Applied Portfolio Management Intel Corporation Sector: Information Technology TRIM Report Date: 5/6/2013 Market Cap (mm) $103,018 Annual Dividend.89 2-Yr Beta (S&P 500 Index) 0.98 Return on Capital 30.3% Dividend Yield 4.3% Annualized Alpha -26.9% Compared With: EPS (ttm) $2.07 Price/Earnings (ttm) 10.0 Institutional Ownership 5.6% QUALCOMM Incorporated Current Price $20.62 Economic Value-Added (ttm) $7,876 Short Interest (% of Shares) 4.8% Samsung Electronics Co. Ltd. 12-mo. Target Price $23.00 Free Cash Flow Margin 13.2% Days to Cover Short 5.4 and the S&P 500 Index Business Description Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. The company operates through PC Client Group, Data Center Group, Other Intel Architecture, Software and Services, and All Other segments. It offers microprocessors that process system data and controls other devices in the system; and chipsets, which sends data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; system-on-chip products that integrate its processing functions with other system components, including graphics, audio, and video onto a single chip; wired network connectivity products; Investment Thesis We recommend trimming exposure to & due to poor positioning of both companies. and have adequate dividend yields and has high profit margins. However, 2012 performance was weak due to the decline in PC sales (14% yoy). The unpopularity of s Windows 8 has been a significant factor in the PC sales decline. Consumer demand is moving away from PCs and toward mobile devices. / have been late to adapt to this demand shift. Consequently, s Windows, Online Services, Entertainment and Devices and Business Segments and 's processor-based revenue stream face growth challenges. Our recommendation to trim the Wintel position comes in conjunction with our colleague, Brea Short s, recommendation to buy a Wintel competitor, Qualcomm. These portfolio changes will increase our IT exposure to an overweight position, and add a mobile and growth-oriented stock to our portfolio. ANNUALIZED 3-YEAR CAGR Total Revenue 14.9% Free Cash Flow -32.8% EBIT 19.2% Total Invested Capital 21.8% NOPAT 17.9% Total Assets 16.7% Earnings Per Share 41. Economic Value-Added 16.5% Dividends Per Share 15.8% Market Value-Added -10.2% 3 2 1-1 -2-3 -4 2 1-1 -2-3 -4 6 5 4 3 2 1 QCOM Samsung ^SPX ROA ROE ROIC 2007 2008 2009 2010 2011 2012 Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield 2008 2009 2010 2011 2012 25.7% 24.6% 35.7% 32.4% 27.4% 15.2% 18.9% 26.3% 18.8% 13.2% 6.4% 3.9% 9.8% 10.2% 10.7% 3.7% 2.7% 3. 3.2% 4.2% $15,000 EBIT Net Operating Profit After Tax Per Share Metrics Earnings Dividends NOPAT Free Cash Flow 2008 2009 2010 2011 2012 0.93 0.79 2.06 2.46 2.20 0.55 0.56 0.63 0.78 0.87 1.17 1.19 2.15 2.42 2.17 1.52 1.30 1.80 1.39 0.44 $10,000 $5,000 2007 2008 2009 2010 2011 2012 $12,000 Economic Value-Added Market Valued-Added $120,000 30 Price/Earnings Price/Free Cash Flow $10,000 $100,000 25 $8,000 $80,000 20 $6,000 $60,000 15 $4,000 $40,000 10 $2,000 5 2007 2008 2009 2010 2011 2012 0 2007 2008 2009 2010 2011 2012 Datasource: Capital IQ
Applied Portfolio Management Microsoft Corporation Sector: Information Technology TRIM Report Date: 5/6/2013 Market Cap (mm) $224,255 Annual Dividend.89 2-Yr Beta (S&P 500 Index) 0.84 Return on Capital 88.5% Dividend Yield 3.3% Annualized Alpha -6.9% Compared With: EPS (ttm) $1.96 Price/Earnings (ttm) 13.7 Institutional Ownership 5.3% QUALCOMM Incorporated Current Price $26.71 Economic Value-Added (ttm) $19,365 Short Interest (% of Shares) 1.3% Intel Corporation 12-mo. Target Price $32.50 Free Cash Flow Margin 39.8% Days to Cover Short 0.0 and the S&P 500 Index Business Description Microsoft Corporation develops, licenses, and supports software products and services; and designs and sells hardware worldwide. The company s Windows & Windows Live division offers PC operating system that primarily includes Windows 7 operating system, Windows live suite of applications and Web services, and PC hardware products. Its Server and Tools division provides Windows Server operating systems, Windows Azure; Microsoft SQL Server, SQL Azure, Windows Intune, Windows Embedded, Visual Studio, Silverlight, system center products, Microsoft consulting services, and Premier product support services. This division also offers cloud-based services; and training and certification to Investment Thesis We recommend trimming exposure to & due to poor positioning of both companies. and have adequate dividend yields and has high profit margins. However, 2012 performance was weak due to the decline in PC sales (14% yoy). The unpopularity of s Windows 8 has been a significant factor in the PC sales decline. Consumer demand is moving away from PCs and toward mobile devices. / have been late to adapt to this demand shift. Consequently, s Windows, Online Services, Entertainment and Devices and Business Segments and 's processor-based revenue stream face growth challenges. Our recommendation to trim the Wintel position comes in conjunction with our colleague, Brea Short s, recommendation to buy a Wintel competitor, Qualcomm. These portfolio changes will increase our IT exposure to an overweight position, and add a mobile and growth-oriented stock to our portfolio. ANNUALIZED 3-YEAR CAGR Total Revenue 8.1% Free Cash Flow 5.1% EBIT 10.5% Total Invested Capital 8.1% NOPAT 11.9% Total Assets 15.9% Earnings Per Share 7.5% Economic Value-Added 12.3% Dividends Per Share 15.4% Market Value-Added -12.2% 5% -5% -1-15% -2-25% -3-35% 15% 1 5% -5% -1-15% -2 10 8 6 4 2 QCOM ^SPX ROA ROE ROIC 2007 2008 2009 2010 2011 2012 Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield 2008 2009 2010 2011 2012 39.8% 35.4% 38.6% 38.8% 37.9% 30.5% 27.2% 35.4% 35.2% 39.8% 9.8% 5.3% 7.6% 10.5% 7.6% 2.3% 1.7% 1.9% 2.5% 3. $30,000 $25,000 EBIT Net Operating Profit After Tax Per Share Metrics Earnings Dividends NOPAT Free Cash Flow 2008 2009 2010 2011 2012 1.90 1.63 2.13 2.73 2.02 0.44 0.52 0.52 0.64 0.80 1.92 1.70 2.01 2.64 2.54 1.18 2.28 1.95 1.84 2.81 $15,000 $10,000 $5,000 2007 2008 2009 2010 2011 2012 $25,000 $15,000 $10,000 $5,000 Economic Value-Added Market Valued-Added $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 2007 2008 2009 2010 2011 2012 30 25 20 15 10 5 0 Price/Earnings Price/Free Cash Flow 2007 2008 2009 2010 2011 2012 Datasource: Capital IQ
