Business Finance 4228/7225

Advanced Investment Analysis

The Stock Market

Summer 2013 Sector Team

Neil Patel

Jeffrey Mulac

Srinath Potlapalli

Overview

IT Sector Weight SIM vs S&P 500 As of 6/30/2013

14.43%

13.25%

13.86%

13.99%

12.14%

7.57%

16.85%

1.60% 2.10% 3.92% 0.22% 0.08% SIM Weight

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Cash

Dividend Receivables

12.20%

10.50%

10.50%

16.70% 12.70%

10.20%

17.80%

3.30% 2.80%

3.30% 0.00%

0.00%

S&P 500 Weight Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Cash

Dividend Receivables

Recap of the Recommendation

• Overweight IT Sector in SIM portfolio by 100-200 bps above the S&P 500 weightage.

• Increase IT Sector allocation by a total of 200-300 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.

*http://us.spindices.com/indices/equity/sp-500

• 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

Stock Analysis

Intel Inc

Company Overview:

Industry: Semiconductor

Ticker: INTC

Current Stock Price: $23.04

52-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

Data as of 7/19/13

Source: finance.yahoo.com

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.

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:

http://www.cbsnews.com/8301-505124_162-57594230/a-big-miss-for-intel-

earnings/

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 2.24 1.87 2.03 2.05

% growth from prior

year

-12% -16% 8% 1%

• 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

Financial Ratio

(INTEL)

2012 2011 2010 2009 2008

Payout Ratio % 40.8 32.7 31.3 72.7 59.5

Free Cash Flow

Per Share

1.52 1.85 2.02 1.18 1

Capital

Spending($b)

(11.0

2)

(10.7

6)

(5.207

)

(4.51

5)

(5.19

7)

Net Margin (%) 20.63 23.97 26.28 12.44 14.08

ROE (%) 22.66 27.15 25.16 10.82 12.93

Financial Ratio

(ARM)

2012 2011 2010 2009 2008

Payout Ratio % 32.7 38.2 40.8 73.9 61.2

Free Cash Flow

Per Share(GBP)

0.09 0.13 0.13 0.07 0.07

Capital

Spending(gbp

mill)

(26) (13) (7) (10) (14)

Net Margin (%) 27.86 22.9 21.14 13.26 14.58

ROE (%) 14.18 11.52 10.53 5.47 7.06

Intel vs ARM – Financial Ratios (source: www.morningstar.com)

Source: Baseline

Valuation – Price Multiples Analysis

Relative to

Industry

High Low Median Current

P/Trailing E 1.1 .48 .84 .72

P/Forward E 1.1 .07 .84 .81

P/B 1.2 0.7 1.0 0.9

P/S 1.3 0.9 1.1 0.9

P/CF 1.4 0.6 0.9 0.7

Relative to

S&P 500

Hig

h

Low Media

n

Current

P/Trailing E 2.6 0.59 1.1 0.73

P/Forward E 2.9 0.69 1.1 0.83

P/B 1.9 0.9 1.2 0.9

P/S 5.3 1.4 2.6 1.5

P/CF 2.2 0.6 1.1 0.6

Absolute

Valuation

High Low Median Current Target

Multiple

Target E,

S, B,

etc/Share

Target

Price (F x

G)

A. B. C. D. E. F. G. H.

P/Forward E 35.7 8.4 17.1 12.5 17.1 1.87 31.97

P/S 8.3 1.8 3.2 2.2 3.2 10.78 34.49

P/B 6.2 1.8 3.0 2.3 3.0 10.3 30.9

P/EBITDA 23.1 4.31 9.15 5.62 9.15 4.25 38.93

P/CF 25.5 5.1 10.2 6.6 10.2 4.06 40.64

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.

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

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 $20.60

3.0% $32.63 $29.98 $27.71 $25.74 $24.03 $22.52 $21.18

Growth

Rate

3.5% $34.54 $31.53 $28.98 $26.81 $24.92 $23.27 $21.82

4.0% $36.83 $33.36 $30.47 $28.03 $25.94 $24.13 $22.25

4.5% $39.63 $35.56 $32.23 $29.46 $27.11 $25.11 $23.37

5.0% $43.13 $38.25 $34.34 $31.15 $28.49 $26.24 $24.31

5.5% $47.63 $41.61 $36.92 $33.17 $30.11 $27.55 $25.40

6.0% $53.64 $45.93 $40.14 $35.65 $32.05 $29.11 $26.66

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 141.00 150.0 150.0 150.0 182.3 193.3 204.9 216.2 228.0 240.6 252.6

% 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 94 100 100 100 106 112 119 126 133 140 147

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 135,386 100%

Free Cash Flow Yield 5.34%

Free Cash

Yield 6.19%

Current P/E 11.5 12.5 12.7 Terminal P/E 15.6

Projected P/E 12.3 13.4 13.6

Current EV/EBITDA 5.9 6.3 5.5

Terminal

EV/EBITDA 6.4

Projected EV/EBITDA 6.3 6.7 5.9

Shares Outstanding 5,160.0

Current Price $ 24.46

Implied equity value/share $ 26.24

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

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.

