greg price greg shaskus min shen matt sims chris stuart
TRANSCRIPT
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Greg PriceGreg Shaskus
Min ShenMatt Sims
Chris Stuart
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Recommendation100 bps increase in SIM allocation for IT
resulting in 227 bps overweight
Support:Sector Size and CompositionBusiness AnalysisEconomic AnalysisFinancial AnalysisValuation Analysis
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Sector OverviewLargest Weight16 IndustriesHighly CyclicalRevenues up 8% last quarterEPS up 56% last quarterEstimated 63% increase in earnings this
quarter
Sector Market Cap
(Millions) Info Tech $ 1,966,161 Financials $ 1,742,608 Health Care $ 1,223,100 Cons Staples $ 1,167,036 Energy $ 1,148,905 Industrials $ 1,122,994 Cons Disc $ 1,100,889 Utilities $ 367,268 Materials $ 355,185 Telecom $ 288,242
Source: Standard and Poors
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SIM Sector AllocationCurrently 127 Basis points overweight S&P
500 SectorS&P 500 Weight
SIM Weight
+/-
Consumer Discretionary 10.55% 10.44% -0.11%
Consumer Staples 10.91% 11.71% 0.80%
Energy 11.18% 9.76% -1.43%
Financials 16.47% 11.41% -5.07%
Health Care 11.55% 14.63% 3.07%
Industrials 10.76% 13.10% 2.34%
Info Tech. 18.91% 20.18% 1.27%
Materials 3.45% 1.64% -1.82%
Telecom 2.73% 3.70% 0.98%
Utilities 3.48% 2.10% -1.38%
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IndustriesBy Market Cap:Rank Industry
Market Cap (billions)
Holdings
1 Systems Software 185.9$ ORCL2 Computer Hardware 165.3$ HPQ, NCR3 IT Consulting 142.6$ 4 Internet Software 113.7$ 5 Communications Equipment 99.5$ RIMM6 Semi-conductors 69.3$ INTC7 Services, Data 31.9$ 8 Computer Storage 23.6$ 9 Electronic Component 23.1$
10 Offi ce Electronics 13.2$ 11 Application Software 11.4$ 12 Semi-conductor Equipment 11.3$ 13 Electronic Equipment 9.2$ 14 Home Entertainment Soft. 5.8$ 15 Electronic Manufacturing 3.3$ 16 Technology Distribution 2.7$
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Industry PerformanceBy revenue growth:
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Industry PerformanceBy earnings per share growth:
Rank IndustryMarket Cap
(billions)Holdings
EPS (current)
EPS est.
1 Semiconductor Equipment 11.3$ 589% 221%2 IT Consulting 142.6$ 350% 173%3 Communications Equipment 99.5$ RIMM 70% 111%4 Services, Data 31.9$ 69% 313%5 Computer Hardware 165.3$ HPQ,NCR 49% 104%6 Offi ce Electronics 13.2$ 48% 80%7 Semiconductors 69.3$ INTC 45% 100%8 Electronic Manufacturing 3.3$ 39% 7%9 Internet Software 113.7$ 28% 31%
10 Electronic Component 23.1$ 21% 19%11 Electronic Equipment 9.2$ 7% 5%12 Technology Distribution 2.7$ 7% 65%13 Home Entertainment Soft. 5.8$ -6% -12%14 Systems Software 185.9$ ORCL -12% 8%15 Application Software 11.4$ -17% 158%16 Computer Storage 23.6$ -41% 114%
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Industries: SummaryAttractive 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
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Largest Companies
Constituent Symbol Sector Price ($)Exxon Mobil Corp XOM Energy 65.23Apple Inc. AAPL Info. Tech. 253.99Microsoft Corp MSFT Info. Tech. 28.93General Electric Co GE Industrials 18.04Procter & Gamble PG Consumer Staples 62.42J ohnson & J ohnson J NJ Health Care 64.75Bank of America Corp BAC Financials 17.3Wells Fargo & Co WFC Financials 32.97J P Morgan Chase & Co J PM Financials 41.95Intl Business Machines Corp IBM Info. Tech. 126.27
10 largest companies in S&P 500:
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Sector PerformancePrice Returns by Sector
MTD QTD YTDYTD Rank
Energy -4.22% 0.02% 0.11% 6 Materials -4.13% -3.74% -1.42% 7
Industrials -2.71% 1.27% 13.88% 1 Cons Disc -2.73% 3.13% 13.49% 2
Cons Staples -0.26% -1.81% 3.14% 4 Health Care -1.29% -5.14% -2.40% 8 Financials -1.40% -0.12% 10.69% 3 Info Tech -3.05% -1.34% 0.31% 5 Telecom -1.40% -2.78% -8.28% 10 Utilities -1.64% 0.75% -3.90% 9