Recommendation: Trim Sector: Technology Sub-Sector: Systems Software/Semiconductors Investment Thesis We recommend trimming the Wintel position (Intel and Microsoft) due to poor positioning of both companies. and have moderate to high dividend yields and shows efficiency through high margins. However, the 2012 financials of both companies were weak due to the decline in PC sales. According to IDC, the year over year decline in PC sales is 14%. The unpopularity of s Windows 8 has been a significant factor in the PC sales decline. Studies indicate consumer demand is moving away from PCs and toward mobile devices. / have been late to adapt to this demand shift. Consequently, s Windows, Online Services, Entertainment and Devices and Business Segments have struggled to expand segment revenue percentages. Likewise, this decline in demand has hampered revenue growth for. Wintel s failure to expand into mobile segments is a threat to their ability to maintain dividend yields. Our recommendation to trim the Wintel position comes in conjunction with our colleague, Brea Short s, recommendation to buy a Wintel competitor, Qualcomm. All three companies are good EVA generators with un priced value creation that we hope to capture. This collaborative portfolio position change will diversify our IT sector holdings, increase our IT exposure to an overweight position, and add Qualcomm, a mobile and growth oriented stock, to our portfolio. Macroeconomic Thesis The lagging and coincident indicator rating scale shown in the graph confirms that the US economy has been in an expansionary mode. The leading indicator ranking scale suggests that economic activity will slow in the first half of 2013. ISM new manufacturing orders and consumer sentiment have been on a decline since coming out of the 2008 recession, which impacts both and. The economy is entering a slowing phase whether it is a mid cycle slowdown or beginning of a recession remains to be determined which means we are just past the peak of the financial cycle. 3 P age
SIF Purchase versus Current Trim was added to the SIF in 2008. 2008 The majority of stocks were appealing because of their undervaluation which was a result of the recession. Their stock prices were expected to rise. processors were perceived as the best in the industry. PC market had positive outlook. 2013 is undervalued, although we do not expect a significant rise in price. has an attractive dividend yield, however. processors competition is stronger. PC market is declining with limited growth opportunities as consumers migrate away from the PC toward mobile devices. 's chips not suitable for many smaller, mobile devices. Moving into the mobile market late would require a large catalyst. 4 P age
was added to the SIF in 2012. 2012 Strong financial measures. High expectations for Windows 8. PC dominated sector sales. 2013 Financial measures suffer from low PC sales. YoY PC sales decline is expected. Windows 8 is unpopular. s Windows, Online Services, Business Segment & Entertainment and Devices divisions experiencing low/no growth. 5 P age
1 year returns S&P 500 S&P 500 and low stock returns have been substandard to S&P since June 2012 Despite recent and price increases, both still perform well below the S&P benchmark. As discussed more in the Industry Presence analysis, & s overall decreasing stock price trend can be attributed to: o low PC sales; o decreasing market share; o and a slow economy. PC sales are anticipating an 11% 14% YoY decrease in 2013. QCOM Our macroeconomic analysis suggests economic activity is expected to remain slow. Technology stocks still present interesting opportunities, given that the sector has lagged the S&P 500 in 2012 2013. Competitors like Qualcomm are achieving market share growth and increases in stock returns. The graph to the left depicts and stock prices lagging behind Qualcomm s stock price. 6 P age
Industry Presences Current versus Purposed Sector Weights The lower left hand chart illustrates the SIF s 2012 sector exposure. The SIF is currently 2.2% below market weight in the Information Technology sector. The lower right hand chart exhibits the 2013 sector weighting after the recommended buy and trims in the Information Technology sector. Notice how the SIF will be overweighed by approximately 8% in the Information Technology sector after the purposed position changes. As our research will explain in the Value Creation section, there is a lot of un priced EVA in,, and QCOM (the SIF s purposed holdings). The overweight in the Information Technology sector will position the SIF to experience stock price and yield increases as the Information Technology sector catches up to the S&P in upcoming cycles. Industry Outlook Industry analysis firms, Gartner and IDC, reported declines in 1Q13 PC sales that were worse than anticipated. IDC estimated a 14% year over year decline and Gartner estimated the decline at 11%. This 1Q13 decline is the fourth consecutive quarter posting a year over year decline in PC sales. This trend is expected to continue toward a low as the PC market shrinks. The PC market as a whole is getting smaller; therefore growth opportunities are getting smaller for companies with a significant percentage of revenue that relies on PC sales. Companies like / that currently rely on PC based product line are realizing diminished revenue growth and decreased market share. Technology companies must adjust with the consumer demand shift. For many companies, this means tailoring to a more mobile based constituency. Year over year decline in PC sales (1Q2012 1Q2013) 7 P age