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.

DCF Valuation - Oracle

ORACLE(ORCL)

Srinath Potlapalli Terminal Discount

Rate = 11.0%

6/11/2013 Terminal FCF

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 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00

% 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 20 20 30 30 40 40 50 50 50 60 60

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 189,940 100%

Free Cash Flow Yield 8.37% Free Cash Yield 6.42%

Current P/E 14.8 13.5 13.4 Terminal P/E 17.8

Projected P/E 19.1 17.4 17.3

Current EV/EBITDA 9.2 8.7 8.5 Terminal EV/EBITDA 11.7

Projected EV/EBITDA 11.7 11.1 10.9

Shares Outstanding 4,630.0

Current Price $ 31.86

Implied equity value/share $ 41.02

Upside/(Downside) to DCF 28.8%

Debt 18,852

Cash 14,955

Cash/share 3.23

As of 7/21/13

Current Price: $31.86

Target Price: $41.02

Upside: 28.8%

Corning Inc.

Data as of July 19, 2013

NYSE: GLW

Industry: Electronic Components & Equipment

(specialty glass & ceramics)

Current Price: $15.03

52 wk range: $10.62 - $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%

Revenue Breakdown

Display Technologies 36.3%

Telecommunications 26.6%

Environmental Technologies

12.0%

Specialty Materials 16.8%

Life Sciences 8.2%

Other 0.1%

2012 Revenue

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 – Gorilla Glass in windshields

– Willow Glass as roofing shingles, iWatch?

– View Inc. collaboration

Risks

• Loss of a top ten customer (50% of total revenue in 2012)

• Struggling international economies

• Declining LCD TV prices

• Supplier/materials loss

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

Valuation

Relative to

S&P 500 High Low Median Current

P/Trailing E 6.3 0.41 0.89 0.73

P/Forward E 6.5 0.57 0.99 0.75

P/B 2.6 0.4 0.9 0.4

P/S 5.9 1.7 3.7 1.9

P/CF 3.9 0.6 1.2 0.7

Relative to

Industry High Low Median Current

P/Trailing E 3.0 0.31 0.82 0.81

P/Forward E 1.2 0.64 0.89 0.82

P/B 0.9 0.4 0.7 0.7

P/S 2.2 0.7 1.3 1.0

P/CF 1.4 0.6 0.8 0.8

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

Discounted Cash Flow

• Current Price: $15.03

• Target Price: $19.22

• Potential Upside: 27.2%

BUY

75 bps

Apple (AAPL) Valuation

Relative to

Industry High Low Median Current

P/Trailing E 6.4 1.1 1.6 1.1

P/Forward E 3.5 0.92 1.6 1.0

P/B 2.2 0.4 1.2 1.1

P/S 4.4 0.8 2.6 1.7

P/CF 6.4 1.1 2.4 1.2

Relative to

S&P 500 High Low Median Current

P/Trailing E 8.1 0.62 1.8 0.63

P/Forward E 4.1 0.67 1.7 0.7

P/B 4.3 0.6 2.4 1.4

P/S 5.3 0.8 3.1 1.6

P/CF 7.6 0.8 3.0 0.9

Absolute

Basis High Low Median Current

P/Trailing E 161.5 9.5 29.8 10.2

P/Forward E 76.2 9.6 25.7 10.7

P/B 11.9 1.7 5.5 3.4

P/S 8.3 1.2 4.0 2.4

P/CF 82.6 8.4 29.8 9.0

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

DCF - AAPL

Discount Rate = 12.5%

Growth Rate = 5%

Current Price: $424.19

Target Price: $592.13

Potential Upside: 39.6%

SIM Weight (June 2013): 4.6%

HOLD

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 170,803 186,229 197,662 212,487 226,298 241,008 253,058 265,711 278,997 292,946 307,594

% 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 11 17 18 425 453 482 506 531 558 586 615

