bm410 investments
Download
Skip this Video
Download Presentation
BM410: Investments

Loading in 2 Seconds...

play fullscreen
1 / 41

BM410: Investments - PowerPoint PPT Presentation


  • 73 Views
  • Uploaded on

BM410: Investments. Industry Analysis: Global and Country Or understanding the critical industry factors that affect your company. Objectives. A. Understand the critical areas of the global analysis framework, particularly industry analysis

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' BM410: Investments' - luke-boyer


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
bm410 investments

BM410: Investments

Industry Analysis:

Global and Country

Or understanding the critical industry factors that affect your company

objectives

Objectives

A. Understand the critical areas of the global analysis framework, particularly industry analysis

B. Understand how to include industry forecasts into your company report

C. Understand where to find sources of data for your international and domestic industry prospects

D. Review an example of an analysis of an industry, and understand the required format of your Industry Report

a understand the critical areas of the global analysis industry framework
A. Understand the Critical Areas of the Global Analysis Industry Framework

1. Global Industry Analysis

  • Key Considerations?
  • What are the key trends globally which have or will have an effect on the industry
    • What has been happening in global markets that can or may have an effect on my market and company?
    • What are the likely key trends in technology, production, sales, etc. that can or may affect the industry?
    • Who are the potential international competitors who can or may enter my market?
2 country industry analysis
2. Country Industry Analysis
  • Key considerations?
    • I. Industry life cycles
      • What is the sensitivity of company earnings to business cycles?
        • Key factors to analyze
          • Sensitivity of sales of the firm’s product to the business cycles
          • Operating leverage
          • Financial leverage
    • II. Industry competitiveness models
      • Porter’s 5 Forces
      • SWOT Analysis
i industry life cycles
I. Industry Life Cycles
  • All industries are in different stages of development!
    • You must determine at which stage your industry is in currently
    • Remember that technological innovation may have the effect of changing the life cycle of the industry

StageSales Growth

  • Start-up Rapid & Increasing
  • Consolidation Stable
  • Maturity Slowing
  • Relative Decline Minimal or Negative
industry life cycles
Industry Life Cycles

Stage 1 Stage 2 Stage 3 Stage 4

Start-up Consolidation Maturity Decline

Beginning Rapid Stabilization and Deceleration

Development Growth Market Maturity of Growth

bryan s view of industry and management
Bryan’s View of Industry and Management

Good Poor

Good Do ??

Well

Poor ?? Poor

Industry

Management Quality

b how to include industry forecasts in your company report
B. How to Include Industry Forecasts in your Company Report
  • How do you include industry data in your report?

Generally, through industry competitiveness models

  • What is the purpose of these models, i.e. strategic analysis?
    • Industries, like companies, can be evaluated in a consistent format to determine its attractiveness
      • The key is to develop/use a consistent format that will help you understand the key drivers of profitability in the industry
        • Once you have identified the key drivers of industry profitability, then you evaluate your company on those key drivers.
choice of industry competitiveness models
Choice of Industry Competitiveness Models
  • Does it matter which model of competitiveness you choose?
    • While the choice of model and the model format may differ, the key is to understand the key factors driving all areas of the industry to determine the relative attractiveness of the industry
industry competitiveness models swot analysis
Industry Competitiveness Models – SWOT Analysis
  • Strengths
    • What are the positives for the industry, i.e. what factors make this industry attractive short-term?
  • Weaknesses
    • What factors make this industry unattractive, particularly in the short-term?
  • Opportunities/Trends
    • What factors make this industry likely to do well in the future?
  • Threats
    • What factors are most likely to make this industry unattractive in the future?
ii industry competitive models porter model
II. Industry Competitive Models – Porter Model

New Entrants

Industry

Suppliers Competitors Buyers

Substitutes

determinants of industry profitability
Determinants of Industry Profitability
  • Industry Structure
    • 1. Industry Competitors - rivalry
    • 2. Potential Entrants – threats
    • 3. Suppliers – bargaining power
    • 4. Buyers – bargaining power
    • 5. Substitutes – threats
  • The strength of these forces is a function the industry structure
industry profitability continued
Industry Profitability (continued)
  • The collective strength of these 5 areas affects a firms ability to earn returns in excess of their cost of capital
    • If the forces are positive, firms can earn good rates of return
    • If not, despite good management, firms may have difficulty earning good returns
1 industry competitors
1. Industry Competitors
  • Rivalry Determinants
    • Industry growth
    • Fixed (or storage costs) / value added
    • Intermittent overcapacity
    • Product differences
    • Brand identity
    • Switching costs
  • Concentration and balance
  • Informational complexity
  • Diversity of competitors
  • Corporate stakes
  • Exit barriers
2 potential entrants
2. Potential Entrants
  • Entry Barriers
    • Economies of scale
    • Proprietary product differences
    • Brand identity
    • Switching Costs
3 suppliers
3. Suppliers
  • Determinants of Supplier Power
    • Differentiation of inputs
    • Switching costs of suppliers
    • Presence of substitute inputs
    • Supplier concentration
    • Importance of volume to supplier
    • Cost relative to total purchases in industry
  • Threat of forward integration to threat of backward integration
  • Capital requirements
  • Access to distribution
  • Absolute cost advantages
  • Government policy
  • Expected retaliation
4 substitutes
4. Substitutes
  • Determinants of Substitutions Threat
    • Relative price performance of substitutes
    • Switching costs
    • Buyer propensity for substitutes
5 buyers
5. Buyers
  • Determinants of Buyer Power