Consumers are migrating away from the PC toward mobile devices. Smartphones are in about 55% of U.S. homes today, an increase of nearly 2 from 2010 when smartphones were in 36% of U.S. homes. According to a study by Accenture, this growth in demand for mobile devices, particularly smartphones, is not mirrored by the PC. For example, in 2009 26% of consumers who participated in the study owned a smartphone as compared to 58% in 2012. That is a 32% three year growth of smartphones owned, compared to a 3% growth of PCs owned. Companies like Google, Apple, and Qualcomm have adapted with this shift in demand and taken advantage of the mobile industry growth. Wintel has not been so quick to adapt and now struggles to compete as they lose market share to earlier adapters. The graphs below treat QCOM/'s total sales and QCOM/'s total sales as one market (totaling 10). Over the past three years while QCOM s market share has increased by 6., s market share has decreased by 6.. QCOM is directly stealing s market share, affecting as well. 8 P age
Business Segments Illustrated below are s business segments as a percentage of s total revenues in years 2007 and 2012. Notice how revenues in s PC Client Group business segment have declined from 70.8% in 2007 to 64.3% in 2012. Considering the consumer preference for PCs is declining by 11 14% year over year, we would expect s PC Client Group percentage to decrease by a similar magnitude. At the same time we would expect other segments, such as the mobile segment, to increase in revenue percentage. However, this is not the case. s failure to produce increasing revenues in growing markets segments suggests is unable to adapt core competencies to changing consumer preferences. 9 P age
The charts below depict s current business segments as a percentage of revenues. As to be expected with PC s decreasing popularity, s Windows segment experiences a 3.5% decrease in percentage of revenues between years 2007 and 2012. However, s Entertainment and Devices (which includes mobile devices) has only experienced 1% growth over this same time period, increasing from 12% to 13%. Where as, s server and tools segment has grown 3.6% in the 5 years. This indicates is focusing on its Server and Tool segment offerings as oppose to Entertainment and Devices offerings. 10 P age
Financial Analysis Return on Equity (ROE) and Return on Assets (ROA) Return on assets has been on a downtrend since the latest recession. ROE has decreased almost 1 from 2011 to 2012 Return on assets has not shown any sign of growth since 2007. The year 2012 is the lowest ROA as been in the past six years. ROE has also shown no signs of growth and is at a six year low in 2012. ROE decreased 2 from 2007 to 2012. Earnings Yield and Dividend Yield Earnings yield trends an increase. In 2012 earnings yield was at a high of 10.7%. Dividend yield was stagnant from 2009 to 2011 with about a 3% increase in 2012. Earnings yield declined sharply in 2012. Dividend yield shows little growth. 11 P age
Value Creation Metrics Net Operating Profit After Tax and Free Cash Flow NOPAT decreased from $12,700 in 2011 to $10,800 in 2012. FCF decreased from 2010 to 2012 by almost $8,000. NOPAT trends slight growth with a decrease in 2012. FCF declined from 2009 to 2010 with an increase in 2012. Economic Value Added and Market Value Added EVA increased greatly from 2009 to 2010 and stayed about the same level in 2011 but decreased by 2,000 in 2012. The difference between the two variables has been showing a consistent undervaluation since 2010. EVA increased from 2009 to 2011 and decreased in 2012 while MVA decreased every year. appeared close to fairly valued in 2010, but with an EVA increase and MVA decrease is now undervalued. Over the past three years both and have consistently had an EVA higher than their MVA. This indicates both have un priced value creation which we hope to capture in 2013. 12 P age
Value Spread: ROIC to WACC ROIC decreased from 55% in 2011 to a more typical 3 in 2012. With a WACC of 8.3%, ROIC WACC spread is 21.7%. This spread indicates has a moderate ability to translated invested capital into revenue increase. Since 2007 ROIC has stayed between 7 and 9. The past three years has been closer to 9 with 88.5% in 2012. With a WACC of 8.1%, ROIC WACC spread is 80.4%. This wide spread indicates has great ability to drive returns with invested capital. WACC Etc. Other Analyst Recommendation Weighted Average Cost of Capital (WACC) Assumptions A WACC of 8.1% was calculated using: Short term debt cost of 1.72% Long term growth rate of 2. Cost of Equity of 8.7% was calculated using: o Risk Free Rate of 1.72% o Market risk premium of 7. o Beta of 1.0 A WACC of 8.3% was calculated using: Short term debt cost of 1.72% Long term growth rate of 3. Cost of Equity of 8.7% was calculated using: o Risk Free Rate of 1.72% o Market risk premium of 7. o Beta of 1.0 13 P age
