Business Finance 4228/7225 Advanced Investment Analysis The Stock Market. Summer 2013 Sector Team Neil Patel Jeffrey Mulac Srinath Potlapalli

Transcription

1 Business Finance 4228/7225 Advanced Investment Analysis The Stock Market Summer 2013 Sector Team Neil Patel Jeffrey Mulac Srinath Potlapalli

2 Overview

3 IT Sector Weight SIM vs S&P 500 As of 6/30/ % 2.10% 3.92% 0.08% 0.22% 16.85% 7.57% 12.14% 17.80% 10.20% 13.99% 3.30% 3.30% 2.80% 12.70% 14.43% 0.00% 0.00% 12.20% 13.25% 13.86% SIM Weight S&P 500 Weight 16.70% 10.50% 10.50% Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Cash Dividend Receivables Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Cash Dividend Receivables

4 Recap of the Recommendation Overweight IT Sector in SIM portfolio by bps above the S&P 500 weightage. Increase IT Sector allocation by a total of bps Why? IT Sector is underperforming the market by 9% YTD* (buying opportunities) Continued IT Sector growth in the future Improving economic conditions in the U.S. * Overweight: Application and Systems Software (big data software growing in demand) Hardware (mobile sales continue to grow) Internet Software and Services (cloud computing) Underweight: PC semiconductors and equipment (decreasing demand) PC hardware (decreasing demand) IT consulting & services

5 Stock Analysis

6 Intel Inc Data as of 7/19/13 Company Overview: Industry: Ticker: Semiconductor INTC Current Stock Price: $ Week Range: $19.23-$26.90 Market Capitalization: $114.53B Shares Outstanding: 4.97B Beta: 0.99 Dividend Yield: 0.9(3.8%) 2012 Revenue: $53.34B 2012 Earnings: $11B Source: finance.yahoo.com

7 Business Analysis - Intel Inc Among stocks in the current SIM IT Portfolio Intel is the only company with major revenue/earning stream from declining PC industry Key Business Drivers: Corporate and Government IT Spending. Intel is a highly cyclical stock. Global demand for chips and competition from foreign suppliers such as ARM. PC/Notebook Demand both in domestic and international markets. R&D and Innovation. Falling PC and chip prices coupled with R&D spending impact margins. Data Center growth coupled with the proliferation of cloud computing. Growth in mobile device,smartphone and tablet sectors.

8 Business Analysis Intel Inc Stock Performance: Intel stock performed well during the past year due to growing business in Data Center Group and expansion in software service arena Intel s earnings might decline to rapid fall in demand for PC s in the global market. Intel has been a late mover into mobile computing sector which is limiting its stock performance. With high capex budgets and deteriorating PC demand Intel s stock price may decline in the near term. For FY2013 Q2: Intel reported 39cents a share vs Analyst consensus of 40 cents. Intel to cut down its capex and focus more on growing mobile device sector under the new management. /. Recent earnings report:

9 Financial Analysis Year. Current Year Current+1 estimate Current+2 estimate Current +3 estimate Revenue 53,341 53,583 55,880 57,886 % growth from prior year -1% 0% 4% 4% Earnings Per Share Source: Baseline Revenue and earnings forecast for Intel are sluggish in the near term Intel is expected to grow in mobile and cloud computing with new technologies % growth from prior year -12% -16% 8% 1% Intel vs ARM Financial Ratios (source: Financial Ratio Financial Ratio (INTEL) (ARM) Payout Ratio % Payout Ratio % Free Cash Flow Free Cash Flow Per Share Per Share(GBP) Capital Spending($b) (11.0 2) (10.7 6) (5.207 ) (4.51 5) (5.19 7) Capital Spending(gbp (26) (13) (7) (10) (14) Net Margin (%) mill) Net Margin (%) ROE (%) ROE (%)

10 Valuation Price Multiples Analysis Relative to Hig Low Media Current Absolute High Low Median Current Target Target E, Target S&P 500 h n Valuation Multiple S, B, Price (F x P/Trailing E etc/share G) P/Forward E A. B. C. D. E. F. G. H. P/Forward E P/B P/S P/CF P/S Relative to Industry High Low Median Current P/B P/EBITDA P/Trailing E P/Forward E P/B P/S P/CF P/CF Valuation of price multiples indicate that Intel is valued below S&P 500 and the Industry likely due to sluggish PC demand forecast. Target Price of Intel based on median historic P/E multiple is $31.97.