Bargaining leverage

    • Buyer concentration versus firm concentration
    • Buyer volume
    • Buyer switching costs versus firm switching costs
    • Buyer information
    • Ability to backward integrate
    • Substitute products
  • Price Sensitivity
  • Price to total purchases
  • Product differences
  • Brand identity
  • Impact on quality / performance
  • Buyer profits
  • Decision maker’s incentives
c sources of data for industry analysis
C. Sources of Data for Industry Analysis
  • Where is the best place to start? (see CR-FD-
    • Company 10K reports
      • Companies are required by law to disclose information relating to what is happening in the industry (i.e. risk factors) and to a degree how they are doing relative to these events.
        • Generally, the larger and better run companies will have a good description on the factors affecting the industry
        • Look in the reports of other similar companies as well
sources of data continued
Sources of Data (continued)
  • BYU Library: Business and Company Resource Center (see FR FD-1A – Finding Key Sources of Financial Information)
    • Go to [www.BYU.edu], [Libraries], [Harold B. Lee Library], [Find Articles], the click on the “Find Articles by Subject.” Select [Business]. There is a lot of information. Look for “Business and Company Resource Center.” Click on the [connect] link. Proceed through the first screen and select the “Business and Company Resource Center with PROMT and Investext Plus”. Enter your company or industry name and hit Search. You will be brought into a screen that has company profile, news/magazines, histories, investment reports, financials, rankings, suits and claims, products, industry overview, and associations.
sources of data continued1
Sources of Data (continued)
  • Bloomberg:
    • Type IBQ [go]. This will give you a list of the 50+ industries, Select an industry and hit [go]. This gives a few pages of information on the industry selected
  • Value-line (from the BYU Library):
    • At the beginning of each industry section, there is a short description of the industry, the key drivers, and what is happening domestically.
sources of data continued2
Sources of Data (continued)
  • Other sources:
    • US Government, including the Commerce department
    • Sell-side research, i.e. Merrill, Morgan Stanley, Schwab, etc.
    • Multilateral government institutions, i.e. the World Bank and International Monetary Fund
d understand required areas of your industry report
D. Understand Required Areas of your Industry Report

10 Required Key Areas:

  • General Industry Information
  • Industry Type
  • Key Indices
  • Recommendation
  • Description and Summary
  • Competitive Structure
  • Competitiveness Analysis Model
  • Key Valuation Ratios to Watch
  • Key Items to Watch
  • Relative Performance versus the market and economy
general industry information
General Industry Information

This section includes three areas:

  • Narrow industry classification

This is the specific industry you are concerned with—the industry in which your company operates, i.e. Computer Hardware

  • Broad industry classification

This is the broader industry classification for your industry, i.e., Computers

  • Country

This is the country of domocile of your company, i.e., the United States for Apple

industry type
Industry Type
  • I use the 6 industry types proposed by Peter Lynch.
    • Each of these general types of industries/firms possess different characteristics, so investors need to focus on different attributes to determine if the industry/firm is attractive or not.
      • Slow Growers
      • Stalwarts
      • Fast Growers
      • Cyclicals
      • Turnarounds
      • Asset Plays
slow growers
Slow Growers
  • Slow growers: Utilities
    • At or near the top of the industry or product life cycle
    • Typically pay a regular dividend due to few attractive internal investments
  • Focus on:
    • Potentially profitable new products or acquisitions that will allow rising earnings and dividends
    • Repositioning of products along the life cycle
stalwarts
Stalwarts
  • Stalwarts: Pharmaceuticals
    • Expected to have faster earnings growth, but their consistent growth, priced into the stock price, makes large price changes unlikely
    • Tend to do relatively better in times of uncertainty due to a flight to quality and liquidity
  • Focus on:
    • The firm’s current PE versus its history with the market and industry
    • Anything that might increase the firm’s earnings growth rate
fast growers
Fast Growers
  • Fast Growers: technology
    • Comprised of smaller aggressive firms with high earnings growth potential (>20% year)
    • Risky as stock prices tumble at first sign of negative earnings surprises
  • Focus on:
    • How will the firm sustain its high growth rate?
    • How will this growth be financed?
    • Is it maintaining its cash flow growth?
cyclicals
Cyclicals
  • Cyclicals: automotive, building construction
    • Firms whose sales and profits rise and fall with the business cycle
  • Focus on:
    • Economic forecasts and where we are currently
    • The firm’s internal conditions, management
    • Their financial ability to weather economic downturns

