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Industry Specific Analysis

Industry Specific Analysis. Chapter 9 Robinson, Munter, Grant. Learning Objectives. Understand the role of industry benchmarks Understand how industry membership can affect financial statements Understand the importance of industry identification

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Industry Specific Analysis

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  1. Industry Specific Analysis Chapter 9 Robinson, Munter, Grant

  2. Learning Objectives • Understand the role of industry benchmarks • Understand how industry membership can affect financial statements • Understand the importance of industry identification • Be aware of nonfinancial analysis measures used for specific industries Chapter 9

  3. Analysis • Time series • Compare subject firm to itself over time • Cross-sectional • Compare subject firm to an appropriate benchmark within the same period of time • Industry Averages Chapter 9

  4. Conglomerates • Difficult to benchmark because they operate in multiple industries • Must disclose segment data for • Lines of business that contribute at least 10% of revenues, assets or net income • At least 75% of total revenues • These disclosures can be used for industry specific analysis Chapter 9

  5. Accounting RequirementsUS GAAP (FAS 131) • Requires each segment to disclose • Sales revenues • Operating profit • Assets • Some expense items Chapter 9

  6. Accounting RequirementsIAS 14 Primary segment disclosures • Revenues and operating profit • Assets and liabilities • Capital expenditures • Depreciation and amortization • Other non-cash expenditures Chapter 9

  7. Accounting RequirementsIAS 14 Secondary segment disclosures • Revenue • Assets • Capital expenditures • Inter-segment pricing for both primary and secondary segments Chapter 9

  8. Industry comparison example Chapter 9

  9. Retail • Wal-Mart Stores • Sales are largely cash-based • Largest assets: Inventory, Property • Largest liabilities: Accounts payable, long-term debt • Largest expense: Cost of goods sold Chapter 9

  10. RetailSpecific information • Affected by: • Consumer confidence, • CPI • Disposable income • Real GDP growth • Interest rates • Same store sales indicates the amount of the sales growth that is coming from new stores versus existing stores. Chapter 9

  11. Health Care Management • United Health Group provides health care management and insurance • Service firm – no inventory • Goodwill indicates expansion through acquisition • Medical cost payable is largest liability • Unearned premiums is a current liability • Revenues primarily from premiums earned • Largest expense is for medical costs Chapter 9

  12. Health Care ManagementSpecific information Health care facilities • CPI • Federal budget • Medicaid/Medicare spending • Unemployment • Uninsured Chapter 9

  13. Health Care ManagementSpecific information Insurance • Net investment yield • Interest rates • Demographics • Premium growth and Reinsurance rates • Lapse ratio, Net premiums written to surplus, Combined ratio Chapter 9

  14. Publishing • The New York Times Company • Large accounts receivable • Advertising and subscription revenue • Largest assets are property and equipment • “Costs in excess of net assets acquired” is goodwill • Liability for Un-expired subscriptions Chapter 9

  15. PublishingSpecific information • Demographic trends • Preference for books, newsprint, magazines vary by age group • Health of the education sector • Text book sales • Volatility of paper prices • May provide sales mix information • Advertising vs. circulation • Newspaper, broadcasting, internet sales Chapter 9

  16. Restaurants • McDonald’s Corporation • Property & Equipment is the largest asset • Reliant upon long-term financing • Large retained earnings • Revenues from company-owned stores and franchise fees • Food and packaging costs are only about 1/3 of revenues • Labor-related costs are nearly 75% of food/packaging costs Chapter 9

  17. RestaurantsSpecific information • Financial statement information • Average weekly sales • Same store sales • Nonfinancial statement measures • Consumer confidence • CPI • Interest rates • Real disposable income • Real GDP growth Chapter 9

  18. Waste Management • Republic Services, Inc. • Property & equipment is largest asset • Large depreciation expense • Followed closely by Intangible assets • Large amortization expense • Significant long-term debt Chapter 9

  19. Waste ManagementSpecific information • Daily municipal solid waste per capita • GDP • Landfill and incinerator capacity of company • Landfill disposal charges • US population growth Chapter 9

  20. Utilities • First Energy Corp. • Regulated industry • Unique financial statement presentation • Assets may be presented in reverse order • Heavily invested in PP&E • Goodwill from acquisitions • Liability for decommissioning nuclear power plants Chapter 9

  21. UtilitiesSpecific information • Regulatory Assets • Expenses deferred until the next general rate increase • Interest rates • GDP • Cooling/heating degree days (from 65°) • Industrial production • Household formation and housing starts • Risks from commodities markets Chapter 9

  22. Insurance • The Progressive Corporation • Invested premiums dominate assets • Reported in more detail • Deferred expenses for commissions, underwriting and other costs of acquiring policies • Amortized over the life of the policy • Unique liabilities • Unearned premiums • Loss reserve • Premium revenue and related loss expense on income statement Chapter 9

  23. InsuranceSpecific information • Legal requirements of coverage • Net investment yield • Interest rates • Demographics • Premium growth and Reinsurance rates • Lapse ratio, Net premiums written to surplus, Combined ratio Chapter 9

  24. Computer Hardware • Dell Computer Corporation • Inventories are relatively small • Receivables are relatively large • Accounts payable is large • Days payable ≈ 53 • Small amount of long-term debt • Separate R&D on the income statement Chapter 9

  25. Computer HardwareSpecific information • Business capital spending • Consumer confidence • Currency exchange • Global sales report (Semiconductor industry) • Leading economic indicators • Real GDP growth • Exchange rate fluctuations Chapter 9

  26. Airlines • Continental Airlines • Service industry • Flight equipment is dominant asset • Routes, gates and slots (cost of acquiring) • Capitalized and amortized • Air traffic liability is unearned revenue • Wages and fuel dominate operating expenses Chapter 9

  27. AirlinesSpecific information • Revenue passenger mile (RPM) • Available seat-mile • Load factor • Consumer confidence • Disposable income and Corporate profits • Jet fuel prices • Number of aircraft in fleet Chapter 9

  28. Financial Institutions • Citigroup, Inc. • Service industry (diversified) • 90% of assets are cash, deposits, investments or other receivables and loans • Customer deposits are a liability • Loan interest is primary revenue source Chapter 9

  29. Financial InstitutionsSpecific information • Interest rates • Disposable income • Consumer confidence • Consumer borrowing patterns • Housing and large expenditures • Delinquencies and bankruptcies • Efficiency ratio Chapter 9

  30. Summary • Understand industry benchmarks • Understand how industry membership can affect financial statements • Understand the importance of industry identification • Be aware of nonfinancial analysis measures used for specific industries Chapter 9

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