Information Technology Sector Stock Report

Student Investment Management BUS-FIN 724/824Spring 2007

Student Analysts:

Taylor McAuliff

Scott McBrayer

Akshay Mehta

Jennifer Noble

Benjamin Primrose

Penny Yen

Information Technology Sector (SP-45)

Student Investment Management BUS-FIN 724/824Spring 2007

Student Analysts:

Taylor McAuliff

Scott McBrayer

Akshay Mehta

Jennifer Noble

Benjamin Primrose

Penny Yen

IT Sector Review

SIM HOLDINGS(Mar, 2007)

Cons Discr8%

Con Staples8%

Energy7%Utilities

1%

Telecom7%

Industrials11%

Materials3%

Financials21%

Health Care18%

Info Tech16%

S&P HOLDINGS (Mar, 2007)

Cons Discr11%

Con Staples9%

Energy10%

Utilities4%

Telecom4%

Industrials11%

Materials3%

Financials21%

Health Care12%

Info Tech15%

Begin QS&P 500 SIM Overweight

14.98%15.61%

($3,592,904)0.63%

VoteReduction by 1.0%

ProposedS&P 500 SIM Underweight

14.98% 14.61% 0.37%

IT Sector Proposed ActionInformation Technology SectorProposed Action

Sector Ticker Current Current Current Current Proposed % Change Change Proposed Proposed ProposedPrice SIM Weight SIM Shares Action of Holding (BPS) SIM Weight SIM Shares(May 2007) (May 2007) Holdings ($) Held Holdings ($) Held

Info Tech HPQ $42.14 3.4% $859,656 20,400 HOLD 0.0% 0 3.40% $859,656 20,400INFY $52.35 5.0% $1,251,165 23,900 SELL -50.0% -250 2.50% $625,583 11,950

MSFT $29.94 6.8% $1,694,604 56,600 SELL -25.0% -170 5.10% $1,270,953 42,450INTC $23.09 0.0% $0 0 BUY +100% +200 2.00% $492,176 21,316

AKAM $45.02 0.0% $0 0 BUY +100% +161 1.61% $396,202 8,80115.15% 14.61% $3,644,569

Total Portfolio $24,608,806

SUMMARY

• HOLD: HPQ

• SELL (PORTION): MSFT -170 BPS(25% of Holdings)

• SELL (PORTION): INFY - 250 BPS(50% of Holdings)

• BUY: INTC – 200 BPS (2.0% of Portfolio)

• BUY: AKAM – 161 BPS (1.61% of Portfolio)

SUMMARY

• HOLD: HPQ

• SELL (PORTION): MSFT -170 BPS(25% of Holdings)

• SELL (PORTION): INFY - 250 BPS(50% of Holdings)

• BUY: INTC – 200 BPS (2.0% of Portfolio)

• BUY: AKAM – 161 BPS (1.61% of Portfolio)

Microsoft Corp

(NYSE:MSFT)

Recommendation:

Sell Portion (170 basis pts)

Microsoft Corp

(NYSE:MSFT)

Recommendation:

Sell Portion (170 basis pts)

Microsoft Overview

Industry: Application Software• Market Cap: $272.91 B• 2006 Sales: $44.282 B

Business Segments• Client: Windows operating systems (Vista)• Server and Tools: Windows Operating System Support• Information Worker: Microsoft Office (2007)• Microsoft Business Solutions: Financial Management, etc. for businesses • MSN: Internet Service Provider• Mobile and Embedded Devices: Communications• Home and Entertainment: Xbox

Microsoft (DCF Valuation)

MICROSOFTDCF ValuationTicker: MSFT Terminal Discount Rate = 10.0%Scott A. McBrayer Terminal FCF Growth = 5.0%

Forecast TerminalYear 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value

Revenue 50,924 58,563 67,347 76,103 85,235 94,611 104,072 113,438 122,513 129,864 136,357 % Growth 15.00% 15.00% 13.00% 12.00% 11.00% 10.00% 9.00% 8.00% 6.00% 5.00%

