Analysis and Valuation of

Equity Securities

Chapter 6: Industry Analysis

Chapter 7: Valuation of Individual Firm
Chapter 9: Technical Analysis
 Chapter 6: Industry
Analysis

◼Approaches to choosing stocks for investment

◼Industry Analysis
◼Industry life cycle
◼Industry structure
◼Industry trend
◼Industrial groups and rotational investment
Approaches to Choosing Stocks
for Investment

• Top-down approach • Bottom-up approach

▫ Economic analysis ▫ Company analysis
▫ Industry analysis ▫ Industry analysis
▫ Company analysis ▫ Economic analysis
▫ Macroeconomic
viewpoint ▫ A stock-picking
viewpoint
Economic Activity
• Government Economic Policy
• Fiscal Policy
• Monetary Policy
• Growth & Inflation
• Business Cycles and Economic Indicators
• Business Cycle
• Economic Indicators
• Money supply and stock prices
• Business Cycles and Industry Relationships.
Industry Analysis
• Comprises of two broad areas.

▫ The Industry life cycle

▫ The Industry structure.

 Industry Life Cycle

Industry Life Cycle Analysis(ILC)

• Particular phase of an industry in the life cycle
influences many variables considered in the
valuation process
▫ Earnings growth, dividends, capital expenditure, and
product demand
• The analyst can be guided towards decisions on
▫ Industry growth, duration of growth, profitability, and
potential rates of return
• The analyst can determine
▫ Relative positions of companies within the industry and
translate company differences into assumptions
affecting their individual valuations.
 Industry Life Cycle

Stages of the Industry Life Cycle

https://einvestingforbeginners.com/stages-industry-life-cycles-csmit/
 Industry Life Cycle

Development/Embryonic
Product – Companies get started
– new ideas, products, or production techniques

Ownership – Generally privately owned

and capital – Financed with owner/s’ money, and funds
from family, friends, banks, and later venture
capitalists
– Common need for capital to grow and expand.
Sales and – Slow as the product penetrates market
business – Upon success the market demand grows
growth increasing sales, earnings, and assets
Distribution – No distribution of profits
of profit
 Industry Life Cycle

Growth
Product & – Some market acceptance for products
Sales
Ownership – Additional financing through share
and capital offering.

Business risk – Still generally risky

& growth – Possibilities of large capital gains or losses
Distribution – At early growth, earnings retained for
of profit reinvestment.
– Firms making profits may distribute stock
dividends.
–Low cash dividends may be paid
 Industry Life Cycle

Expansion/Shakeout
Product & – Sales the growth rate slows down.
Sales
Ownership – Fully incorporated through share offering
and capital – varied sources of capital available
Business – Competition intensifies because of new
risk & entrants
growth – Investors’ recognition potential fall in growth
my cause considerable decline in stock price
– Uneven and non-smooth growth makes it
difficult to determine the cross-over point
Distributio – Low to moderate cash dividends (5-15% to 25-
n of profit 30%)
– Stock dividends and stock splits are common.
 Industry Life Cycle

Maturity
Product & – Industry sales growth resembles the national
Sales economic growth rate

Ownership – Financing alternatives are available both

and capital domestically and internationally.
Business –Market is more or less saturated.
risk &
growth
Distribution –Large cash dividends (45% - 60% payout is
of profit common.)
 Industry Life Cycle

Decline
Product & –Sales decline
Sales –due to lack of new innovation and entry of
substitutes with technological advances.
– Declining industries may be specific to a country

Distribution – Dividend payouts often rises to 100%

of profit – Often the firms do not send signal of
problem to investors so it maintains
dividends in the face of falling earnings. As a
result, dividend payout ratio increases until
management realises that cash needs to be
conserved. Then, either drastic dividend cuts
follow, or there is an elimination of dividends
entirely.
Test Your Learning
1. From your learning in the economics classes, can
you mention the three phases of the business cycle?
2. Which stage of the industry life cycle do the
following industries belong to?
▫ Mobile phone operators
▫ Soft drink
▫ Software
▫ Online education
▫ Audio cassette
3. Who are venture capitalists?
Test Your Learning
4. Which stage of the industry life cycle offers the
highest dividend payout? Which stage offers the
lowest?
5. Remember the BCG growth-share model. Where
would you put a business unit in the maturity stage
of its industry life cycle in the BCG growth-share
matrix?
Thank You

Be back with session 2 in 15

minutes