11.9

Valuation: Computer Hardware

Relative to SP 500

High Low Median Current

P/Trailing E 1.8 .87 1.2 .98

P/Forward E 1.9 .81 1.2 .92

P/B 2.5 1.2 1.5 2.4

P/S 1.5 .8 1 1.4

P/CF 1.7 .9 1.2 1.1

Valuation: Computer Hardware

Absolute Basis

High Low Median Current

P/Trailing E 135.8 11.6 27.5 47.1

P/Forward E 422.1 12.9 24.4 17.2

P/B 13.8 1.8 3.6 3.0

P/S 13.0 1.6 4.0 2.8

P/CF 37.3 6.4 14.0 14.9

Valuation: Semiconductors

Relative to SP 500

High Low Median Current

P/Trailing E 5.6 .8 1.5 2.7

P/Forward E 34.7 .6 1.4 1.0

P/B 2.6 .9 1.3 1.4

P/S 5.8 1.9 2.7 2.6

P/CF 2.4 .9 1.3 1.4

Valuation: Semiconductors

Absolute Basis High Low Median Current

P/Trailing E 75.6 9.4 23.2 15.9

P/Forward E 35.1 9.8 20.1 15.5

P/B 26.6 3.0 5.2 4.7

P/S 21.8 2.2 7.2 3.5

P/CF 65.6 8.2 18.2 13.1

Valuation: Systems Software

Valuation: Systems Software

Relative to SP 500

High Low Median Current

P/Trailing E 2.5 .83 1.3 .90

P/Forward E 1.7 .78 1.2 .92

P/B 5.2 1.3 1.9 2.20

P/S 9.7 2.8 4.6 3.20

P/CF 3.7 1.1 1.7 1.20

Recommendation

• Long Term:– Info Tech will be sector leader amongst S&P

• Short Term:– Have enjoyed strong outperformance– Rebound in economy/spending may take time

Recommendation

Lower our weight of the info technology sector by 250 basis points

• Why?– Currently overweight by 288 basis points– Info Tech sector is up 42% YTD compared to

14% for the S&P 500• GDP Growth forecasted 2% – 2.5% for years to

come puts some pressure on IT growth• Majority of growth s/t likely to come from smaller

companies (we don’t own)

Recommendation

– Use proceeds to possibly bring financials sector to S&P 500 level weight?

– Being in-line with S&P 500 index still has Info Tech at a 19% allocation