Information Technology

1
Information Technology Telecommunications
Services

• Sarah Ronning
• Nikhil Sadhu
• Rajeev Ponnusamy
• Bryan Schmehl
• Tim Hatfield
• Geoffrey Shaver

2
Info Tech Sector

• SIM Portfolio
• Microsoft 6.17
• Intel 3.31
• IBM 2.93
• SP 500
• Microsoft 3.37
• Intel 1.98
• IBM 1.66
• Cisco 1.56

• 83 companies in this sector
• Largest companies
• Microsoft 280.61 B
• Intel 220.72 B
• IBM 155.77 B
• Cisco 158.83 B

3
Telecom Sector

• SIM Portfolio
• Alltel 1.38
• Verizon 0.86
• Nextel 1.1
• SP 500
• Verizon 0.96
• SBC 0.79
• BellSouth 0.47
• Alltel 0.15
• Nextel 0.22

• 12 companies in this sector
• Largest companies
• Verizon 89.33 B
• SBC Comm. 78.17 B
• BellSouth 47.64 B

4
Sector Opportunities and Risk

• TeleCom
• Opportunities
• Overseas growth
• Forecasted Increases in Consumer and Corporate IT
  spending
• US economy
• Risks
• Overcapacity
• Government Regulations

• IT
• Opportunities
• New/Emerging Technology (Wireless, 64bit
  processors)
• Forecasted Increases in Consumer and Corporate IT
  Spending
• US economy
• Risks
• Delay in Corporate IT Spending

5
Recommendations

• Hold on Nextel and Intel,
• Buy Network Appliance and Symantec as new stocks,
• Raise the weights of Verizon and IBM,
• Lower the weight of Microsoft,
• Sell Alltel.

6
Network Appliance (NTAP)

• Current Price 21.89
• 52 Week High/Low 26.69 / 9.26

7
Network Appliance (NTAP)

• Provider of enterprise network storage and data
  management solutions.
• Market Cap 7.5 B
• Beta 3.336
• PEG Ratio 2.04

8
Network Appliance (NTAP) Business Analysis

• Company Life Cycle Growth
• Steadily increasing Sales and Gross Profit
• Business Growth/Cyclical
• Growth Stock Short-Term Horizon, Low Debt, Low
  Liquidity

9
Network Appliance (NTAP) Business Analysis

• Recent Developments
• Contract Wins
• Shell Oil and Gas
• 1800contacts.com
• Fujitsu
• Passed Designed for Windows testing by
  Microsoft for Win 2003
• Spinnaker Networks acquired
• Increased partnership program to include Siemens
  and Adaptec
• Increased emphasis on sells
• Launched internal sells program to capture DoD
  contracts

10
Network Appliance (NTAP) Financial Analysis
2002 2003 2004 Earnings 0.23 0.38 0.50
P/E 109.04 66.00 50.16 SPX
Earnings 46.04 53.34 59.13 SPX
P/E 22.81 19.69 17.76 Relative 4.78 3.35 2.
82 Projected 5yr Growth 25 Previous 5yr
Growth 25.4
11
Network Appliance (NTAP) Financial Analysis
12
Network Appliance (NTAP) Financial Analysis
13
Network Appliance (NTAP) Financial Analysis
14
Network Appliance (NTAP) Financial Analysis
15
Network Appliance (NTAP) Recommendation

• Opportunities
• Acquisitions
• Corporate IT Spending
• Microsoft Certification
• Partnership Program
• Risks
• EMC
• Corporate IT Spending
• On-Hand Cash

Buy with a weight of 3.00 Recommended hold
time of 2 3 quarters
16
Symantec (SYMC)

• Recommendation
• Add to SIM portfolio at 3.74 weight
• Recent Price 31.92
• 52-wk hi/lo 34.60/18.18

17
Symantec (SYMC) - Background

• Provides content and network security software
  and appliance solutions to enterprises,
  individuals, and service providers.
• Industry Systems Software
• Market Cap 9.94 B.
• Beta 1.52

18
Symantec (SYMC) Business Analysis

• Company Life Cycle Growth
• Steadily increasing Revenue and Earnings
• Business Growth
• Growth Stock Short-Term Horizon, Low Debt
  Ratio, High Capital Spending Growth Rate