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 550 562 575 6,800 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 555,804 100%

Free Cash Flow Yield 8.91% Free Cash Yield 7.14%

Current P/E 9.7 9.1 8.4 Terminal P/E 12.3

Projected P/E 13.6 12.7 11.7

Current EV/EBITDA 6.5 6.3 5.8 Terminal EV/EBITDA 8.9

Projected EV/EBITDA 9.1 8.8 8.2

Shares Outstanding 938.7

Current Price 424.19$

Implied equity value/share 592.13$

Upside/(Downside) to DCF 39.6%

Debt 3,382

Cash 4,988

Cash/share 5.31

12.0 12.25 12.5 12.75 13.0

4.5% 610.82 590.92 572.26 554.74 538.25

4.75% 622.23 601.38 581.88 563.58 546.42

5% 634.45 612.56 592.13 573.02 555.09

5.25% 647.58 624.54 603.09 583.07 564.33

5.5% 661.72 637.41 614.84 593.81 574.18

Qualcomm, Inc.

Company Overview (as of 7/23/2013):

Ticker:

Industry:

Current Price:

52-Week Price Range:

Market Cap:

Beta:

Dividend (Yield):

FY 2012 Revenue:

FY 2012 Earnings:

QCOM

Communication Equipment

$62.30

$56.30-$68.50

$107.6B

1.17

$1.40 (2.3%)

$19.121B

$6.109B

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.

Financial Analysis

Key Statistics Qualcomm

Texas

Instruments Broadcom NVIDIA

Market Capitalization: $106.9 bill ion $42.0 bill ion $19.9 bill ion $8.5 bill ion

Revenue (mrq): $6.1 bill ion $2.9 bill ion $2.0 bill ion $955.0 million

Revenue Growth (YoY): 24% -8% 10% -9%

Current Ratio: 3.4 2.6 2.3 5.0

Net Cash: $12.4 bill ion $(221) million $981 million $3.7 bill ion

% 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): 0.75 2.88 0.80 1.67

• Qualcomm has an advantage over its competitors in nearly every

category

• Current and PEG ratios

DCF Analysis

Recommendation: • Buy 75bps

• Increase current holding to

4.62%

Current P/E 15.67

Projected P/E 19.03

Current EV/EBITDA 8.22

Projected EV/EBITDA 10.57

Shares outstanding 1,763

Current price 62.30$

Implied equity value/share 75.65$

Upside/(downside) to DCF 21.4%

Sensitivity Analysis

10.00% 10.50% 11.00% 11.50% 12.00%

4.0% 80.87$ 74.48$ 69.01$ 64.27$ 60.13$

4.5% 85.46$ 78.21$ 72.08$ 66.82$ 62.28$

5.0% 90.96$ 82.61$ 75.65$ 69.77$ 64.73$

5.5% 97.69$ 87.90$ 79.88$ 73.21$ 67.56$

6.0% 106.10$ 94.36$ 84.96$ 77.27$ 70.86$

Discount Rate

Growth

Rate

Sensitivity Analysis

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

Google, Inc.

Company Overview (as of 7/23/2013):

Ticker:

Industry:

Current Price:

52-Week Price Range:

Market Cap:

Beta:

Dividend (Yield):

FY 2012 Revenue:

FY 2012 Earnings:

GOOG

Internet Software & Services

$903.76

$604.34-$928.00

$301.1B

1.15

N/A (N/A)

$50.175B

$10.737B

DCF Analysis

Recommendation: • Hold

• Current holding is 4.45%

• As price appreciates, holding

will reach SIM max of 5%

Current P/E 20.77

Projected P/E 23.19

Current EV/EBITDA 14.35

Projected EV/EBITDA 16.02

Shares outstanding 333

Current price 904.13$

Implied equity value/share 1,009.39$

Upside/(downside) to DCF 11.6%

Sensitivity Analysis

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

10.50% 11.00% 11.50% 12.00% 12.50%

4.5% 1,081.72$ 991.30$ 913.99$ 847.17$ 788.86$

5.0% 1,147.55$ 1,044.79$ 958.02$ 883.83$ 819.68$

5.5% 1,226.56$ 1,108.00$ 1,009.39$ 926.12$ 854.89$

6.0% 1,323.12$ 1,183.86$ 1,070.10$ 975.46$ 895.52$

6.5% 1,443.82$ 1,276.58$ 1,142.96$ 1,033.78$ 942.92$

Discount Rate

Growth

Rate

Sensitivity Analysis

Recommendation

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

Questions?