1. Team Members: Hanh Bui Vamsi Namburi Hang Nguyen Tejaswi Ponnada
Finance 724/824 Winter Information Technology Sector Stock Recommendation
Team Members:
Hanh Bui
Vamsi Namburi
Hang Nguyen
Tejaswi Ponnada
Jonathan Schick

2. Agenda Recap of Sector Presentation Stock Recommendation: Q&A Sell Buy
Recap Recommendation Sell Buy Q&A

3. Weight
Recap Recommendation Sell Buy Q&A

4. Recap As of 02/28/2010, IT is overweight by 90bp
S&P500: %
SIM: %
Class voted: to increase 26bp
Recap Recommendation Sell Buy Q&A

5. Recommendation Sell 430bp of IBM Buy 350bp of RIMM Buy 50bp of HPQ
Buy 56bp of INTC
Recap Recommendation Sell Buy Q&A

6. Current and Proposed Weights
Recap Recommendation Sell Buy Q&A

7. Research In Motion Life On Blackberry
Recap Recommendation Sell Buy Q&A

8. Background Canadian company founded in 1984
Leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide global communications market.
Primary revenue driver: BlackBerry wireless solution
Traditional B2B focus: sales to carriers and services revenues from infrastructure access fee paid by carrier/distributor.
- with offices in NAM, APAC and Europe.
BlackBerry wireless devices, software and service.
Revenue generated from BlackBerry device sales
Recap Recommendation Sell Buy Q&A

9. Competitive Advantage
International expansion
Increasing carrier customer base in NAM with 63% revenues generated in United States.
Expect sales to increase in Europe and Asia (China).
Device portfolio
Segmented by multiple price points and feature sets versus Apple’s premium web/application experience offered at a high-end price point.
Recap Recommendation Sell Buy Q&A

10. Competitive Advantage
Innovation
BlackBerry Bold (RIM’s first HSDPA smart phone)
BlackBerry Storm (RIM’s first touch-screen with smart phone with the award-winning SurePress technology)
BlackBerry Pearl Flip (RIM’s first “clam-shell” smartphone)
BlackBerry Curve 8350i (iDen-based smart phone with Push-to-Talk)
BlackBerry Curve 8900 (based on a next generation platform)
2009 R&D expenditure of $684.7 million with 5000 employees and 2 new centers in U.S. and Germany
Recap Recommendation Sell Buy Q&A

11. Competitive Advantage
Unique industry position
The only company to provide network infrastructure as part of an optimized enterprise solution
Vertically integrated and provides both hardware and software (UI, bundled applications) and related services.
Yields strong gross and operating margins with recurring revenue.
Recap Recommendation Sell Buy Q&A

12. Risks Competition International exposure
Intense competition: Google’s Nexus One, Motorola Droid and HTC Eris
Apple moving toward non-exclusive distribution strategy
Well-positioned within existing enterprise accounts but increased competition by Apple, Microsoft, Android and other platforms
International exposure
U.S. sales account for 63% of total revenue, any changes in competitive, economic or regulatory environment could affect sales.
(iPhone also being sold by Verizon not likely to occur in 2010).
Recap Recommendation Sell Buy Q&A

13. Risks Increased B2C focus Increased Capital expenditure
Consumers demand low security requirements and are unwilling to pay price premium for RIM features
Consumer focus on Internet browsing and “apps” and currently RIM offers sub-par browsing and apps experience. Future success depends on strengthening these offerings
Increased Capital expenditure
Capital spending increased from $350M in fiscal 2008 to $834M in 2009
Expect to increase- due to new products and “outsourcing” of fundamental research via spending on IP rights
Recap Recommendation Sell Buy Q&A