11 Sensitivity Analysis - Intel Discount Rate = 11.5% Reasons for the Assumption: Intel is a cyclical tech stock Uncertainty in growth Decline in core PC business FCF Growth Rate = 5% Reasons for the Assumption: Intel is leading in booming Data Center business Intel has a good chance to capture the mobile device market Great corporate Governance and brand Image Growth Rate Discount Rate 9.0% 9.5% 10% 10.5% 11% 11.5% 12.0% 2.5% $31.02 $28.65 $26.6 $24.82 $23.24 $21.85 $ % $32.63 $29.98 $27.71 $25.74 $24.03 $22.52 $ % $34.54 $31.53 $28.98 $26.81 $24.92 $23.27 $ % $36.83 $33.36 $30.47 $28.03 $25.94 $24.13 $ % $39.63 $35.56 $32.23 $29.46 $27.11 $25.11 $ % $43.13 $38.25 $34.34 $31.15 $28.49 $26.24 $ % $47.63 $41.61 $36.92 $33.17 $30.11 $27.55 $ % $53.64 $45.93 $40.14 $35.65 $32.05 $29.11 $26.66

12 Valuation DCF Analysis INTEL(INTC) Srinath Potlapalli Terminal Discount Rate = 11.5% 6/11/2013 Terminal FCF Growth = 5.0% Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenue 53,341 53,623 54,914 57,342 60,782 64,429 68,295 72,051 76,014 80,194 84,204 % Growth 0.5% 2.4% 4.4% 6.0% 6.0% 6.0% 5.5% 5.5% 5.5% 5.0% Operating Margin 14,638 13,406 13,179 13,189 13,372 14,174 15,366 16,211 17,483 18,445 19,367 Operating Margin 27.4% 25.0% 24.0% 23.0% 22.0% 22.0% 22.5% 22.5% 23.0% 23.0% 23.0% Gains(losses) on equity investments,net % Growth 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Interest and Other Interest % of Sales 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Taxes 3,868 3,551 3,492 3,494 3,552 3,765 4,079 4,304 4,639 4,895 5,139 Tax Rate 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% Net Income 11,005 10,105 9,938 9,945 10,109 10,715 11,611 12,249 13,204 13,931 14,627 % Growth -8.2% -1.7% 0.1% 1.7% 6.0% 8.4% 5.5% 7.8% 5.5% 5.0% Add Depreciation/Amort 7,522 7,546 10,764 11,027 11,852 12,564 13,317 14,410 15,203 16,039 16,841 % of Sales 14.1% 14.1% 19.6% 19.2% 19.5% 19.5% 19.5% 20.0% 20.0% 20.0% 20.0% Plus/(minus) Changes WC (754) 729 (116) (218) (365) (387) (410) (432) (456) (481) (505) % of Sales -1.4% 1.4% -0.2% -0.4% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% Subtract Cap Ex 11,027 11,100 11,367 11,870 12,156 12,886 13,659 14,410 15,203 16,039 16,841 Capex % of sales 20.7% 20.7% 20.7% 20.7% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Free Cash Flow 6,746 7,280 9,219 8,884 9,440 10,006 10,860 11,817 12,748 13,449 14,122 % Growth 7.9% 26.6% -3.6% 6.3% 6.0% 8.5% 8.8% 7.9% 5.5% 5.0% NPV of Cash Flows 58,575 43% NPV of terminal value 76,811 57% Terminal Value 228,123 Projected Equity Value 135, % Free Cash Flow Yield 5.34% Free Cash Yield 6.19% Current P/E Terminal P/E 15.6 Projected P/E Terminal EV/EBITDA 6.4 Current EV/EBITDA Projected EV/EBITDA Shares Outstanding 5,160.0 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 7.3% Debt 13,448 Cash 8,478 Cash/share 1.64 Current Price: $24.46 Target Price: $26.24 Upside to DCF: 7.3% Based on an upside price of 7.3%,decline in global PC demand and a slowdown in emerging markets Intel is SELL

13 Additions to SIM IT Portfolio Evaluated following 3 stocks for adding to the SIM portfolio Yahoo(YHOO): Impressive growth in stock value over the past year. Led by a new CEO. Oracle(ORCL): Stable large cap stock with little downside and projected to have a good run with cloud computing business. Amazon(AMZN): Expected earnings growth due to global expansion.

