Transcript Sector Valuation - Fisher College of Business

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
Sector Overview
 Largest Weight
 16 Industries
 Highly Cyclical
 Revenues up 8% last quarter
 EPS up 56% last quarter
Sector
Info Tech
Financials
Health Care
Cons Staples
Energy
Industrials
Cons Disc
Utilities
Materials
Telecom
Market Cap
(Millions)
$
1,966,161
$
1,742,608
$
1,223,100
$
1,167,036
$
1,148,905
$
1,122,994
$
1,100,889
$
367,268
$
355,185
$
288,242
Source: Standard and Poors
 Estimated 63% increase in earnings this quarter
SIM Sector Allocation
 Currently 127 Basis points overweight S&P 500
Sector
Percentage
Consumer Discretionary
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
Series1
S&P 500
SIM
Weight Weight
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%
CD
CS
Engy.
Fin.
HC
Ind.
IT
Mat.
Tel.
Util.
-0.11%
0.80%
-1.43%
-5.07%
3.07%
2.34%
1.27%
-1.82%
0.98%
-1.38%
Industries
 By Market Cap:
Rank
Industry
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Systems Software
Computer Hardware
IT Consulting
Internet Software
Communications Equipment
Semi-conductors
Services, Data
Computer Storage
Electronic Component
Office Electronics
Application Software
Semi-conductor Equipment
Electronic Equipment
Home Entertainment Soft.
Electronic Manufacturing
Technology Distribution
Market Cap
Holdings
(billions)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
185.9
165.3
142.6
113.7
99.5
69.3
31.9
23.6
23.1
13.2
11.4
11.3
9.2
5.8
3.3
2.7
ORCL
HPQ, NCR
RIMM
INTC
Industry Performance
 By revenue growth:
Industry Performance
 By earnings per share growth:
Rank
Industry
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Semiconductor Equipment
IT Consulting
Communications Equipment
Services, Data
Computer Hardware
Office Electronics
Semiconductors
Electronic Manufacturing
Internet Software
Electronic Component
Electronic Equipment
Technology Distribution
Home Entertainment Soft.
Systems Software
Application Software
Computer Storage
Market Cap
EPS
Holdings
EPS est.
(billions)
(current)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11.3
142.6
99.5 RIMM
31.9
165.3 HPQ,NCR
13.2
69.3
INTC
3.3
113.7
23.1
9.2
2.7
5.8
185.9
ORCL
11.4
23.6
589%
350%
70%
69%
49%
48%
45%
39%
28%
21%
7%
7%
-6%
-12%
-17%
-41%
221%
173%
111%
313%
104%
80%
100%
7%
31%
19%
5%
65%
-12%
8%
158%
114%
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
Largest Companies
 10 largest companies in S&P 500:
Constituent
Exxon Mobil Corp
Apple Inc.
Microsoft Corp
General Electric Co
Procter & Gamble
Johnson & Johnson
Bank of America Corp
Wells Fargo & Co
JP Morgan Chase & Co
Intl Business Machines Corp
Symbol
XOM
AAPL
MSFT
GE
PG
JNJ
BAC
WFC
JPM
IBM
Sector
Energy
Info. Tech.
Info. Tech.
Industrials
Consumer Staples
Health Care
Financials
Financials
Financials
Info. Tech.
Price ($)
65.23
253.99
28.93
18.04
62.42
64.75
17.3
32.97
41.95
126.27
Sector Performance
Price Returns by
Sector
Energy
Materials
Industrials
Cons Disc
Cons Staples
Health Care
Financials
Info Tech
Telecom
Utilities
MTD
QTD
YTD
-4.22%
-4.13%
-2.71%
-2.73%
-0.26%
-1.29%
-1.40%
-3.05%
-1.40%
-1.64%
0.02%
-3.74%
1.27%
3.13%
-1.81%
-5.14%
-0.12%
-1.34%
-2.78%
0.75%
0.11%
-1.42%
13.88%
13.49%
3.14%
-2.40%
10.69%
0.31%
-8.28%
-3.90%
YTD
Rank
6
7
1
2
4
8
3
5
10
9
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
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
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
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
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
Stovall’s guide to S&P
Sector Rotation
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.
Capital Spending V. IT Sector
Federal Funds Rate V. IT Sector
Velocity of Money V. IT Sector
Consumer Confidence V. IT Sector
Consumer Spending V. IT Sector
Employment V. IT Sector
Real GDP V. IT Sector
Market Pyramid
Railroad: Total International
Traffic
Revenue (Indexed)
150%
125%
100%
EBITDA Margin
30%
1.6
Sector
25%
1.4
1.2
20%
1.0
15%
0.8
0.6
10%
Relative to S&P 500
5%
0%
0.4
0.2
0.0
Absolute
Relative
High
26.5
1.4
Low
21.2
.8
Median
22.2
1.1
Current
26.5
1.4
Net Profit Margin
14%
2.0
Relative to S&P 500
1.8
13%
1.6
13%
1.4
12%
1.2
1.0
12%
Sector
11%
11%
10%
0.8
0.6
0.4
0.2
0.0
Absolute
Relative
High
12.9
1.9
Low
11.3
1.2
Median
11.8
1.4
Current
12.9
1.9
EPS Growth (yr over yr)
60%
50%
40%
Sector
30%
20%
10%
0%
-10%
-20%
Relative to S&P 500
-30%
(%)
Absolute
Relative
High
47.8
35.5
Low
-18.2
-33.9
Median
16.0
-
Current
.4
5.3
Return on Equity
25%
2.0
1.8
20%
15%
1.6
Sector
1.4
10%
Relative to S&P 500
5%
0%
1.2
1.0
0.8
Absolute
Relative
High
23.5
1.8
Low
18.7
.9
Median
19.5
1.3
Current
23.5
1.6
Financial Analysis
 Strong overall performance
 Growth potential within sector
 EPS projections
 Sector rotation
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= Cheap
Red= Expensive
Sector Valuation: Info Tech (22 years)
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
Green= Cheap
Red= Expensive
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= Cheap
Red= Expensive
Sector Valuation: Info Tech (5 years)
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
Green= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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= Cheap
Red= Expensive
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.
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