14. Revenue Growth
Recap Recommendation Sell Buy Q&A

15. EPS
Recap Recommendation Sell Buy Q&A

16. 3 month performance
Recap Recommendation Sell Buy Q&A

17. 1 year performance
Recap Recommendation Sell Buy Q&A

18. 5 year performance
Recap Recommendation Sell Buy Q&A

19. Valuation
Recap Recommendation Sell Buy Q&A

20. *Your Target E, S, B, etc/Share
Price Target
Absolute Valuation
High
Low
Median
Current
#Your Target Multiple
*Your Target E, S, B, etc/Share
Your Target Price
(F x G) A. B. C. D. E. F. G. H.
P/Forward E
45.7
10.8
25.6 14
3.3
84.48
P/S
13.7
2.4
6.3
2.7
3.5
26.99
94.465
P/B
22.7 2
4.7
14.79
93.177
P/EBITDA
90.01
7.21
23.88
11.99 17
5.79
98.43
P/CF
85.9 10
27.2
14.1 19
4.93
93.67
Current price: $73.39
Multiples Average: $92.84
DCF Target Price: $110.10
50% Multiples + 50% DCF = $ or 38.2% upside
Recap Recommendation Sell Buy Q&A

21. DCF

22. HP – Buy 50 basis points
Best performing IT company this month in SIM at 7.9%
Continues to grow through acquisitions
EDS 2008
3com 2009
Becoming the first full service provider
Revised guidance upward for 2010
Revenues of $121.5-$122.5B vs $118-$119B
EPS of $4.37-$4.44 vs $4.25-$4.35
Recap Recommendation Sell Buy Q&A

23. DCF

24. Sensitivity Analysis
Recap Recommendation Sell Buy Q&A

25. Valuation - multiples Recap Recommendation Sell Buy Q&A
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
1.5
.63
1.0
.67
P/Forward E
1.6
.64
.88
.77
P/B
1.4 .5 .9
1.3
P/S .4 .7
P/CF
1.8 .6 .8
Relative to Industry
High
Low
Median
Current
P/Trailing E
1.1
.54
.79
.74
P/Forward E
1.2
.57
.75
.81
P/B .7 .3 .6
P/S
1.0 .5
P/CF .8
Recap Recommendation Sell Buy Q&A

26. Valuation - multiples Price for multiples - $60.53
DCF Target Price - $66.58
50% multiples, 50% DCF - $63.55 or 22.21%
Recap Recommendation Sell Buy Q&A

27. Intel- Buy 56bp Market Cap: $113.4bn
World largest semiconductor chip maker, market share of over 70%
80% international sales
2009 Q4 revenue jumped 28% year-over-year
Benefit from IT spending rebound
Recap Recommendation Sell Buy Q&A

28. DCF

29. Sensitivity Analysis
Recap Recommendation Sell Buy Q&A

30. Valuation Current price: $20.79 Multiples Average: $26.91
DCF Target Price: $27.58
50% Multiples + 50% DCF = $27or 31% upside
Recap Recommendation Sell Buy Q&A

31. Sell IBM
International Business Machines – core focus on providing IT strategy and consulting services to business domains
Competition in all business lines from offshore companies
Increasing dollar value a concern for their revenue from offshore consulting
No sign of potential breakthrough technologies (growing through acquisitions)
Recap Recommendation Sell Buy Q&A

32. Financial Valuations Price Target from Valuation: $135.28
Recap Recommendation Sell Buy Q&A

33. DCF

34. Sensitivity Analysis Price Target from DCF: $143.08
Overall Price (50% from both DCF and Valuation) :
0.5* * = $139.08
Recap Recommendation Sell Buy Q&A

35. Stocks Analyzed
Researched stocks in Telecom Sector with focus on low-medium market caps and growth potential

36. Recommendation Sell 430bp of IBM Buy 350bp of RIMM Buy 50bp of HPQ
Buy 56bp of INTC
Recap Recommendation Sell Buy Q&A

37. Q&A

38. NCR Discount Rate: 13.2% Terminal FCF Growth: 5% Current : $13.06
DCF Target: $18.14
Upside: 39%

39. NCR

40. Oracle Discount Rate 12% Terminal Growth 4% Current $24.76
Price Target $32.84
Upside 33.1%

41. Oracle Absolute Valuation High Low Median Current
#Your Target Multiple
*Your Target E, S, B, etc/Share
Your Target Price
(F x G) A. B. C. D. E. F. G. H.
P/Forward E
117.9
10.6
25.0
13.5 21
1.55
32.55
P/S
27.5
2.7
6.2
5.0
5.3
6.1
32.33
P/B
61.9
3.4
9.9
3.8
5.2
6.26
32.57
P/EBITDA
97.13
8.06
16.27
8.81 12
32.42
P/CF
151.5
11.1
27.3
15.5
1.53
32.25