Post on 02-Feb-2016
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Industry Analysis: Global and Country
Or understanding the critical industry factors that affect your company
BM410: Investments
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
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
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
All industries are in different stages of development!You must determine at which stage your industry is
in currentlyRemember that technological innovation may have
the effect of changing the life cycle of the industry
Stage Sales GrowthStart-up Rapid & IncreasingConsolidation StableMaturity SlowingRelative Decline Minimal or Negative
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
Good Poor
Good Do ??
Well
Poor ?? Poor
Industry
Management Quality
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
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
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
New Entrants
Industry
Suppliers Competitors Buyers
Substitutes
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)
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
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
Entry Barriers• Economies of scale• Proprietary product differences• Brand identity• Switching Costs
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
Determinants of Substitutions Threat• Relative price performance of substitutes• Switching costs• Buyer propensity for substitutes
5. Buyers
Determinants of Buyer PowerBargaining 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
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)
• 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 (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 (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
10 Required Key Areas:1. General Industry Information2. Industry Type3. Key Indices4. Recommendation5. Description and Summary6. Competitive Structure7. Competitiveness Analysis Model8. Key Valuation Ratios to Watch9. Key Items to Watch10. Relative Performance versus the market and economy
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
2. 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 GrowersStalwartsFast GrowersCyclicalsTurnaroundsAsset Plays
Slow Growers
Slow growers: UtilitiesAt or near the top of the industry or product life
cycleTypically 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: 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 industryAnything that might increase the firm’s earnings
growth rate
Fast Growers
Fast Growers: technologyComprised 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: automotive, building constructionFirms whose sales and profits rise and fall with the
business cycle Focus on:
Economic forecasts and where we are currentlyThe firm’s internal conditions, managementTheir financial ability to weather economic
downturnsNote: 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: 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: • 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
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
This is where you put your reputation on the line and state your recommendationThis 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
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
Your competitive structure would include:Number of players in the industrySize of the various playersKey items critical to the industry, i.e. drivers of
profitabilityAmount 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
You get to choose your competitive analysis modelTwo most familiar are the SWOT analysis and
Porters 5 forces. Other models are available and can be used. The choice is yoursThe 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
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 industryPick the ratios that best show differences in
those key driversRemember 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
Here is what you should watched for this industryAs 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
This section shows how the industry has performed versus a major market index (of your choice) and versus economic growthWhile 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 YTDXCI 29.5 81.7 75.2 -35.0 -14.9 -12.4SPX 33.1 28.3 20.9 -9.0 -11.9 -3.9Relative -3.6 53.4 54.3 -26.0 -3.0 -8.5GDP 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
Any questions on the format of the analysis I require for your Industry Report?
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?