Operating Income 20,257 23,072 25,584 26,636 29,832 33,114 36,425 39,703 42,880 45,452 47,725 Operating Margin 39.78% 39.40% 37.99% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%

Interest and Other- net 2,546 2,928 3,367 3,805 4,262 4,731 5,204 5,672 6,126 6,493 6,818 Interest % of Sales 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Taxes 7,297 8,320 9,264 7,306 8,183 9,083 9,991 10,890 11,761 12,467 13,090 Tax Rate 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%

Net Income 15,506 17,680 19,687 23,135 25,911 28,762 31,638 34,485 37,244 39,479 41,453 % Growth 14% 11% 18% 12% 11% 10% 9% 8% 6% 5%

Add Depreciation/Amort 1,018 1,171 1,347 1,636 1,833 2,034 2,238 2,439 2,634 2,792 2,932 % of Sales 2.00% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15%Plus/(minus) Changes WC (1,027) (1,922) (2,299) (2,283) (2,557) (2,838) (3,122) (3,403) (3,675) (3,896) (4,091) % of Sales -2.02% -3.28% -3.41% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00%Subtract Cap Ex 1,000 1,171 1,414 1,636 1,833 2,034 2,238 2,439 2,634 2,792 2,932 Capex % of sales 1.96% 2.00% 2.10% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15%

Free Cash Flow 14,498 15,758 17,321 20,852 23,354 25,923 28,516 31,082 33,569 35,583 37,362 YOY growth 9% 10% 20% 12% 11% 10% 9% 8% 6% 5%

Terminal 784,599.7 Terminal Value 784,600 P/E 18.9 NPV of free cash flows 153,556 38% EV/EBITDA 15.5 NPV of terminal value 249,998 62% Free Cash Yield 4.76%Projected Equity Value 403,553 Free Cash Flow Yield 3.59%

Shares Outstanding 10,900.0

Current Price 30.83

Implied equity value/share 37.02 Target Price

Upside/(Downside) to DCF 20.1%

Microsoft

High Low Mean Current Target Multiple

Target ESP

Target Price

P/Forward Earnings

65.2 15.1 33.3 17.6 17.6 1.61 28.34

P/S 30.88 5.29 11.03 6.39 6.39 5.66 36.16

P/B 21.5 3.8 6.8 7.9 7.9 5.41 42.74

P/EBITA 47.6 12.0 22.8 15.9 15.9 1.9 30.21

P/CF 71.2 16.4 31.2 22.1 22.1 2.85 62.99

Average: $40.08

Absolute Valuation

Microsoft Summary

SUMMARY

Current Price $30.83

DCF Valuation Target Price = $37.02

Absolute Valuation Target Price = $40.09

Target Price Selected: $37.02 (20% Upside)

Microsoft Remains Undervalued

Recommendation: Sell a portion of Microsoft holdings

Reason: Diversify IT portfolio holdings

Application: Reduce Current Holding by 25% - 170 BPS

Infosys Tech. Ltd.

(Nasdaq: INFY)

Recommendation:

Sell Portion (250 basis pts)

Infosys Tech. Ltd.

(Nasdaq: INFY)

Recommendation:

Sell Portion (250 basis pts)

Infosys Company Overview

Industry: Computer Services / IT Consulting•Market Cap: $27.57 billion•2007 Sales: $3.1 billion; YoY growth of 44%

Business:•Provides consulting and IT services to clients globally. •Pioneer in strategic offshore outsourcing of software services.•Current SIM Holding Amt: $1,251,165

Current SIM Portfolio Weight: 5.38%

Infosys (Reasons To Sell 250 bps)

•High employee turnover rates Must sustain employee growth to sustain revenue growth3,182 employees left during this year (20% attrition rate)

•Increase in wages (13-15% in India; 5-6% outside of India)Estimates that wage increase will impact margins by around 300 basis points