14 Additions to SIM IT Portfolio We recommend Oracle s core products are part of server infrastructure and its business growth is not impacted by decline in PC business. Growing revenue in cloud computing subscriptions. Oracle purchased Application software such as Peoplesoft, JD Edwards, Seibel, Hyperion, Java, Sun etc; to strengthen its database business. Oracle has made several acquisitions that should help it position well in he growing cloud computing business. Oracle s core strategy is to integrate Database, Hardware and Server platforms into one single engineered platform and deploy them across the data centers.

15 DCF Valuation - Oracle ORACLE(ORCL) Srinath Potlapalli Terminal Discount Rate = 11.0% Terminal FCF 6/11/2013 Growth = 4.3% Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenue 37,121 37,180 38,072 39,595 41,377 43,446 45,835 48,356 50,774 53,313 55,978 % Growth 0.2% 2.4% 4.0% 4.5% 5.0% 5.5% 5.5% 5.0% 5.0% 5.0% Operating Margin 13,705 14,682 15,035 15,636 16,340 17,157 18,100 19,096 20,056 21,059 22,111 Operating Margin 36.9% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% Gains(losses) on equity investments,net % Growth 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Interest and Other (800) (800) (800) (800) (836) (878) (926) (977) (1,026) (1,077) (1,131) Interest % of Sales -2.2% -2.2% -2.1% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0% Taxes 2,981 2,973 3,279 3,417 3,570 3,749 3,955 4,172 4,381 4,600 4,830 Tax Rate 23.0% 21.4% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% Net Income 9,954 10,929 10,976 11,439 11,953 12,550 13,240 13,967 14,668 15,401 16,170 % Growth 9.8% 0.4% 4.2% 4.5% 5.0% 5.5% 5.5% 5.0% 5.0% 5.0% Add Depreciation/Amort 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 % of Sales 7.5% 7.5% 7.4% 7.1% 6.8% 6.4% 6.1% 5.8% 5.5% 5.3% 5.0% Plus/(minus) Changes WC (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) % of Sales -1.0% -1.0% -1.0% -1.0% -0.9% -0.9% -0.8% -0.8% -0.7% -0.7% -0.7% Subtract Cap Ex Capex % of sales 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Free Cash Flow 12,354 13,329 13,366 13,829 14,333 14,930 15,610 16,337 17,038 17,761 18,530 % Growth 7.9% 0.3% 3.5% 3.6% 4.2% 4.6% 4.7% 4.3% 4.2% 4.3% NPV of Cash Flows 88,347 47% NPV of terminal value 101,593 53% Terminal Value 288,465 Projected Equity Value 189, % Free Cash Flow Yield 8.37% Free Cash Yield 6.42% Current P/E Terminal P/E 17.8 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 11.7 Projected EV/EBITDA Shares Outstanding 4,630.0 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 28.8% Debt 18,852 Cash 14,955 As of 7/21/13 Current Price: $31.86 Target Price: $41.02 Upside: 28.8%

16 Corning Inc. Data as of July 19, 2013 NYSE: GLW Industry: Electronic Components & Equipment (specialty glass & ceramics) Current Price: $ wk range: $ $16.43 Market Cap: 22.3B Shares outstanding: 1.48B Beta: 1.76 Div (yield) 0.40 (2.7%) Revenue: $8.012B Earnings: $1.7B SIM weight (June 2013): 3.93%

17 Revenue Breakdown 2012 Revenue Other 0.1% Life Sciences 8.2% Specialty Materials 16.8% Display Technologies 36.3% Environmental Technologies 12.0% Telecommunications 26.6%

18 Business Analysis Innovator of diverse products and uses customers/partners include Apple, Samsung, Sony, Dow Chemical, Verizon, AT&T Business Drivers R&D and innovation Consumer spending: TVs, smartphones, tablets, cars Capital spending: auto & truck manufacturing, cable and internet lines Multi-use application of products Risks Gorilla Glass in windshields Willow Glass as roofing shingles, iwatch? View Inc. collaboration Loss of a top ten customer (50% of total revenue in 2012) Struggling international economies Declining LCD TV prices Supplier/materials loss