19
Symantec (SYMC) Business Analysis

• Market leader in anti-virus and internet security
  software
• Recent Gartner report forecast the CAGR() for
  new license revenue of all security software at
  10.2 for 2002-2007

20
Symantec (SYMC) 1-yr price history
21
Symantec (SYMC) Financial Analysis

• Announced 2 for 1 split as Stock Dividend in
  October Took effect earlier this month
• Does not currently pay cash dividend
• Double digit year-over-year revenue increases
  past 4 years
• 2003 31 increase
• 2002 26 increase
• 2001 14 increase
• 2000 26 increase

22
Symantec (SYMC) Financial Analysis
2002 2003 2004 Earnings 0.81 1.06 1.19
P/E 36.68 28.03 24.97 SPX
Earnings 46.04 53.27 58.95 SPX
P/E 22.49 19.43 17.56 Relative 1.63 1.44 1.
42 Projected 5-yr Growth 17.0 Previous 5-yr
Growth 21.4
23
Symantec (SYMC) Financial Analysis Earnings
Revisions
24
Symantec (SYMC) Valuation Analysis

• P/E is 34.99
• Above industry average is 31.87
• Price/Sales (TTM) is 6.54
• Slightly below industry average 6.99
• Price/Book (MRQ) is 4.30
• Slightly below industry average 4.94
• Price/Cash Flow (TTM) is 26.39
• Slightly below industry average 27.10

25
Symantec (SYMC) - Catalysts

• Quotes from recent Gartner report
• Symantec has gone from strength to strength in
  terms of its ability to execute in the enterprise
  antivirus channel. Symantec has strong enterprise
  growth and high renewals
• Has good reputation for brands and customer
  support.
• Recent acquisition of On Technology Corp.
• Growth in demand for products

26
Symantec (SYMC) Negatives/Risks

• Microsoft beginning to enter this market
• CA recently announced a 1-yr anti-virus software
  trial to home users while SYMC offers only
  30-days
• Competing products and new entrants could force
  profit margins down

27
Symantec (SYMC) - Conclusion

• Recommend Buy
• Add to SIM portfolio at 3.74 weight
• Strong history of growth on top and bottom lines
• Market leader in a field with high and growing
  demand

28
Verizon Communications

• Recommendation
• Increase overweight to 1.76
• Despite an overall negative outlook in the
  telecom sector, we feel that we need to own the
  stocks we anticipate will end out on top.

29
Verizon- Business Analysis
Pros

• 3rd largest long distance carrier
• Largest market share in wireless industry
• 1 wireless customer satisfaction

• Opportunity to bid for 330 million government
  contract
• New fiber-optic FTTP technology being rolled out
  in early 2004

30
Verizon- Business Analysis

• Cons

• Number portability reduces switching costs
• Pending FCC rulings on FTTP technology ownership
  rights could eliminate incentive to invest further

31
Verizon- Financial Analysis
32
Verizon- Financial Analysis

• ROE is falling TTM 21.40
• Still ahead of industry average 19.53
• Still ahead of sector average 14.81
• Still ahead of SP 500 average 17.89
• Currently yielding 4.78 in dividends
• 5-yr Div. growth rate is lowly 0.39
• But its 2.54 for the industry

33
Verizon- Financial Analysis
34
Verizon- Financial Analysis
35
Verizon- Summary

• Catalysts
• Technology
• Market share
• Concerns
• Repeatedly falling earnings and earnings
  revisions
• Cheap for a reason

• Conclusion
• Due to diversification across the telecom sector
  and potential catalysts in the near future, VZ is
  an obvious choice for a stock that should ride
  out the sector low.
• Recommendation
• Overweight 1.76

36
Microsoft- Rewards/Positives

• The PC sector and IT spending projected for
  growth in 2004 and 2005
• Microsoft increased market share in all major
  categories (servers, gaming, mobile-handhelds)
• 50 Billion Cash reserve. No debt
• Threat of break up receded
• Product pipeline remains strong (longhorn)

37
Microsoft- Risk/Negatives

• Linux poses a threat to Microsofts monopoly in
  Operating System market
• Microsoft has had a negative cash flow since 1999
• Microsoft's product in extremely competitive
  markets
• Xbox- Playstation
• MSN - AOL
• SQL server Oracle
• New investments might not pay off (online music,
  search engine, longhorn platform)
• Antitrust case in Europe

