IT Sector Presentation Spring 2006 Divya Mirchandani Jake Monk Sameem Lutfi Pat McAuley Suk-Ho Lee

IT Sector PresentationSpring 2006

Divya Mirchandani

Jake Monk

Sameem Lutfi

Pat McAuley

Suk-Ho Lee

Agenda

• Size and Composition

• Business Analysis

• Economic Analysis

• Financial Analysis

• Valuation Analysis

• Recommendation

Size

• Size of the Sector– $1.88 Trillion

• Percentage of S&P 500– 15.29%

• Percentage of Current Holdings– 16.83%

Industries in IT Sector

Industry Market Cap Industry Market Cap

Application Software 463.6B Multimedia & Graphics Software 36.2B

Business Software & Services 195.3B Networking & Communication Devices 153.0B

Communication Equipment 433.1B Personal Computers 121.1B

Computer Based Systems 15.3B Printed Circuit Boards 32.7B

Computer Peripherals 40.1B Processing Systems & Products 50.9B

Data Storage Devices 72.7B Scientific & Technical Instruments 121.7B

Diversified Communication Services 180.7B Security Software & Services 18.2B

Diversified Computer Systems 247.5B Semiconductor - Broad Line 277.4B

Diversified Electronics 117.5B Semiconductor - Integrated Circuits 163.5B

Healthcare Information Services 10.7B Semiconductor - Specialized 77.4B

Information & Delivery Services 20.9B Semiconductor Equipment & Materials 100.4B

Information Technology Services 65.8B Semiconductor- Memory Chips 35.5B

Internet Information Providers 186.4B Technical & System Software 63.2B

Internet Service Providers 7.4B Telecom Services - Domestic 337.2B

Internet Software & Services 160.3B Telecom Services - Foreign 754.1B

Long Distance Carriers 945.8M Wireless Communications 604.6B

Largest Companies in the Sector• 1. Microsoft (MSFT) - $251.0B• 2. Vodafone Group (VOD) - $152.0B• 3. Cisco Systems (CSCO) – $128.9B• 4. International Business Machines (IBM) - $127.5B• 5. Google (GOOG) - $118.6B• 6. China Mobile Hong Kong (CHL) - $115.4B• 7. Intel (INTC) - $114.7B• 8. AT&T (T) - $101.5B• 9. Verizon Communications (VZ) - $96.0B• 10. Nokia (NOK) - $92.6B

Performace

• YTD– Sector: 3.17%– S&P 500: 6.21%

• QTD– Sector: (0.81%)– S&P 500: 2.39%

Business Analysis

• Currently between growth and mature depending on industry within sector

• Changes are fast, when shift occurs, companies can find themselves in hardship if they did not adjust accordingly

Business Analysis

• Hardware sales in U.S. have lulled, especially in P.C. market

• Viability of hardware portion coming from emerging markets

• Software and services portion of the sector, U.S. economy not as much a factor as companies are constantly upgrading software to increase efficiency

Business Analysis

• Profitability– Hardware in high supply, almost a commodity– Competition is stiff driving prices and margins

down

• Industry players– Generally dominated by a few big companies– Niche companies can exist– Copycat industry

Business Analysis

• Ease of Entry: Difficult– Due to high start up costs– The need for intellectual capital– High cost of capital

• Power of suppliers: Weak– Many suppliers– Inputs for end product are generally simple

• Power of buyers: Strong– Breadth of tech choices for productivity

Business Analysis

• Threat of Substitutes: Medium– Varies from industry to industry– Hardware is generally high– Application specific devices low

• Competition: Intense– Intense rivalry for selling products at lower prices– Some companies make most profit on sale of

accesories

Regression Analysis: SP-45 vs. SP5A• Significantly high

Correlation with the Market, as represented by the SP-500.– R-Square = 0.78– T-stat = 14.18– P-Value = 7.51E-20

Regression Analysis: SP-45 vs. SP5A (t-1)

• No significant relationship when you incorporate a 1 month lag factor. Relationship strongest when we run the contemporaneous regression.

CPI (Computers) vs. SP45 (Total Return)

• No significant Relationship– Low R-square– Relatively low t-stat and Coefficient

Economic Analysis(SP-45 vs. GDP)

• Very low correlation with most economic indicators.• Sector functions fairly independent of economic

indicators such as Interest Rates, Inflation, Unemployment.

• However, highly correlated with the GDP and S&P 500

Income Statement Analysis

Net Income Ratios

Revenue AnalysisS&P INFO TECH. SECTOR COMPOSITE ADJ M-Wtd (SP-45)StockVal® DATE 05-05-2006

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

REVENUES ($BIL)

1212

1313

1515

1717

1919

2121

2323

2626

2929

32

36

40

4%

8%

12%

16%

NPM

TAX7 8 6 7 5 5 6 8 10 9 10 10 11 13 7 5 8 10 11

33 33 32 29 59 35 30 35 36 35 36 43 35 34 26 22 23 31 29

FYEDec

Growth & MarginsProspective Growth & Margin Check StockVal ®

M-Wtd (SP-45)Price 24.940 05/05/06 Earnings Adjustments

Percent Change Actual Year Profit Momentum %

Quarter Revenue REV RPS EARN EPS EPS Ago Margin % SF REV EPS

Jun 04 7,858.9 14 14 76 77 0.20 0.11 10.3 0 +13 +55

Sep 04 7,771.3 11 12 43 44 0.20 0.14 10.5 0 +10 +34

Dec 04 8,545.2 7 10 21 24 0.25 0.20 11.5 0 +7 +25

Mar 05 8,140.5 7 11 12 15 0.21 0.19 10.4 0 +7 +13

Jun 05 8,288.0 5 9 14 19 0.24 0.20 11.2 0 +5 +17

Sep 05 8,225.2 6 9 13 17 0.24 0.20 11.2 0 +6 +15

Dec 05 8,787.8 3 8 10 16 0.29 0.25 12.4 -1 +3 +17

Mar 06 8,679.7 7 9 15 17 0.25 0.21 11.2 0 +6 +15

T4Q 33,980.7 5 9 13 17 1.01 11.5

Jun 06 E 13 14 0.27 0.24 +13

Sep 06 E 18 19 0.28 0.24 +17

Dec 06 E 21 19 0.34 0.29 +20

Mar 07 E 24 24 0.31 0.25 +21

F4Q E 19 19 1.20

Point-to-Point Growth Rates (%) Long-Term Growth Rate Estimates (%)

Years REV RPS EARN EPS Median Estimate 14.0%

1 5 9 13 17 Number of Estimates 11

3 8 10 34 37 Standard Deviation 5

5 1 3 1 3 Default GRE Estimate 11.0%

10 5 6 7 8 Analyst GRE Estimate 11.0%

15 6 7 10 11

20 5 3 7 4 Expected Report Date

Balance Sheet Analysis

Cash Flow Analysis

Valuation Analysis

Valuation Analysis

Valuation Analysis

Valuation Analysis

Recommendations

• Recap– Percentage of S&P 500,15.29%– Percentage of Current Holdings, 16.83%

• With performance of IT sector this quarter, Percentage of Current Holdings should decrease closer to S&P weighting – 14.5%