19 Stock Performance Stock is up 25% since July 21, 2012; outperforming S&P by 50 bps YTD Revenues are at all time highs and earnings are beginning to come around acquisitions have hindered income Declining LCD TV prices offset by improved fusion manufacturing process for glass (earnings up 4.2% in Q1 2013) Life Sciences division growing due to expansion into China and India

20 Valuation Relative to S&P 500 High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Relative to Industry High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF

21 Sensitivity Analysis Discount Rate: 12% Corning, like industry very cyclical Decline in LCD prices Innovative products, but risk with new product R&D paying off Growth Rate: 4.5% Huge potential with many products: Gorilla Glass, Willow Glass, Advanced Dynamic Glass Solid management with focus on R&D Acquisitions of Life Sciences labs has increased growth potential in segment

22 Discounted Cash Flow Current Price: $15.03 Target Price: $19.22 Potential Upside: 27.2% BUY 75 bps

23 Apple (AAPL) Valuation Relative to Industry High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Relative to S&P 500 High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Absolute Basis High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF

24 AAPL considerations Positives Top innovator for consumer electronics $60B share buyback plan to boost share price (by end of 2015) Products Per Tim Cook new hardware, software and services to be unveiled in Fall 2013 and in 2014 (FY end 9/2013) Lower-end iphone and ipad to steal market share from Samsung Larger screen iphone and ipad to gain consumers iwatch Negatives Can they produce profitable innovation in post-jobs era next big device? Down 19.6% YTD compared to S&P up 18.8% Google, Samsung consistently gaining ground

25 DCF - AAPL Apple (AAPL) Terminal Discount Rate = 12.5% Terminal FCF Growth = 5.0% Year 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Revenue 170, , , , , , , , , , ,594 % Grow th 9.0% 6.1% 7.5% 6.5% 6.5% 5.0% 5.0% 5.0% 5.0% 5.0% Operating Income 56,400 57,100 62,000 65,871 70,152 74,712 75,917 79,713 83,699 87,884 92,278 Operating Margin 33.0% 30.7% 31.4% 31.0% 31.0% 31.0% 30.0% 30.0% 30.0% 30.0% 30.0% Interest Income Interest Inc as % of sales 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Other Income, net ,800 7,242 7,712 8,098 8,503 9,486 9,960 10,458 Other Inc as % of sales 0.3% 0.3% 0.3% 3.2% 3.2% 3.2% 3.2% 3.2% 3.4% 3.4% 3.4% Interest (161) (188) (198) (212) (226) (241) (253) (266) (279) (293) (308) Interest % of Sales -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% Taxes (158) (143) (148) (4,373) (4,657) (4,960) (5,056) (5,309) (5,608) (5,888) (6,183) Tax Rate -6.9% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% Net Income 40,993 43,764 47,637 49,297 53,859 57,842 60,987 63,771 66,959 70,307 73,822 % Grow th 6.8% 8.8% 3.5% 9.3% 7.4% 5.4% 4.6% 5.0% 5.0% 5.0% Add Depreciation/Amort 4,500 5,587 5,930 6,375 6,789 7,230 7,592 7,971 8,370 8,788 9,228 % of Sales 2.6% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Plus/(minus) Changes WC % of Sales 0.0% 0.0% 0.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% Subtract Cap Ex 10,000 10,988 9,685 9,562 11,541 11,809 13,412 15,411 16,740 17,577 18,456 Capex % of sales 5.9% 5.9% 4.9% 4.5% 5.1% 4.9% 5.3% 5.8% 6.0% 6.0% 6.0% Free Cash Flow 35,493 38,363 43,881 46,110 49,107 53,263 55,167 56,331 58,589 61,519 64,595 % Grow th 8.1% 14.4% 5.1% 6.5% 8.5% 3.6% 2.1% 4.0% 5.0% 5.0% NPV of Cash Flows 277,320 50% NPV of terminal value 278,483 50% Terminal Value 904,325 Projected Equity Value 555, % Free Cash Flow Yield 8.91% Free Cash Yield 7.14% Current P/E Terminal P/E 12.3 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 8.9 Projected EV/EBITDA Shares Outstanding Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 39.6% % % % % % Discount Rate = 12.5% Growth Rate = 5% Current Price: $ Target Price: $ Potential Upside: 39.6% SIM Weight (June 2013): 4.6% HOLD Debt 3,382 Cash 4,988 Cash/share 5.31