Forecasting assumptions Forecasting assumptions are largely based on average performance and tapered to perpetuity. Intel Income Statement Income Statement adjustments are as follows: Gross Margin and Operating Profit Margin compressed to reflect 7 year business cycle average; reduce effect of recession and expansion. Net Profit Margin also compressed, consistent with modeling with a margin of safety. Intel Balance Sheet Balance Sheet forecasting assumptions are largely based on average performance and held static in perpetuity. Adjustments are as follows: Inventory was adjusted to exclude high inventory carry in 2008 due to the recession. Total Debt was toward the long term historical average. Total equity was decreased to reflect recent average levels. 14 P age
Microsoft Income Statement Income Statement adjustments are as follows: Revenue growth was adjusted to Capital IQ analyst expectations then tapered to a conservative perpetuity. Margins were adjusted to Capital IQ analyst expectations and tapered to conservative perpetuities. Common shares growth is expected to continue decline while buys back shares and have growth in perpetuity. Dividend growth rate was also reduced, once again consistent with the margin of safety principle. Microsoft Balance Sheet Balance Sheet adjustments are as follows: Cash and equivalents were tapered off from 2012 to be conservative. Total receivables average was reduced to offset a high 2008 rate due to the recession. Inventory was reduced to a conservative rate that was sustained from 2009 to 2010. Total current assets average was lowered to offset the abnormally high rates in 2011 and 2012. Net PPE was tapered off in conservation. Total debt and total equity were raised as a better reflection of the past two years. 15 P age
Forecast Analysis Based on the aforementioned forecast we expect the following results: Total Revenue Revenues continue to increase slowly over the next five year period. Slow growth is consistent with pre recession and expansion growth trends Revenues maintain steady growth over the next five years. Margin Analysis Gross Profit and Operating Profit Margins Gross Profit and Operating Profit Margins remain average and consistent of the next five years. Slight decrease in both reflects conservative estimation techniques. Gross Profit and Operating Profit Margins remain high and consistent over the next five years. Slight decrease in both is due to conservative estimation techniques. 16 P age
Net Profit Margin decreases and normalizes at pre recession level. While free cash flow stabilizes near historical average. Net Profit and Free Cash Flow Margins stabilize around the historical norm. Earnings Per Share Earnings Per Share resume growth similar to 2010 and 2011 Earnings Per Share resume pre 2012 growth and a more moderate rate Dividends Per Share Dividends Per Share exhibits slow growth, slightly disproportional to EPS over the next five years. Slow growth is due to the use of pre recessional style growth assumptions Dividends Per Share continues historical pattern of moderate but consistent growth. 17 P age
Earnings and Dividends Yield As you can see the earnings and dividend yields have been compressed by conservative modeling assumptions. Notice how, even in conservation, and continue to produce attractive and sustainable earnings and dividend yields. Intrinsic Value Estimation Based on our modeling assumptions, the intrinsic value of FCFs valuation model shows to be undervalued by $12.41. This results in a 60.2% undervaluation from the 2012 year end storck price of $20.62. Additionally, s per share intrinsic value is expected to continue rising. We expect to benefit from the year end stock price catching up with s intrinsic value. 18 P age
Dividend Discount Valuation Model The Dividend Discount Valuation Model contradicts the Intrinsic Value of FCF s Valuation Model. Per the Dividend Discount Model, the current value of s future dividends only supports a stock price of $12.18/share. Based on this model, is 78.08% overvalued. Although, more than half the current stock price is supported by the present value of dividends alone. With conservative forecasting in place, s dividend yield is expected to increase from 3. to 4. over the next 5 years. Dividend growth rates used were the same rates used in forecasting assumptions. Beta was smoothed to 1.00 as it was in the WACC assumptions. Intrinsic Value Estimation Based on our modeling assumptions, the intrinsic value of FCFs valuation model shows to be undervalued by $25.39. This results in a 95. undervaluation from the 2012 year end storck price of $52.10. The margin of undervaluation has been growing since 2009. Per share intrinsic value is expected to continue rising. Per share intrinsic value is expected to increase by more than $10.00 by 2017. We expect to benefit from the year end stock price catching up with s intrinsic value. 19 P age
Dividend Discount Valuation Model The Dividend Discount Valuation Model contradicts the Intrinsic Value of FCF s Valuation Model. Per the Dividend Discount Model, the current value of S future dividend only supports a stock price of $14.52/share. Based on this model is 112.33% overvalued. Although, almost half the current stock price is supported by the present value of dividends alone. With conservative forecasting in place, s dividend yield is expected to decrease from 4.2% to 2.6% over the next 5 years. Dividend growth rates used were the same rates used in forecasting assumptions. Beta was smoothed to 1.00 as it was in the WACC assumptions. Recommendation Summary Our decision to equally trim our positions in Intel and Microsoft comes in conjunction with our colleague Brea Short s recommendation to buy Qualcomm. In trimming our exposure to Wintel from 1 portfolio weight to that of about 7%, the Student Investment Fund (SIF) will be able to take on a full 5% position in Qualcomm. It is in the SIF s best interest to maintain a partial position in Wintel because Intel and Microsoft are currently providing