Information Technology Sector Stock Report

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Information Technology Sector Stock Report
Student Analysts Taylor McAuliff Scott
McBrayer Akshay Mehta Jennifer Noble Benjamin
Primrose Penny Yen

• Student Investment Management BUS-FIN 724/824
• Spring 2007

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Information Technology Sector (SP-45)
Student Analysts Taylor McAuliff Scott
McBrayer Akshay Mehta Jennifer Noble Benjamin
Primrose Penny Yen

• Student Investment Management BUS-FIN 724/824
• Spring 2007

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IT Sector Review
Begin Q SP 500 SIM Overweight
Begin Q 14.98 15.61 (3,592,904) 0.63
Vote Reduction by 1.0 Vote Reduction by 1.0 Vote Reduction by 1.0 Vote Reduction by 1.0
Proposed SP 500 SIM Underweight
Proposed 14.98 14.61 0.37
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IT Sector Proposed Action

• 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)

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Microsoft Corp (NYSEMSFT) Recommendation Sell
Portion (170 basis pts)
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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

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Microsoft (DCF Valuation)
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Microsoft
Absolute Valuation
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
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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) Target Price Selected 37.02 (20 Upside)
Microsoft Remains Undervalued Microsoft Remains Undervalued
Recommendation Sell a portion of Microsoft holdings Recommendation Sell a portion of Microsoft holdings
Reason Diversify IT portfolio holdings Reason Diversify IT portfolio holdings
Application Reduce Current Holding by 25 - 170 BPS Application Reduce Current Holding by 25 - 170 BPS
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Infosys Tech. Ltd. (Nasdaq INFY) Recommendation
Sell Portion (250 basis pts)
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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

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Infosys (Reasons To Sell 250 bps)

• High employee turnover rates
• Must sustain employee growth to sustain revenue
  growth
• 3,182 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

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Infosys (DCF Valuation)
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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

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Intel, Inc (NYSEINTC) Recommendation Buy
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Intel Overview

• Industry 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

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Intel Company Overview
Intel is the worlds 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.
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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
• Upside29.1

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Intel (DCF Valuation)
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Intel Sensitivity Analysis
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Intel Absolute Valuation
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
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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

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Intel Summary

• Intel is highly profitable
• Intel stock is undervalued with a 29.1 upside
• Current Price22.16
• Target Price 28.62
• Recommendation Buy 2.0 of portfolio (200 BPS)

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Akamai Tech., Inc. (NasdaqAKAM) Recommendation
Buy
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• If youve ever checked sports scores,
• booked a hotel, tracked an order, or
• watched a movie trailer online, chances
• are good that we delivered your
• experience. (AKAM website)

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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.

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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

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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.

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Akamai

• 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.

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Akamai (DCF Valuation)
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Akamai (DCF Summary)
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IT Stock Report Summary

• 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)

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Thank You

• Questions?