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Business AnalysisSector growth depends on
InnovationTechnological advancementCost reduction
Highly diverse with companies in growth and mature phases
Few dominant players in each industry within the sectorDependence on cutting edge technology leads to
enormous R&D costsR&D spending is 2.5 times of the automotive industry and
more than 3 times of the pharmaceutical industryR&D costs largest barrier to entry
Huge threat of substitutes and piracy
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Business Analysis (cont.)Highly cyclical sector with large impact on
SIMTends to have large growth during market
recoveriesCan be highly volatile
Affected by customer and corporate spendingSignals 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
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Business Analysis (cont.)Growth potential in the smart phone and
tablet marketApple, 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 AfricaAs penetration rates approach 90% in
developed regions companies look for new opportunities
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Other growth opportunitiesMicrosoft Office 2010 to be released in JuneIT Solution Services
Business Analysis (cont.)
Risks of W-recession or unstable recoveryLast Thursday and Friday
was a perfect example Tech stocks were hit hard Many lost all of their gains
for the year
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Business Analysis SummaryLong-term
IT growth opportunities outweigh risksDemand will continue to increaseIT becoming a business staple with massive
growth potential Short-term
Corporate spending/profits continue to increase
GDP growth
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Stovall’s guide to S&P Sector Rotation
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Stovall’s Sector RotationIT 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.
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Capital Spending V. IT Sector
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Federal Funds Rate V. IT Sector
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Velocity of Money V. IT Sector
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Consumer Confidence V. IT Sector
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Consumer Spending V. IT Sector
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Employment V. IT Sector
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Real GDP V. IT Sector
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Market Pyramid
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Railroad: Total International Traffic
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Revenue (Indexed)
100%
125%
150%
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EBITDA Margin
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0%
5%
10%
15%
20%
25%
30%
Absolute
Relative
High 26.5 1.4
Low 21.2 .8
Median 22.2 1.1
Current 26.5 1.4
Relative to S&P 500
Sector
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Net Profit Margin
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
10%
11%
11%
12%
12%
13%
13%
14%
Absolute
Relative
High 12.9 1.9
Low 11.3 1.2
Median 11.8 1.4
Current 12.9 1.9
Relative to S&P 500
Sector
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EPS Growth (yr over yr)
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
(%) Absolute
Relative
High 47.8 35.5
Low -18.2 -33.9
Median 16.0 -
Current .4 5.3
Relative to S&P 500
Sector
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Return on Equity
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0%
5%
10%
15%
20%
25%
Absolute
Relative
High 23.5 1.8
Low 18.7 .9
Median 19.5 1.3
Current 23.5 1.6
Relative to S&P 500
Sector