•Margins are under pressure due to rising Rupee This quarter the operating margin dropped by 100 basis points due to rupee appreciation

•Top line growth was below expectations for 4Q07•DCF: Stock Overvalued

Downside -6.24%

Infosys (DCF Valuation)DCF Valuation4/6/2007 Terminal Discount Rate = 10.5%Ticker: INFY Terminal FCF Growth = 5.5%Katherine Taylor McAuliff

Forecast TerminalYear 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value

Revenue 3,090.00$ 4,017.00$ 5,222.10$ 6,266.52$ 7,519.82$ 8,271.81$ 9,098.99$ 10,008.89$ 10,809.60$ 11,674.36$ 12,608.31$ % Growth 30.00% 25.00% 20.00% 20.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00%

Operating Income 852.00$ 1,414.60$ 1,833.76$ 2,193.28$ 2,631.94$ 2,895.13$ 3,184.65$ 3,503.11$ 3,783.36$ 4,086.03$ 4,412.91$ Operating Margin 30.57% 32.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%

Other Income (net) 83.00$ 108.46$ 141.00$ 137.86$ 165.44$ 181.98$ 200.18$ 220.20$ 237.81$ 256.84$ 277.38$ Interest % of Sales 2.69% 2.20% 2.20% 2.20% 2.20% 2.20% 2.20% 2.20% 2.20% 2.20% 2.20%

Taxes 84.00$ 220.84$ 290.29$ 372.98$ 447.58$ 492.34$ 541.57$ 595.73$ 643.39$ 694.86$ 750.45$ Tax Rate 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%

Minority Interest 2.00$ 6.03$ 7.83$ 18.80$ 22.56$ 24.82$ 27.30$ 30.03$ 32.43$ 35.02$ 37.82$ % of sales 0.06% 0.15% 0.15% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30%

Net Income 850.00$ 1,296.19$ 1,676.63$ 1,939.36$ 2,327.24$ 2,559.96$ 2,815.95$ 3,097.55$ 3,345.35$ 3,612.98$ 3,902.02$ % Growth 52.49% 29.35% 15.67% 20.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00%

Add Depreciation/Amort 139.05$ 180.77$ 234.99$ 281.99$ 338.39$ 372.23$ 409.45$ 450.40$ 486.43$ 525.35$ 567.37$ % of Sales 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Plus/(minus) Changes WC (336.10)$ (355.35)$ (421.79)$ (501.32)$ (601.59)$ (661.74)$ (727.92)$ (800.71)$ (864.77)$ (933.95)$ (1,008.67)$ % of Sales -10.88% -8.85% -8.08% -8.00% -8.00% -8.00% -8.00% -8.00% -8.00% -8.00% -8.00%Subtract Cap Ex 186.00$ 246.00$ 339.96$ 407.95$ 489.54$ 538.49$ 592.34$ 651.58$ 703.70$ 760.00$ 820.80$ Capex % of sales 6.02% 6.12% 6.51% 6.51% 6.51% 6.51% 6.51% 6.51% 6.51% 6.51% 6.51%

Free Cash Flow 466.95$ 875.61$ 1,149.89$ 1,312.08$ 1,574.50$ 1,731.95$ 1,905.15$ 2,095.66$ 2,263.31$ 2,444.38$ 2,639.93$ YOY growth 87.52% 31.32% 14.11% 20.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00%

Terminal 55702.5P/E 14.28$

NPV of free cash flows $9,371.37 EV/EBITDA 10.90$ NPV of terminal value $16,808.44 Free Cash Yield 4.74%Projected Equity Value $26,179.81Free Cash Flow Yield

Shares Outstanding 558 07-10 Cash/Op's 23,543

Current Price 50.04 Cash/Op's % of Sales 27.5%

Implied equity value/share $46.92

Upside/(Downside) to DCF -6.24%

Infosys Summary

Summary Current Price: $50.04 DCF Valuation: $46.92 Recommendation: Sell 50% of holdings –