Note: Watch for when earnings begin to rise after an economic downturn. Although its PE will be high, this is the best time to buy (assuming your economic forecasts are correct)

turnarounds
Turnarounds
  • Turnarounds: Industries in transition
    • Firms with current internal weaknesses but external opportunities which investors believe they can recover from
    • Due to typically high leverage and investor pessimism, these generally are risky investments but can be profitable investments if you get them right
  • Focus on:
    • The firm’s specific plans to correct the problem/or hire new management with turnaround experience
      • Discussions with firm’s suppliers/customers may provide information on the success and timing of a turnaround
asset plays
Asset Plays
  • Asset plays:
    • Firm’s with valuable assets that are hidden in the balance sheet, i.e. land holdings, film libraries, trademarks, patents, or subscribers
  • Focus on:
    • The value (intrinsic) of each major division (or specific assets) on a stand-along basis. Compare this to the current market price of the firm
3 key indices
3. Key Indices
  • Here you pick the two best indices which best represent the industry you are analyzing.
    • An easy way to determine which industry indices to use would be to go to Bloomberg, type your company symbol [equity] [go], “DES” [go], then page down. You will see which indices your company is included in.
    • Check your indices to determine what information is available, i.e., price, PE, dividend, etc.
    • Generally, you want indices in which the major companies in your industry are included
  • In the case of the Computer Industry, I chose the AMEX Computer Technology Index (it has price and PE data).
4 recommendation
4. Recommendation
  • This is where you put your reputation on the line and state your recommendation
    • This is where you determine, strategically, whether this industry is a buy, hold, or sell.
      • Remember that you can have an attractive company in an unattractive industry, and an unattractive company in an attractive industry. This is just your assessment of the industry.
    • I consider the Computer Hardware Industry a hold, as it is fast becoming a commodity/appliance type product.
      • Unless a manufacturer can differentiate their product, it will be difficult to maintain the higher margins necessary for profitability
5 description and summary
5. Description and Summary
  • This is a short description and summary of the industry
    • Include a short but broad description to help the reader understand the industry
    • In addition, include one or two key points of your analysis to support your recommendation from #4 above.
    • In the Computer Hardward Industry, I discuss a short description of the industry and the key areas included. Then I review the key issues supporting my “hold” recommendation, mainly the evolution of the industry and the challenges it faces.
6 competitive structure
6. Competitive Structure
  • Your competitive structure would include:
    • Number of players in the industry
    • Size of the various players
    • Key items critical to the industry, i.e. drivers of profitability
    • Amount of international versus domestic competition
  • The computer industry is characterized by a few manufactures that produce internationally, particulalry in emerging markets as labor costs are critical. In addition, I discuss the key areas of maintaining profitability in the industry, i.e. Service and support.
7 competitive analysis model
7. Competitive Analysis Model
  • You get to choose your competitive analysis model
    • Two most familiar are the SWOT analysis and Porters 5 forces. Other models are available and can be used. The choice is yours
      • The most important key is that you cover all the important areas of industry analysis.
  • In the Computer Hardware Industry example, I used the SWOT framework which looked at both the short-term and long-term analysis. Key was the ability to specify the key drivers of profitability and key drivers of risk.
8 key valuation ratios to watch
8. Key Valuation Ratios to Watch
  • Here you tell what you consider are the most important valuations ratios to watch.
    • Think through what are the key drivers of profitability for the industry
      • Pick the ratios that best show differences in those key drivers
      • Remember that these ratios will differ by industry (and often country as well). Look in specific sell-side reearch for key ratios that are emphasized (see TT01)
  • Key in the Computer industry is profitability. As such, PE and PB are important. In addition, some companies have high levels of cash, so you must ensure earnings are from operations and not interest.
9 key items to watch
9. Key Items to Watch
  • Here is what you should watched for this industry
    • As you understand the key drivers of the industry, try to understand key items to watch that allow you to understand what is happening in the industry.
  • In the Computer Industry, a key item is the Book to Bill ratio. This measures industry new orders (new orders booked), to billing (orders where they have requested payment).
    • When this ratio is greater (less) than 1.0, it is assumed that the industry is expanding (contracting).
    • Note that there are book to bill ratios in many of the major countries, i.e., Japan, Taiwan, etc.).
10 relative performance versus the market and economy
10. Relative Performance versus the Market and Economy
  • This section shows how the industry has performed versus a major market index (of your choice) and versus economic growth
    • While this is more important for more mature industries, it can be helpful for all industries as it gives a historical snapshot of performance versus specific benchmarks.

Relative Performance versus the S&P 500 (in percent %): 00 01 02 03 04 05 YTD

XCI 29.5 81.7 75.2 -35.0 -14.9 -12.4

SPX 33.1 28.3 20.9 -9.0 -11.9 -3.9

Relative -3.6 53.4 54.3 -26.0 -3.0 -8.5

GDP 4.3 4.6 4.2 4.1 1.1 1.0

Note: GDP data are from Teaching Tool FR-CR-1A Industrial Example - AAPL

questions
Questions
  • Any questions on the format of the analysis I require for your Industry Report?
review of objectives

Review of Objectives

A. Do you understand the critical areas of the global analysis framework, particularly industry analysis?

B. Do you understand how to include industry forecasts into your company report?

C. Do you understand where to find sources of data for your international and domestic industry prospects?

D. Did you understand the example of an analysis of an industry, and the required areas of your industry report?

ad