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Financial AnalysisStrong overall performanceGrowth potential within sector
EPS projectionsSector rotation
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Sector Valuation: Info Tech (22 years)
Absolute Basis
High Low Median Current
P/Trailing E 74.6 11.1 26.1 18.9
P/Forward E 64.7 12.1 22.5 14.4
P/B 15.1 2.3 4.1 3.7
P/S 6.7 0.8 2.5 2.4
P/CF 45.8 8.2 16.0 12.1
Green= CheapRed= Expensive
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Sector Valuation: Info Tech (22 years)
Green= CheapRed= Expensive
Relative to SP 500
High Low Median Current
P/Trailing E 2.6 0.91 1.4 1.1
P/Forward E 2.7 0.98 1.3 1.0
P/B 3.0 0.9 1.4 1.7
P/S 3.0 0.9 1.7 2.0
P/CF 2.6 1.1 1.5 1.3
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Sector Valuation: Info Tech (5 years)Absolute Basis
High Low Median Current
P/Trailing E 25.0 11.1 20.8 18.9
P/Forward E 22.4 12.1 18.9 14.4
P/B 4.8 2.3 3.9 3.7
P/S 3.0 1.3 2.5 2.4
P/CF 17.7 8.2 14.1 12.1
Green= CheapRed= Expensive
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Sector Valuation: Info Tech (5 years)
Green= CheapRed= Expensive
Relative to SP 500
High Low Median Current
P/Trailing E 1.5 0.91 1.2 1.1
P/Forward E 1.4 0.98 1.3 1.0
P/B 1.8 1.2 1.5 1.7
P/S 2.1 1.5 1.7 2.0
P/CF 1.6 1.1 1.3 1.3
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Industry Valuation: Computer Hardware (HPQ, NCR)
Absolute Basis
High Low Median Current
P/Trailing E 95.1 10.4 21.9 17.0
P/Forward E 45.6 10.8 19.5 14.9
P/B 11.2 1.0 3.9 5.0
P/S 3.3 0.4 1.3 1.7
P/CF 29.2 7.1 13.6 11.2
Green= CheapRed= Expensive
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Industry Valuation: Computer Hardware (HPQ, NCR)
Relative to SP500
High Low Median Current
P/Trailing E 5.7 0.75 1.2 0.98
P/Forward E 1.9 0.81 1.2 1.0
P/B 2.5 0.4 1.3 2.4
P/S 1.5 0.5 1.0 1.4
P/CF 1.7 0.8 1.2 1.2
Green= CheapRed= Expensive
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Industry Valuation: Semiconductor (INTC)
Absolute Basis
High Low Median Current
P/Trailing E 135.8 11.6 23.5 26.4
P/Forward E 422.1 11.9 24.1 11.9
P/B 13.8 1.6 3.6 3.0
P/S 13.0 0.7 3.3 3.0
P/CF 37.3 6.4 14.3 9.9
Green= CheapRed= Expensive
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Industry Valuation: Semiconductor (INTC)
Relative to SP500
High Low Median Current
P/Trailing E 5.6 0.74 1.4 1.5
P/Forward E 34.7 0.60 1.4 0.84
P/B 2.6 0.8 1.3 1.4
P/S 5.8 0.9 2.4 2.5
P/CF 2.4 0.9 1.3 1.0
Green= CheapRed= Expensive
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Industry Valuation: Systems Software (ORCL)
Absolute Basis
High Low Median Current
P/Trailing E 75.6 9.4 26.9 15.3
P/Forward E 35.1 9.8 19.7 14.3
P/B 26.6 3.0 5.8 4.6
P/S 21.8 2.2 7.8 3.6
P/CF 65.6 8.2 19.2 12.1
Green= CheapRed= Expensive
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Industry Valuation: Systems Software (ORCL)
Relative to SP500
High Low Median Current
P/Trailing E 2.5 0.83 1.4 0.88
P/Forward E 1.7 0.78 1.2 1.0
P/B 5.5 1.3 2.2 2.2
P/S 9.7 2.8 5.6 3.0
P/CF 3.7 1.0 1.8 1.3
Green= CheapRed= Expensive
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Industry Valuation: Communications Equipment (RIMM)
Absolute Basis
High Low Median Current
P/Trailing E 211.9 11.0 25.4 20.9
P/Forward E 475.1 12.1 22.4 16.8
P/B 12.1 1.0 4.3 3.0
P/S 5.1 0.7 2.1 3.2
P/CF 55.5 8.8 17.6 14.5
Green= CheapRed= Expensive
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Industry Valuation: Communications Equipment (RIMM)
Relative to SP500
High Low Median Current
P/Trailing E 10.1 0.91 1.4 1.2
P/Forward E 29.1 1.0 1.4 1.2
P/B 2.4 0.3 1.4 1.4
P/S 3.0 0.7 1.6 2.7
P/CF 3.2 0.8 1.6 1.5
Green= CheapRed= Expensive
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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.
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Recommendation100 bps increase in weight to 227 bps
overweightTop-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