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Introduction to Global Insight’s WIS Stock Sector Benchmarks A New Tool for Financial Analysis

Introduction to Global Insight’s WIS Stock Sector Benchmarks A New Tool for Financial Analysis. Presented by Mark Killion, CFA Managing Director Global Insight’s World Industry Services. WIS Stock Sector Benchmarks: A New Tool for Financial Analysis. Agenda:.

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Introduction to Global Insight’s WIS Stock Sector Benchmarks A New Tool for Financial Analysis

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  1. Introduction to Global Insight’sWIS Stock Sector BenchmarksA New Tool for Financial Analysis Presented by Mark Killion, CFA Managing Director Global Insight’s World Industry Services

  2. WIS Stock Sector Benchmarks:A New Tool for Financial Analysis Agenda: • Introduction to Global Insight’s latest measures for sector investment research and corporate strategy • New Global Sector benchmarks organized into standard stock sector classification that follow GICS and Dow-Jones • Easy point and click access to a unique multidimensional global data set, which includes all sectors in all countries • Sector indicators line up well with items in company income statements: sales, profits, and costs • “Cleanest,” best measure of underlying, normalized profits and sales • Does not suffer from well-known “survivorship bias,” but is subject to “top-down” macro constraint for consistency and quality control • Unique and consistent financial benchmarks that are flexibly defined across country/regions and sectors

  3. Energy Basic Materials (10) Industrials (9) Consumer Discretionary (9) Consumer Staples (5) Health Care (2) Financials (3) Information Technology (3) Telecommunications Utilities What Stock Market Sectors are Included? All of the Top-Ten Economic Sectors are Included! In addition to over 40 additional industries and sub-sectors (number of sub-sectors shown in parentheses)

  4. Global Insight’s framework: Top-down consistency augmented by bottom-up B2B and trade patterns Sales translated into profits via operating and financial leverage Our sector sales and profits are: The “cleanest” measure of current operating performance More reliable than unconstrained “bottom up” measures Free from “survivorship bias” “Normalized” earnings growth Which will see fastest growth? Which sector stock prices are relatively rich/cheap given the outlook for growth and volatility? What Indicators are Included for Sectors? WIS Includes Indictors that Line up Directly with Key Items in Company Income Statements • Sector-level measures include: • sales, profits, and margins • measured in US$ and Euros • (forthcoming: CapEx, FCF) • Sector sales and profits are key to: • understanding asset valuation, credit quality, and cash flows • anticipating the CapEx cycle and employment growth • Sector indicators are big “Peer Group” benchmarks for use in Credit Risk and Asset Valuation • Data derived from IRS/Tax filings • Sector data are components of National Income Accounts (NIA)

  5. How Do Stock Sectors Relate to Macro Economic Views? --Business cycle impact greatest in the short and medium term--Over longer time frames, technology and commercial patterns “Feed Back” from the bottom up to shape the macro trend “Top Down” Macro Outlook Drives Sector Conditions! Macro • Policies • Slate of Demand • Scenarios • Prices and Exchange Rates Industry • Output and Purchase Requirements • Consumer versus B2B Sales • Technology, Commercial Linkages among Sectors • Trade and Competition Company • Trends in Sales Growth, Cost Structure • Market Penetration • Prospects for Cash Flow • Earnings Growth for Asset Valuation Sector Data Benchmarks Serve as a “Gear Box” that Connects Macro with Companies!

  6. Who Provides the Sector Benchmarks? Stock Sector Benchmarks is Created by Global Insight’s World Industry Service (WIS) • WIS expertise is a focus on sector markets: measuring sector size, composition, and growth • Track changing sources of growth in sales, costs, and profits • Aggregations and comparisons, consistency across 70 countries with global totals • Common coverage: All sectors in all countries • Detailed sector categories add up to total GDP • Key indicators for each sector (sales, costs, profits…) • Measure inter-sector relationships in B2B markets, trade patterns, IT spending, and risk management

  7. An Example of the Outlook for Growth in Key Global Sectors Global Recovery Will Lift Most Sectors(% Growth in Inflation-Adjusted Sector Sales in 70 Largest Economies) • This is an example of global sector sales growth, shown over time, with a forecast • Sector indicators provided for detailed as well as the high level global view of all sectors, such as this • “Drill down” from the high-level global view into finer definitions of sectors and sub-sectors • “Drill down” as well as into finer views of geographic regions and countries

  8. Services Held Up Better Than Manufacturing(% Growth in Inflation-Adjusted Sector Sales for World and Key Regions) Start with High-Level View, Then Drill Down Into Sub-Sectors and Industry Components Key Manufacturing Sectors Key Services Sectors