the SIF with desirable yields at 3% and 4.2% respectively. However, both Intel and Microsoft have performed poorly compared to the S&P over the last four quarters. Shortly after acquiring Microsoft in May of 2012, both Intel and Microsoft stocks diverged from the S&P and began a steady decrease in stock price. Over the last year, Intel and Microsoft have exposed the SIF to 1.5% in weighted returns. We attribute Wintel s poor performance to a failure of the company s ability to adapt core competencies to meet changing consumer demand. While competitors have adjusted, Intel/Microsoft failed to respond to the change in demand from the PC market to mobile device market. For these conflicting reasons, we recommend only a partial trim of Intel and Microsoft. With the funds recovered from this trim, we will invest in Qualcomm. This will give the SIF a moderate overweight in the Information Technology sector. It will also allow the SIF to diversify its IT industry risk by holding stocks that not only have stable, historical yields, but also innovative, well positioned stocks that promise handsome yield growth in the future. 20 P age
Intel Corporation Sector Information Technology Report Date 5/6/2013 2007 Historical Income Statement Highlights Forecasted Income Statement Highlights 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Total Revenue 38,334 37,586 35,127 43,623 53,999 53,341 56,061 58,595 60,383 61,892 63,130 Gross Profit 19,904 20,844 19,561 28,491 33,757 33,151 33,637 35,157 36,230 37,135 37,878 Operating Income 8,732 9,664 8,639 15,588 17,477 14,638 13,567 14,825 15,096 15,473 15,782 Net Income 6,976 5,292 4,369 11,464 12,942 11,005 10,371 10,840 11,171 11,450 11,679 Retained Earnings 30,848 26,537 26,318 32,919 29,656 32,138 38,144 44,622 51,434 58,572 66,026 Total Common Shares 5,816 5,663 5,557 5,555 5,256 4,996 4,846 4,701 4,561 4,424 4,292 Total Diluted Shares 5,936 5,748 5,645 5,696 5,411 5,160 5,006 4,856 4,710 4,569 4,432 Earnings Per Share $1.20.93.79 $2.06 $2.46 $2.20 $2.14 $2.31 $2.45 $2.59 $2.72 Dividends Per Share.45.55.56.63.78.87.90.93.96.97.98 Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Cash and Equivalents 7,307 3,350 3,987 5,498 5,065 8,478 6,519 6,814 7,021 7,197 7,341 Total Receivables 2,576 1,712 2,273 2,867 3,874 4,902 3,808 3,980 4,101 4,204 4,288 Inventory 3,370 3,744 2,935 3,757 4,096 4,734 4,485 4,688 4,831 4,951 5,050 Total Current Assets 23,885 19,871 21,157 31,611 25,872 31,358 32,769 34,250 35,295 36,177 36,901 Net PPE 16,918 17,574 17,225 17,899 23,627 27,983 26,129 27,310 28,143 28,847 29,424 Total Assets 55,651 50,472 53,095 63,186 71,119 84,351 80,742 84,391 86,965 89,140 90,922 Payables and Accruals 7,804 5,994 6,649 8,334 9,564 10,362 10,216 10,678 11,004 11,279 11,505 Total Current Liabilities 8,571 7,818 7,591 9,327 12,028 12,898 12,361 12,920 13,314 13,647 13,920 Total Debt 2,120 1,285 2,073 2,128 7,341 13,462 11,212 11,719 12,077 12,378 12,626 Total Equity 42,762 39,546 41,704 49,430 45,911 51,203 50,455 52,736 54,344 55,703 56,817 $70,000 $60,000 $50,000 $40,000 $30,000 $10,000 Total Revenue $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Net Income $3.00 $2.50 $2.00 $1.50 $1.00.50.00 Earnings Per Share Dividends Per Share $40,000 $35,000 $30,000 $25,000 $15,000 $10,000 $5,000 Total Current Assets Cash and Equivalents $100,000 $80,000 $60,000 $40,000 Total Assets Net PPE 60,000 50,000 40,000 30,000 20,000 10,000 0 Total Equity Total Debt 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5
Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Gross Profit Margin 51.9% 55.5% 55.7% 65.3% 62.5% 62.1% 60. 60. 60. 60. 60. Operating Profit Margin 22.8% 25.7% 24.6% 35.7% 32.4% 27.4% 24.2% 25.3% 25. 25. 25. Net Profit Margin 18.2% 14.1% 12.4% 26.3% 24. 20.6% 18.5% 18.5% 18.5% 18.5% 18.5% Free Cash Flow Margin 19.9% 23. 20.6% 23. 13.5% 4.1% 26.8% 16.4% 16.9% 17.2% 17.4% 7 6 5 4 3 2 1 Gross Profit Margin Operating Profit Margin 3 25% 2 15% 1 5% Net Profit Margin Free Cash Flow Margin Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Days Sales Outstanding 24.53 16.63 23.62 23.99 26.19 33.54 24.79 24.79 24.79 24.79 24.79 Inventory Turnover 11.38 10.04 11.97 11.61 13.18 11.27 12.50 12.50 12.50 12.50 12.50 Total Debt to Equity 5. 3.2% 5. 4.3% 16. 26.3% 22.2% 22.2% 22.2% 22.2% 22.2% Total Debt to Assets 3.8% 2.5% 3.9% 3.4% 10.3% 16. 13.9% 13.9% 13.9% 13.9% 13.9% 40 35 30 25 20 15 10 5 0 Days Sales Outstanding Inventory Turnover 14 12 10 8 6 4 2 0 3 25% 2 15% 1 5% Total Debt to Equity Total Debt to Assets Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Total Asset Turnover 0.69 0.74 0.66 0.69 0.76 0.63 0.69 0.69 0.69 0.69 0.69 Equity Multiplier 1.30 1.28 1.27 1.28 1.55 1.65 1.60 1.60 1.60 1.60 1.60 Return on Assets 12.5% 10.5% 8.2% 18.1% 18.2% 13. 12.8% 12.8% 12.8% 12.8% 12.8% Return on Equity 16.3% 13.4% 10.5% 23.2% 28.2% 21.5% 20.6% 20.6% 20.6% 20.6% 20.6% Return on Capital 29.7% 32.6% 33.5% 55.1% 46.9% 30.3% 32.7% 34.2% 33.8% 33.8% 33.8% 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Total Asset Turnover Equity Multiplier 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 3 25% 2 15% 1 5% Return on Equity Return on Assets 6 5 4 3 2 1 Return on Equity Return on Capital -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5
Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E NOWC 5,449 2,812 2,546 3,788 3,471 7,752 4,595 4,803 4,949 5,073 5,175 Net Fixed Assets 16,918 17,574 17,225 17,899 23,627 27,983 26,129 27,310 28,143 28,847 29,424 Total Invested Capital 22,367 20,386 19,771 21,687 27,098 35,735 30,724 32,113 33,093 33,920 34,598 Effective Tax Rate 23.9% 31.1% 23.4% 23.4% 27.2% 26. (Tax rate from last historical year used in forecasts) NOPAT 6,646 6,654 6,617 11,940 12,721 10,831 10,039 10,969 11,170 11,449 11,678 Free Cash Flow N/A 8,635 7,232 10,024 7,310 2,194 15,049 9,580 10,190 10,622 11,000 NOPAT Per Share 1.14 1.17 1.19 2.15 2.42 2.17 2.07 2.33 2.45 2.59 2.72 FCF/Share N/A 1.52 1.30 1.80 1.39 0.44 3.11 2.04 2.23 2.40 2.56 Return on Capital 29.7% 32.6% 33.5% 55.1% 46.9% 30.3% 32.7% 34.2% 33.8% 33.8% 33.8% $40,000 $35,000 $30,000 $25,000 $15,000 $10,000 $5,000 Total Invested Capital Net Fixed Assets $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 NOPAT Free Cash Flow $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Economic Value-Added Market Valued-Added $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 Intrinsic Value of FCFs Valuation Model Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Economic Value-Added 4,834 5,003 5,016 10,183 10,526 7,937 7,550 8,368 8,489 8,702 8,876 Market Valued-Added 112,293 43,474 71,659 67,392 81,547 51,815 113,599 115,194 117,245 119,446 121,835 PV of Future FCFs 144,136 147,175 151,864 154,141 159,316 170,026 168,748 172,836 176,644 180,330 183,937 Value of Non-Oper. Assets 7,307 3,350 3,987 5,498 5,065 8,478 6,519 6,814 7,021 7,197 7,341 Total Intrinsic Firm Value 151,443 150,525 155,851 159,639 164,381 178,504 175,267 179,649 183,666 187,527 191,278 Intrinsic Value of Equity 149,323 149,240 153,778 157,511 157,040 165,042 164,055 167,930 171,589 175,149 178,652 Per Share Intrinsic Value $25.67 $26.35 $27.67 $28.35 $29.88 $33.03 $33.85 $35.72 $37.62 $39.59 $41.63 Year-End Stock Price $26.66 $14.66 $20.40 $21.03 $24.25 $20.62 Over (Under) Valuation/Sh.99 ($11.69) ($7.27) ($7.32) ($5.63) ($12.41) % Over (Under) Valued 3.7% -79.8% -35.7% -34.8% -23.2% -60.2% Cost of Capital 2012 Weight % Cost Wgt Cost Equity Capitalization 103,018 88.4% 8.7% 7.7% Total Debt 13,462 11.6% 4.5% 0.4% Preferred Stock 0 0. 0. 0. Value of All Securities 116,480 100. Effective Tax Rate 26. Long-Term Growth Rate: Risk-Free Rate 1.72% 2. 5-Yr Beta 1.02 Alternative Beta: Market Risk Premium 7. 1.00 CAPM Cost of Equity 8.7% Weighted Average Cost of Capital: 8.1% $45 $40 $35 $30 $25 $20 $15 $10 $5 Year-End Stock Price Per Share Intrinsic Value $2 ($2) ($4) ($6) ($8) ($10) ($12) ($14) Over (Under) Valuation/Sh % Over (Under) Valued 2-2 -4-6 -8-10 2007 2008 2009 2010 2011 2012 -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5
Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Stock Price/Intr. Value $26.66 $14.66 $20.40 $21.03 $24.25 $20.62 $33.85 $35.72 $37.62 $39.59 $41.63 Price to Earnings 22.2 15.7 25.9 10.2 9.8 9.4 15.8 15.5 15.4 15.3 15.3 Price to Free Cash Flow N/A 9.6 15.7 11.7 17.4 47.0 10.9 17.5 16.8 16.5 16.2 Price to Sales 4.0 2.2 3.2 2.7 2.4 1.9 2.9 2.9 2.8 2.8 2.8 Price to Book 2.8 1.6 2.1 1.8 1.8 1.2 2.0 2.0 2.0 2.0 2.0 Earnings Yield 4.5% 6.4% 3.9% 9.8% 10.2% 10.7% 6.3% 6.5% 6.5% 6.5% 6.5% Dividend Yield 1.7% 3.7% 2.7% 3. 3.2% 4.2% 2.7% 2.6% 2.5% 2.5% 2.4% Free Cash Flow Yield N/A 10.4% 6.4% 8.6% 5.7% 2.1% 9.2% 5.7% 5.9% 6.1% 6.2% Price to Earnings Price to Free Cash Flow Price to Sales Price to Book Earnings Yield Dividend Yield 50 3.5 12% 40 30 20 10 3.0 2.5 2.0 1.5 1.0 0.5 1 8% 6% 4% 2% 0 0.0 Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model 2013E Ratio Ratio Ratio Metric Value Intel Corporation May 6, 2013 Expected Dividend Growth Rates Price to Earnings 15.8 $2.14 $33.85 Annual Dividend 3.5% 3. 3. 2. 1. Price to Free Cash Flow 10.9 $3.11 $33.85 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Price to Sales 2.9 $11.57 $33.85.45.55.56.63.78.87.90.93.96.97.98 Price to Book 2.0 $16.66 $33.85 1-Yr Div Growth 11.2% PV Dividends 1-4 $3.05 Dividend Yeld 3.7% Intrinsic Value Estimates vs. Current 2013EPrice 3-Yr Div Growth 15.8% PV Perpetual Div. $9.12 Current Price $23.66 5-Yr Div Growth 14.1% Intrinsic Value $12.18 If Purchased For: $12.18 PV of Free Cash Flows $33.85 Risk-Free Rate 1.72% Current Price $23.66 Expected Return = 8.7% Dividend Discount Model $12.18 5-Yr Beta 1.02 ($12.18).90.93.96 $13.72 $12.75 Price to Earnings $33.85 Market Premium 7. Analyst Notes: Price to Free Cash Flow $33.85 Required Return 8.7% Based on a current dividend of.87, expected growth as shown above and an equity required Price to Sales $33.85 Alternative Beta 1.00 return of 8.7%, is worth $12.18 per share, vs. a current price of $23.66. Price to Book $33.85 Intrinsic Value Estimates vs. Current Price Compared With: QUALCOMM Incorporated Compared With: S&P 500 Index $40 Samsung Electronics Co. Ltd. $35 $30 $25 $20 $15 $10 $5 Current Price PV of Free Cash Flows Dividend Discount Model Price to Earnings Price to Free Cash Flow Price to Sales Price to Book 3 2 1-1 -2-3 -4 QCOM Samsung 2 1-1 -2-3 -4 ^SPX -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5
Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Positive Net Income 1 1 1 1 1 1 1 1 1 1 Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1 Growing ROA (% change NI > % change TA) 0 0 1 1 0 0 0 0 0 0 Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1 Total Assets Growing Faster Than Total Liabilities 1 0 1 0 0 1 1 0 0 0 Increasing Liquidity (Current Ratio) 0 1 1 0 1 0 1 0 0 0 % Change Shares Outstanding (Diluted) < +2. 1 1 0 0 0 0 0 0 0 0 Expanding Gross Margin 1 1 1 0 0 0 0 0 0 0 Asset Turnover (% change sales > % change assets) 1 0 1 1 0 1 0 0 0 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1 Piotroski Score 8 7 9 6 5 6 6 4 4 4 Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E (Current Assets-Current Liabilities)/Total Assets 1.200 0.2866 0.3066 0.4232 0.2336 0.2626 0.3033 0.3033 0.3033 0.3033 0.3033 Retained Earnings/Total Assets 1.400 0.8557 0.6997 0.5831 0.6480 0.4922 0.5572 0.6328 0.7183 0.8078 0.9019 Earnings Before Interest & Tax/Total Assets 3.300 0.6319 0.5369 0.8141 0.8110 0.5727 0.5545 0.5797 0.5728 0.5728 0.5728 Market Value Equity/Total Liabilities 0.600 4.5590 5.9712 5.0954 3.0338 1.8647 3.2500 3.1829 3.1560 3.1429 3.1429 Sales/Total Assets 0.999 0.7439 0.6609 0.6897 0.7585 0.6317 0.6936 0.6936 0.6936 0.6936 0.6936 Altman Score 7.08 8.18 7.61 5.48 3.82 5.36 5.39 5.44 5.52 5.61 The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 10 8 6 4 2 0 Piotroski Financial Fitness Scorecard (10-pt scale) 9 8 7 6 5 4 3 2 1 0 Altman Probability of Bankruptcy Z-Score -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5