250 BPS Reason to Keep Portion: Company is in

best position, compared to its competitors, to benefit from rising demand for offshore services

Analysts view F2008 guidance for 28-30% top line growth as conservative and to be revised upward as year progresses

Intel, Inc (NYSE:INTC)

Recommendation:

Buy

Intel, Inc (NYSE:INTC)

Recommendation:

Buy

Intel OverviewIndustry: Semiconductor

Market Cap: $128.75 Billion

2006 Sales: $35,382 Million

Lines of Business:

•The Digital Enterprise Group (56% of sales)

•The Mobility Group (35% of sales)

•The Flash Memory Group (6% of sales)

•The Digital Home Group

•The Digital Health Group

•The Channel Platforms Group

•The Digital Home, Digital Health and Channel Platforms groups make up combined 3% of sales

Intel Company Overview

Intel is the world’s leader in production of semiconductor chips.

Business:

Intel manufactures and designs a wide range of products including: microprocessors, motherboards, chipsets and flash memory.

Intel has experienced its 20th consecutive year of profitability.

Intel (INTC) Current Price: $22.16 Key Assumptions:

Terminal Discount Rate: 10.5% due to cyclical nature

Terminal FCF Growth Rate: 6% (tech is usually 2x the economic growth rate which has a historical average of 3%)

Target Price: $28.62 Upside:29.1%

Intel (DCF Valuation)DCF Valuation1/25/2007Ticker: INTC Terminal Discount Rate = 10.5%Jennifer Noble Terminal FCF Growth = 6.0%

Forecast TerminalYear 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value

Revenue 37,859 40,509 43,344 46,379 49,625 53,099 56,816 60,793 65,048 69,602 74,474 % Growth 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Operating Income 9,360 9,802 10,259 11,247 12,034 12,876 13,778 14,742 15,774 16,878 18,060 Operating Margin 24.72% 25.00% 25.00% 24.25% 24.25% 24.25% 24.25% 24.25% 24.25% 24.25% 24.25%

Interest and Other- net 877 943 1,015 1,067 1,141 1,221 1,307 1,398 1,496 1,601 1,713 Interest % of Sales 2.32% 2.33% 2.34% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30%

Taxes 2,460 2,569 2,681 2,952 3,159 3,380 3,617 3,870 4,141 4,430 4,741 Tax Rate 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0%Minority Interest (75) (82) (89) (95) (101) (108) (116) (124) (133) (142) (152)

Net Income 7,268 7,629 8,005 9,267 9,915 10,609 11,352 12,147 12,997 13,907 14,880 % Growth 5% 5% 16% 7% 7% 7% 7% 7% 7% 7%

Add Depreciation/Amort 5,387 5,804 6,254 6,553 7,012 7,503 8,028 8,590 9,191 9,835 10,523 % of Sales 14.13% 14.13% 14.13% 14.13% 14.13% 14.13% 14.13% 14.13% 14.13% 14.13%Plus/(minus) Changes WC (366) (200) 100 325 347 372 398 426 455 487 521 % of Sales -0.97% -0.49% 0.23% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%Subtract Cap Ex 5,505 5,932 6,391 6,493 6,948 7,434 7,954 8,511 9,107 9,744 10,426 Capex % of sales 14.54% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%

Free Cash Flow 6,784 7,301 7,968 9,651 10,327 11,050 11,823 12,651 13,537 14,484 15,498 YOY growth 8% 9% 21% 7% 7% 7% 7% 7% 7% 7%

Terminal 365,068.0 Terminal Value 365,068 P/E 24.5 NPV of free cash flows 64,401 37% EV/EBITDA 12.8 NPV of terminal value 110,161 63% Free Cash Yield 4.25%Projected Equity Value 174,562 Free Cash Flow Yield 3.89%