26 Qualcomm, Inc. Company Overview (as of 7/23/2013): Ticker: Industry: QCOM Communication Equipment Current Price: 52-Week Price Range: Market Cap: Beta: Dividend (Yield): FY 2012 Revenue: FY 2012 Earnings: $62.30 $56.30-$68.50 $107.6B 1.17 $1.40 (2.3%) $19.121B $6.109B

27 Investment Thesis Catalysts: Qualcomm chips are used in a majority of smartphones, with enormous growth potential in Asia. The number of 3G/4G connections is expected to reach 4B by 2016, up from 1.9B currently. Qualcomm carries no long-term debt on its balance sheet. Qualcomm recently increased its cash dividend and share repurchase program. The stock has underperformed the S&P 500 by almost 20% YTD, signaling undervaluation. Risks: The smartphone market is becoming saturated in developed countries, particularly the U.S. Qualcomm is solely dependent on global growth in mobile sales. Competition in the industry will continue to intensify, driving ASP s lower over time. As the world transitions from 3G to 4G/LTE over the long-term, Qualcomm s royalty revenue per device will decrease.

28 Financial Analysis Key Statistics Qualcomm Texas Instruments Broadcom NVIDIA Market Capitalization: $106.9 billion $42.0 billion $19.9 billion $8.5 billion Revenue (mrq): $6.1 billion $2.9 billion $2.0 billion $955.0 million Revenue Growth (YoY): 24% -8% 10% -9% Current Ratio: Net Cash: $12.4 billion $(221) million $981 million $3.7 billion % LT Debt/Total Capital: N/A 27.6% 14.8% 0.4% Operting Margin: 30.4% 20.9% 10.9% 13.9% ROE: 20.7% 16.8% 22.4% 15.1% PEG Ratio (5 yr expected): Qualcomm has an advantage over its competitors in nearly every category Current and PEG ratios

29 DCF Analysis Recommendation: Buy 75bps Increase current holding to 4.62% Current P/E Projected P/E Current EV/EBITDA 8.22 Projected EV/EBITDA Shares outstanding 1,763 Current price $ Implied equity value/share $ Upside/(downside) to DCF 21.4%

30 Sensitivity Analysis Discount Rate Sensitivity Analysis 10.00% 10.50% 11.00% 11.50% 12.00% 4.0% $ $ $ $ $ Growth Rate 4.5% $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ Discount Rate = 11% Qualcomm is a cyclical company Dependence on global economy (China) Terminal Growth Rate = 5% Qualcomm is leader in cellular baseband processor market Mobile sales will continue to grow

31 Google, Inc. Company Overview (as of 7/23/2013): Ticker: Industry: GOOG Internet Software & Services Current Price: 52-Week Price Range: Market Cap: Beta: Dividend (Yield): FY 2012 Revenue: FY 2012 Earnings: $ $ $ $301.1B 1.15 N/A (N/A) $50.175B $10.737B

32 DCF Analysis Recommendation: Hold Current holding is 4.45% As price appreciates, holding will reach SIM max of 5% Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares outstanding 333 Current price $ Implied equity value/share $ 1, Upside/(downside) to DCF 11.6%

33 Sensitivity Analysis Discount Rate Sensitivity Analysis 10.50% 11.00% 11.50% 12.00% 12.50% 4.5% $ 1, $ $ $ $ % $ 1, $ 1, $ $ $ Growth 5.5% $ 1, $ 1, $ 1, $ $ Rate 6.0% $ 1, $ 1, $ 1, $ $ % $ 1, $ 1, $ 1, $ 1, $ Discount Rate = 11.5% Majority of revenue is derived from online advertising Google receives lower advertising revenue on mobile devices Terminal Growth Rate = 5.5% Google is the leader in innovation (20% time) Google will continue to improve the ways in which people access information

34 Recommendation

35 SIM IT Portfolio Recommendations Company Industry % of SIM Assets Decision to Hold/Sell/Buy Apple Inc Hardware/Electronic Equipment 4.6% Hold Google Inc Internet Software & Services 4.45% Hold Intel Inc Semiconductor N/A Sell QualComm Inc CommunicationEquipment 3.87% Buy 75 bps Corning Inc Diversified Electronics 3.93% Buy 75 bps Oracle Corp System Software/ Application Software N/A Buy 150 bps

36 Questions?