Microsoft Corporation Sector Information Technology Report Date 5/6/2013 2007 Historical Income Statement Highlights Forecasted Income Statement Highlights 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Total Revenue 51,122 60,420 58,437 62,484 69,943 73,723 78,810 85,036 89,942 93,540 96,346 Gross Profit 40,429 48,822 46,282 50,089 54,366 56,193 58,792 63,437 67,097 69,781 71,874 Operating Income 18,949 24,071 20,693 24,098 27,161 27,956 27,662 31,463 33,279 34,610 35,648 Net Income 14,065 17,681 14,569 18,760 23,150 16,978 22,618 25,936 25,246 26,256 27,044 Retained Earnings (31,114) (27,703) (23,793) (17,736) (8,195) (856) 14,485 32,679 49,842 67,817 86,541 Total Common Shares 9,742 9,328 8,945 8,813 8,490 8,396 8,270 8,146 8,024 7,903 7,785 Total Diluted Shares 9,886 9,470 8,996 8,927 8,593 8,506 8,378 8,253 8,129 8,007 7,887 Earnings Per Share $1.44 $1.90 $1.63 $2.13 $2.73 $2.02 $2.73 $3.18 $3.15 $3.32 $3.47 Dividends Per Share.40.44.52.52.64.80.88.95 $1.01 $1.05 $1.07 Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Cash and Equivalents 6,111 10,339 6,076 5,505 9,610 6,938 7,251 7,653 7,915 8,044 8,093 Total Receivables 11,338 13,589 11,192 13,014 14,987 15,780 15,762 17,007 17,988 18,708 19,269 Inventory 1,127 985 717 740 1,372 1,137 946 1,020 1,079 1,122 1,156 Total Current Assets 40,168 43,242 49,280 55,676 74,918 85,084 66,988 72,280 76,451 79,509 81,894 Net PPE 4,350 6,242 7,535 7,630 8,162 8,269 8,275 8,504 8,545 8,419 7,708 Total Assets 63,171 72,793 77,888 86,113 108,704 121,271 112,145 121,005 127,987 133,106 137,100 Payables and Accruals 5,572 6,968 6,480 7,308 7,772 8,050 8,882 9,583 10,136 10,542 10,858 Total Current Liabilities 23,754 29,886 27,034 26,147 28,774 32,688 35,157 37,934 40,123 41,728 42,980 Total Debt 0 2,614 7,430 6,121 13,129 11,527 11,033 11,905 12,592 13,096 13,488 Total Equity 31,097 36,286 39,558 46,175 57,083 66,363 66,988 72,280 76,451 79,509 81,894 $120,000 $100,000 $80,000 $60,000 $40,000 Total Revenue $30,000 $25,000 $15,000 $10,000 $5,000 Net Income $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00.50.00 Earnings Per Share Dividends Per Share $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $10,000 Total Current Assets Cash and Equivalents $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 Total Assets Net PPE 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Total Equity Total Debt 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5
Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Gross Profit Margin 79.1% 80.8% 79.2% 80.2% 77.7% 76.2% 74.6% 74.6% 74.6% 74.6% 74.6% Operating Profit Margin 37.1% 39.8% 35.4% 38.6% 38.8% 37.9% 35.1% 37. 37. 37. 37. Net Profit Margin 27.5% 29.3% 24.9% 30. 33.1% 23. 28.7% 30.5% 28.1% 28.1% 28.1% Free Cash Flow Margin 30.4% 18.3% 34.8% 27.5% 22.3% 32. 27.7% 26.7% 27.3% 27.8% 28.6% 9 8 7 6 5 4 3 2 1 Gross Profit Margin Operating Profit Margin 4 35% 3 25% 2 15% 1 5% Net Profit Margin Free Cash Flow Margin Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Days Sales Outstanding 80.95 82.09 69.91 76.02 78.21 78.13 73.00 73.00 73.00 73.00 73.00 Inventory Turnover 45.36 61.34 81.50 84.44 50.98 64.84 83.33 83.33 83.33 83.33 83.33 Total Debt to Equity 0. 7.2% 18.8% 13.3% 23. 17.4% 16.5% 16.5% 16.5% 16.5% 16.5% Total Debt to Assets N/A 3.6% 9.5% 7.1% 12.1% 9.5% 9.8% 9.8% 9.8% 9.8% 9.8% 85 80 75 70 65 60 Days Sales Outstanding Inventory Turnover 90 80 70 60 50 40 30 20 10 0 25% 2 15% 1 5% Total Debt to Equity Total Debt to Assets Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Total Asset Turnover 0.81 0.83 0.75 0.73 0.64 0.61 0.70 0.70 0.70 0.70 0.70 Equity Multiplier 2.03 2.01 1.97 1.86 1.90 1.83 1.67 1.67 1.67 1.67 1.67 Return on Assets 22.3% 24.3% 18.7% 21.8% 21.3% 14. 20.2% 21.4% 19.7% 19.7% 19.7% Return on Equity 45.2% 48.7% 36.8% 40.6% 40.6% 25.6% 33.8% 35.9% 33. 33. 33. Return on Capital 76.4% 73.9% 79.9% 90.5% 85. 88.5% 90.3% 97.5% 99.9% 102.5% 107.1% 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Total Asset Turnover Equity Multiplier 2.50 2.00 1.50 1.00 0.50 0.00 6 5 4 3 2 1 Return on Equity Return on Assets 12 10 8 6 4 2 Return on Equity Return on Capital -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5
Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E NOWC 13,004 17,945 11,505 11,951 18,197 15,805 15,077 16,098 16,847 17,333 17,661 Net Fixed Assets 4,350 6,242 7,535 7,630 8,162 8,269 8,275 8,504 8,545 8,419 7,708 Total Invested Capital 17,354 24,187 19,040 19,581 26,359 24,074 23,352 24,601 25,391 25,752 25,368 Effective Tax Rate 30. 25.8% 26.5% 26.5% 17.5% 23.8% (Tax rate from last historical year used in forecasts) NOPAT 13,259 17,872 15,210 17,713 22,400 21,316 21,092 23,990 25,374 26,389 27,181 Free Cash Flow N/A 11,039 20,357 17,172 15,622 23,601 21,814 22,740 24,584 26,028 27,564 NOPAT Per Share 1.36 1.92 1.70 2.01 2.64 2.54 2.55 2.94 3.16 3.34 3.49 FCF/Share N/A 1.18 2.28 1.95 1.84 2.81 2.64 2.79 3.06 3.29 3.54 Return on Capital 76.4% 73.9% 79.9% 90.5% 85. 