Shares Outstanding 6,100.0

Current Price 22.16

Implied equity value/share 28.62

Upside/(Downside) to DCF 29.1%

Intel Sensitivity Analysis

Sensitivity AnalysisTerm.Disc. Rate

Term. Growth Rate 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5%

4.5% 42.15 37.16 33.29 30.20 27.68 25.58 23.81 22.30

5.0% 46.83 40.50 35.76 32.08 29.14 26.74 24.75 23.06

5.5% 53.39 44.95 38.94 34.43 30.93 28.13 25.85 25.00

6.0% 63.23 51.19 43.17 37.45 33.16 29.83 27.17 32.19

6.5% 79.63 60.54 49.09 41.47 36.03 31.96 28.79 26.26

7.0% 112.42 76.12 57.98 47.11 39.86 34.69 30.81 27.79

7.5% 210.81 107.29 72.00 55.56 45.22 38.33 33.41 29.72

8.0% - 200.80 102.43 69.65 53.26 43.43 36.88 32.19

Intel Absolute Valuation

Absolute valuation

High Low Mean Current Target Multiple

Target ESP

Target Price

P/Forward Earnings

32.1 15.3 21.3 19.8 22.0 1.09 23.98

P/S 7.85 2.73 4.38 3.68 5.0 6.25 31.25

P/B 6.0 2.9 3.9 3.5 4.2 7.93 33.31

P/EBITA 20.5 6.5 10.1 14.9 12.5 1.58 19.75

P/CF 24.5 8.6 12.7 13.8 13.5 1.08 14.58

Average: $24.58

Absolute Valuation

Intel Positives & Negatives

Positives to owning Intel: The stock is undervalued and shows great

promise of growth The company generates profits in the

billions In the last 20 years the company has never

been unprofitable Negatives to owning Intel:

The industry is highly cyclical They are in the midst of a price war with

Advanced Micro Devices (AMD) They experience intense competition from

rivals Performance relies heavily on consumer

demand

Intel Summary

Intel is highly profitable Intel stock is undervalued with a

29.1% upside Current Price:$22.16 Target Price: $28.62 Recommendation: Buy 2.0% of

portfolio (200 BPS)

Akamai Tech., Inc. (Nasdaq:AKAM)

Recommendation:

Buy

Akamai Tech., Inc. (Nasdaq:AKAM)

Recommendation:

Buy

“If you’ve ever checked sports scores,

booked a hotel, tracked an order, orwatched a movie trailer online,

chancesare good that we delivered yourexperience.” (AKAM website)

Akamai Overview

“The leading global service provider for accelerating content and applications online” (AKAM website)

Content Delivery Network (CDN): networks used to speed up, protect, and efficiently operate the internet (and business intranets).

Currently holds 2/3 of CDN market share.

Current Drivers Support for content of:

Adobe Flash Player Europages.com (European Bus.

Directory) Logitech Audi AG Clear Channel NBA NCAA (particularly March Madness) Apple (podcasts and iTv) FIFA World Cup

Beyond online video!

Akamai currently handles about 20% of internet traffic. It uses its technology to reduce bottlenecks and improve performance. Uses the “EdgePlatform” technology to

detect and reduce bottlenecks. Handles the efficient download of Microsoft

Vista OS over the internet. With the release of the Apple iTv, Akamai

will handle downloads between the internet and iTv sets.

Market Cap: 7.11 Billion Avg. Daily Volume: 4.9 million shares Total 2006 Revenue of 428.67 M (up

from 283.12 M in 2005) 1200 employees CEO: Paul Sagan – Was President of

Akamai since May 1999, became CEO in April 2005.

Akamai

Akamai (DCF Valuation)

Akamai (DCF Summary)

IT Stock Report SummarySUMMARY

• HOLD: HPQ

• SELL (PORTION): MSFT -170 BPS(25% of Holdings)

• SELL (PORTION): INFY - 250 BPS(50% of Holdings)

• BUY: INTC – 200 BPS (2.0% of Portfolio)

• BUY: AKAM – 161 BPS (1.61% of Portfolio)

Thank You

Questions?