38
Microsoft- Recommendation

• Underweight to 5.25 of SIM from 6.17
• Current exposure high (SP weight 3.37)
• Better short term opportunities, other than MSFT
  in IT sector
• MSFT excellent long term buy

39
IBM

• Provider of products and services in both the
  hardware and software sectors.
• Market Cap 152.5 B
• Beta 1.49
• P/E Ratio 22.73

40
IBM

• Recommendation
• Overweight to 3.50
• Maintain for the next 3-4 quarters
• Reasons
• Strong forecast (could get some of Oracles
  share)
• Good growth in the services subsector
• Ofcourse, rising tide (especially true for IT
  right now)

41
IBM - Rewards/Positives

• The recent trend in increased IT spending favors
  the software sector and the consulting services
  sector
• IBM is diversifying increases immunity to
  failure in any one of its sub-sectors
• Its ever-winning product DB2 is expected to be
  more profitable and in high demand capturing 12
  of Oracle's market. This is due to IBMs
  continued efforts in making DB2 a truly universal
  database

42
IBM- Risks/Negatives

• Oracle still remains the biggest threat to IBM.
  Oracle's expansion threatens IBMs DB2
• Profits are directly related to corporate
  spending and thus the economy

43
IBM

• Recent Developments
• Focusing on Linux helped Novell finance the
  purchase of SuSE
• Continued efforts to cut costs recent layoffs
• Diversification Productivity Solutions
  (automated self-checkout software), SuSE
• Recent 2.6B deal to provide services to Nordea
  (N.Euorpes largest Financial Svcs company)

44
ALLTEL (AT)

• Recommendation
• Divest from SIM portfolio to 0
• With an overall negative outlook in the telecom
  sector, we need to weed out the weaker stocks,
  especially one with so many negative signs.

45
ALLTEL (AT)

• Provider of wireless, landline local and long
  distance services, internet, paging, and
  directory services.
• Industry Integrated Telecom Services
• Market Cap 13.94 B.
• Beta 0.91

46
ALLTEL (AT) - Business Analysis

• Local Number Portability took effect yesterday
• Group President of Communications doesnt think
  people will convert home numbers to wireless
• How much of that is going to happen?
• Recently launched business prepay wireless at
  Sams Club

47
ALLTEL (AT)Downward Price Momentum
48
ALLTEL (AT) - FinancialsDownward Revised Earnings
49
ALLTEL (AT) - Valuation Analysis

• P/E is 14.64
• Below industry average of 18.43
• Price/Sales (TTM) is 1.70
• Very close to industry average 1.72
• Price/Book (MRQ) is 2.03
• Below industry average of 2.81
• Price/Tangible Book (MRQ) is 23.15
• Well above industry average of 4.18

50
ALLTEL (AT) - CatalystInsider Sell Off

• From SEC Filings
• Director - Warren A. Stephens
• Sold over 13.7 million of stock last week
• Sold over 11 million of stock in September
• Asst. to CEO - Michael T. Flynn
• Sold over 11.1 million of stock via options last
  week
• Sold another 1 million in September
• Executive VP, General Counsel - Francis Frantz
• Sold over 5.7 million of stock via options in
  late October

51
ALLTEL (AT) - Conclusion

• Recommendation - Sell
• Remove from SIM portfolio
• Negative Insider Activity
• Downward Price Momentum
• Negative Earnings Surprise
• Negative Earnings Estimate Revision

52
In Conclusion

• Recent Performance (as of 11/14/03)
• SP 500
• YTD 19.38
• QTD 5.46
• IT
• YTD 41.30
• QTD 8.65
• Telecom
• YTD 6.33
• QTD 1.86
• No reason to think it will change in the near
  future

53
Final Recommendations

• Telecom
• Nextel Hold at 1.10
• Verizon Raise to 1.76
• AllTel Sell to 0.00

• IT
• Microsoft Lower to 5.25
• Intel Hold at 3.31
• IBM Raise to 3.50
• NetApp Buy at 3.00
• Symantec Buy at 3.74

18.8 of SIM

• 2.86 of SIM