Download Ch19e-IndustryAnalys..

Lecture Presentation Software
to accompany
Investment Analysis and
Portfolio Management
Sixth Edition
by
Frank K. Reilly & Keith C. Brown
Chapter 19
Version 1.2
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Industry Analysis
• The second step in the three-step
fundamental analysis procedure
• The first step is the analysis of the stock
market and the economy as a whole
• The last step will be the analysis of
individual companies and stocks
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Why Do Industry Analysis?
• Help find profitable investment
opportunities
• Part of the three-step, top-down plan for
valuing individual companies and selecting
stocks for a portfolio
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What Do We Learn
From Industry Analysis?
• Is there a difference between the returns for
alternative industries during specific time
periods?
• Will an industry that performs well in one
period continue to perform well in the
future? That is, can we use past
relationships between the market and an
individual industry to predict future trends
for the industry?
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What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
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What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
• Is there a difference in the risk for
alternative industries?
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What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
• Is there a difference in the risk for
alternative industries?
• Does the risk for individual industries vary
or does it remain relatively constant over
time?
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Industry Performance
• Wide dispersion in rates of return in different
industries
• Performance varies from year to year
• Company performance varies within industries
• Risks vary widely by industry but are fairly
stable over time
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Links Between the Economy
and Industry Sectors
• Identify and monitor key assumptions and
variables
• Economic trends are either
– Cyclical - up and down with business cycle
– Structural - major change
• Combined changes have implications for the
industry being analyzed
• Switching from one industry group to another over
the course of a business cycle is known as a
rotation strategy
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The Stock Market and
the Business Cycle
Figure 19.2
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The Stock Market and
the Business Cycle
Figure 19.2
peak
trough
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The Stock Market and
the Business Cycle
Basic
Industries
Excel
Consumer
Durables
Excel
Financial
Stocks Excel
trough
peak
Capital
Goods Excel
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Figure 19.2
Consumer
Staples Excel
Cyclical Economic Factors
•
•
•
•
Inflation
Interest rates
International economics
Consumer sentiment
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Structural Economic Changes
and Alternative Industries
• Social Influences
– Demographics
– Lifestyles
• Technology
• Politics and regulations
–
–
–
–
Economic reasoning
Fairness
Regulatory changes affect numerous industries
Regulations affect international commerce
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Theme Investing
• Based on identifying emerging trends, such
as:
– Technology
– Aging population
– Freer trade and developing-country
growth
• Identification of themes provides insight
into industry analysis
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Earnings and Industry Analysis
• Estimating earnings per share
– start with forecasting sales per share
• Industrial life cycle
• Input-output analysis
• Industry-aggregate economy relationship
– earnings forecasting and analysis of industry
competition
• competitive strategy
• competitive environment
• industry operating profit margin
• industry earnings estimate
• industry earnings multiplier
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Sales Forecasting and
Industry Life Cycle
• Pioneering development
• Rapidly accelerating industry
growth
• Mature industry growth
• Stabilization and market maturity
• Deceleration of growth and decline
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Sales Forecasting and
Input-Output Analysis
• Identify suppliers and customers
• Future demand from customers
• Ability of suppliers to provide goods
and services required
• Extended to global industries, include
worldwide suppliers and customers
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Sales Forecasting and
the Industry-Economy Relationship
• Compare industry sales to aggregate
economic series related to the goods
and services provided by the industry
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Forecasting Earnings Per Share
• Analysis of industry competition
• Analysis of competitive structure
• Porter’s concept of competitive
strategy
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Competitive Structure of an
Industry
• Porter’s Competitive Forces
– Rivalry among existing competitors
– Threat of new entrants
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers
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End of Chapter 19
–Industry Analysis
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Future topics
Chapter 20
Company Analysis and Stock Selection
• Value
• Growth
• Strategies
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