  9. (Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS) Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Telecommunication Sector Example World: Total Sales in the Telecommunication Sector (GICS = 50)WIS – Worldwide Sales by Telecommunications Operations Company Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere • This graph shows how Global Insight’s WIS lines up with aggregated company financial data for the telecommunications sector • Geographic coverage is the total world • WIS data (black line with diamond) is total sales • Aggregated company data (green line with triangle) is sum of total sales reported by all companies included in the GICS sector index • Top-10 companies (red dash with circle) show the sum of total sales reported by the world’s 10 largest companies (largest in terms of sales) • WIS is the widest measure of sector activity • includes all commercial activity in the sector • including privately held companies and government owned enterprises • Is not distorted by balance sheet impacts • The ratio of Largest 10 Companies to Total WIS sector sales is a Sector “Concentration Ratio” Telecommunication Sector Sales – US$ Bill.

  10. (Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS) Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Total World Basic Materials Sector World: Total Sales in the Basic Materials Sector (GICS = 15)WIS – Worldwide Sales by Operations Located AnywhereCompany Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere Basic Materials Sector Sales – US$ Bill. Basic Materials Sector Sales - % Growth

  11. Sector-Operating Characteristics:Industry Concentration Ratios Sales Concentration Ratios for GICS 10 Economic Sectors, Total World (Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

  12. Sector-Operating Characteristics:Coefficient of Variation (COV) How Volatile is the World Sales Pattern?Sector Growth, Standard Deviation of Growth, and the Ratio of Growth to Standard Deviation (COV): (Inflation Adjusted Sales,1990-2002)

  13. Sector-Operating Characteristics:Coefficient of Variation (COV) Volatility of Sector Sales in Various Regions The Ratio of Growth to Standard Deviation (COV) (Inflation Adjusted Sales, 1990-2002)

  14. Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Total World Basic Materials Sector How Do WIS Sector Profits Compare to Stock Index Peer Groups? % Growth - Profits in Basic Materials Sector % Growth - Profits in Utility Sector (Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

  15. Sales and Profits Indicators in WIS Stock Sector Benchmark Facilitates Margin Analysis as part of ROE Framework Operating Profit Margins (Excludes Depreciation and Write Offs) (Comparison between United States, United Kingdom, and Continental Europe) Operating Profit Margin for All Companies in the TechnologySector in the GICS Classification Scheme • Improvement in profit margins shown as the most likely source of near-term earnings growth in the technology sector • Framework analyzes the interaction among operating leverage, capacity utilization, and profit margins • Many sectors will need growth in CapEx to generate high margins • Financial Re-structuring has been in vogue in many sectors • CapEx funded with retained earnings • Return on investment and free cash flow receives greater scrutiny • Yet any sizeable increase in M&A and CapEx will limit room for improvement in asset efficiency

  16. Rank of Profits Growth Rate Forecasts Among the Top-10 Economic Sectors in the United States Long-Term “Normalized” Sector Profits Growth(Average Percent Growth of Operating Profits in the US, Forecast for 2004-08, Top-10 GICS Economic Sectors)Forecast Published in Q3 2003 • WIS sector profits show the underlying, normalized rate of earnings growth • Sector forecasts consistent with the “top down” analysis from Global Insight’s World Economic Service • Show normalized sector growth after the cyclical “bounce” of 2003 • Rank growth across sectors for a relative and comparative perspective • Compare sector performance across the World, European, American and Emerging Markets Source: GII World Industry Service

  17. Use WIS Sector Sales and Profits to Show Relative Valuation of Securities Sector PEG Ratio: • Combine sector measures for prices, profits growth, and sector risks into a single valuation metric: • Uses two historical measures and one forecast measure • Prices: Price-to-Earnings Ratio (Historical P/E) • Growth: WIS Profits Growth Rates (Forecast) • Risk: Risk-of-earnings growth (Historical Volatility) • Sector PEG metric shows the relative over- and under-valuation of sectors within a portfolio • Divide sector P/E ratio by the Coefficient of Variation (COV) • COV is defined as the profits growth rate divided by standard deviation of growth

  18. How Much to Pay for Relative Sector Growth and Risk? Sector PEG Ratio = Sector Stock Price Valuation Metric (P/E)Adjusted for Sector Growth and Risk (COV)(Historical Data for P/E is as of September 30, 2003; COV = Ratio of Forecast Normalized Earnings Growth to Historical Volatility of Growth. Historical Volatility covers 1990-2001, Forecast (made in August 2003) covers 2004-08) Source: S&P, GII World Industry Service

  19. More Information? Please Contact Us for a Personal Demonstration! • Mark Killion, CFAManaging Director, World Industry Service1-610-490-2547mark.killion@globalinsight.com • Prem PremakumarApplications Manager, World Industry Service1-610-490-2525prem.premakumar@globalinsight.com

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