88.5% 90.3% 97.5% 99.9% 102.5% 107.1% $30,000 Total Invested Capital Net Fixed Assets $30,000 NOPAT Free Cash Flow $30,000 Economic Value-Added Market Valued-Added $500,000 $25,000 $25,000 $25,000 $400,000 $15,000 $10,000 $5,000 $15,000 $10,000 $5,000 $15,000 $10,000 $5,000 $300,000 $200,000 $100,000 Intrinsic Value of FCFs Valuation Model Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Economic Value-Added 11,790 15,825 13,598 16,055 20,168 19,278 19,115 21,908 23,225 24,209 25,034 Market Valued-Added 315,718 145,050 233,086 199,796 163,317 157,892 386,814 397,044 407,949 419,886 432,290 PV of Future FCFs 362,373 382,007 393,984 410,160 429,256 441,989 457,586 473,577 489,077 504,446 519,579 Value of Non-Oper. Assets 6,111 10,339 6,076 5,505 9,610 6,938 7,251 7,653 7,915 8,044 8,093 Total Intrinsic Firm Value 368,484 392,346 400,060 415,665 438,866 448,927 464,836 481,230 496,992 512,490 527,672 Intrinsic Value of Equity 368,484 389,732 392,630 409,544 425,737 437,400 453,803 469,325 484,400 499,395 514,184 Per Share Intrinsic Value $37.82 $41.78 $43.89 $46.47 $50.15 $52.10 $54.87 $57.61 $60.37 $63.19 $66.05 Year-End Stock Price $35.60 $19.44 $30.48 $27.91 $25.96 $26.71 Over (Under) Valuation/Sh ($2.22) ($22.34) ($13.41) ($18.56) ($24.19) ($25.39) % Over (Under) Valued -6.2% -114.9% -44. -66.5% -93.2% -95. Cost of Capital 2012 Weight % Cost Wgt Cost Equity Capitalization 224,255 95.1% 8.7% 8.3% Total Debt 11,527 4.9% 4.5% 0.2% Preferred Stock 0 0. 0. 0. Value of All Securities 235,782 100. Effective Tax Rate 23.8% Long-Term Growth Rate: Risk-Free Rate 1.72% 3. 5-Yr Beta 0.94 Alternative Beta: Market Risk Premium 7. 1.00 CAPM Cost of Equity 8.7% Weighted Average Cost of Capital: 8.5% $70 $60 $50 $40 $30 $20 $10 Year-End Stock Price Per Share Intrinsic Value ($5) ($10) ($15) ($20) ($25) ($30) Over (Under) Valuation/Sh % Over (Under) Valued -2-4 -6-8 -10-12 -14 2007 2008 2009 2010 2011 2012 -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5
Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Stock Price/Intr. Value $35.60 $19.44 $30.48 $27.91 $25.96 $26.71 $54.87 $57.61 $60.37 $63.19 $66.05 Price to Earnings 24.7 10.3 18.7 13.1 9.5 13.2 20.1 18.1 19.2 19.0 19.0 Price to Free Cash Flow N/A 16.4 13.4 14.3 14.1 9.5 20.8 20.6 19.7 19.2 18.7 Price to Sales 6.8 3.0 4.7 3.9 3.2 3.0 5.8 5.5 5.4 5.3 5.3 Price to Book 5.5 2.5 3.5 2.9 2.0 1.8 4.0 3.9 3.8 3.8 3.8 Earnings Yield 4.1% 9.8% 5.3% 7.6% 10.5% 7.6% 5. 5.5% 5.2% 5.3% 5.3% Dividend Yield 1.1% 2.3% 1.7% 1.9% 2.5% 3. 1.6% 1.6% 1.7% 1.7% 1.6% Free Cash Flow Yield N/A 6.1% 7.5% 7. 7.1% 10.5% 4.8% 4.8% 5.1% 5.2% 5.4% Price to Earnings Price to Free Cash Flow Price to Sales Price to Book Earnings Yield Dividend Yield 25 7.0 12% 20 15 10 5 6.0 5.0 4.0 3.0 2.0 1.0 1 8% 6% 4% 2% 0 0.0 Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model 2013E Ratio Ratio Ratio Metric Value Microsoft Corporation May 6, 2013 Expected Dividend Growth Rates Price to Earnings 20.1 $2.73 $54.87 Annual Dividend 10. 8. 6. 4. 2. Price to Free Cash Flow 20.8 $2.64 $54.87 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Price to Sales 5.8 $9.53 $54.87.40.44.52.52.64.80.88.95 $1.01 $1.05 $1.07 Price to Book 4.0 $13.56 $54.87 1-Yr Div Growth 25. PV Dividends 1-4 $3.15 Dividend Yeld 2.6% Intrinsic Value Estimates vs. Current 2013EPrice 3-Yr Div Growth 15.4% PV Perpetual Div. $11.38 Current Price $30.83 5-Yr Div Growth 14.9% Intrinsic Value $14.52 If Purchased For: $14.52 PV of Free Cash Flows $54.87 Risk-Free Rate 1.72% Current Price $30.83 Expected Return = 8.7% Dividend Discount Model $14.52 5-Yr Beta 0.94 ($14.52).88.95 $1.01 $16.94 $15.90 Price to Earnings $54.87 Market Premium 7. Analyst Notes: Price to Free Cash Flow $54.87 Required Return 8.7% Based on a current dividend of.80, expected growth as shown above and an equity required Price to Sales $54.87 Alternative Beta 1.00 return of 8.7%, is worth $14.52 per share, vs. a current price of $30.83. Price to Book $54.87 Intrinsic Value Estimates vs. Current Price Compared With: QUALCOMM Incorporated Compared With: S&P 500 Index $60 Intel Corporation $50 $40 $30 $20 $10 Current Price PV of Free Cash Flows Dividend Discount Model Price to Earnings Price to Free Cash Flow Price to Sales Price to Book 5% -5% -1-15% -2-25% -3-35% QCOM 15% 1 5% -5% -1-15% -2 ^SPX -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5
Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Positive Net Income 1 1 1 1 1 1 1 1 1 1 Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1 Growing ROA (% change NI > % change TA) 1 0 1 0 0 1 1 0 0 0 Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1 Total Assets Growing Faster Than Total Liabilities 0 1 1 0 1 0 1 0 1 0 Increasing Liquidity (Current Ratio) 1 0 1 1 0 0 0 0 0 0 % Change Shares Outstanding (Diluted) < +2. 1 1 1 1 1 1 1 1 1 1 Expanding Gross Margin 1 0 1 0 0 0 0 0 0 0 Asset Turnover (% change sales > % change assets) 1 0 0 0 0 1 0 0 0 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1 Piotroski Score 9 6 9 6 6 7 7 5 6 5 Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E (Current Assets-Current Liabilities)/Total Assets 1.200 0.2202 0.3427 0.4115 0.5094 0.5185 0.3406 0.3406 0.3406 0.3406 0.3406 Retained Earnings/Total Assets 1.400-0.5984-0.4979-0.3868-0.2284-0.0946-0.0107 0.1676 0.3575 0.5242 0.6925 Earnings Before Interest & Tax/Total Assets 3.300 1.0912 0.8767 0.9235 0.8245 0.7607 0.8140 0.8581 0.8581 0.8581 0.8581 Market Value Equity/Total Liabilities 0.600 2.9803 4.2678 3.6953 2.5618 2.4505 6.0297 5.7793 5.6396 5.5905 5.5884 Sales/Total Assets 0.999 0.8292 0.7495 0.7249 0.6428 0.6073 0.7020 0.7020 0.7020 0.7020 0.7020 Altman Score 4.52 5.74 5.37 4.31 4.24 7.88 7.85 7.90 8.02 8.18 The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 10 8 6 4 2 0 Piotroski Financial Fitness Scorecard (10-pt scale) 9 8 7 6 5 4 3 2 1 0 Altman Probability of Bankruptcy Z-Score -Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5