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Chapter 14 INDUSTRY ANALYSIS Multiple Choice Questions

Overview 1. a. b. c. d. In fundamental analysis, industry analysis is the: first step. second step. third step. fourth step.

(b, easy) What Is An Industry? 2. a. b. c. d. Standard & Poor's new Global Industry Classification system divides everything into _________economic sectors. 10 20 30 40

(a, easy) 3. a. b. c. d. Standard and Poor's new Global Industry Classification System already includes _______ companies. 10,000 25,000 50,000 75,000

(b. moderate)

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4.

A well-known and widely used system that classified industries for more than 60 years was the: Commercial Industrial Classification system. National Industrial Classification system. Standard Industrial Classification system. American Industrial Classification system.

a. b. c. d.

(c, easy) 5. a. b. c. d. Which of the following covers approximately 1,700 companies, divided into 96 industries? SIC NAICS GICS Value Line Investment Survey

(d, moderate) The Importance of Sector/Industry Analysis 6. a. b. c. d. Industry analysis is important because: companies can only do as well as their industry. industries often have an inverse relationship to the market. industries perform very differently over time. companies in declining industries lose money.

(c, moderate) 7. If an industry is ranked number one, based on price performance such as the S&P Industry Stock Indexes, an investor cannot necessarily expect that same industry to be ranked number one again next year. can usually depend on an industry to maintain its top ranking for five years or more. can expect that industry to do well over the next 10 to 20 years. can expect that industry to drop out of the top ten within five years.

a. b. c. d.

(a, moderate)

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Analyzing Sectors/Industries 8. a. b. c. d. Which life cycle stage generally sees industries improving their products, lowering prices, and start to attract considerable investment funds? pioneering stage expansion stage stabilization stage maturity stage

(b, moderate) 9. a. b. c. d. Weaker firms typically fail the most in the: pioneering stage. expansion stage. stabilization stage. maturity stage.

(a, moderate) 10. a. b. c. d. Which of the following is not one of the stages of the industry life cycle? introductory declining stabilization pioneering

(a, easy) 11. a. b. c. d. The basic competitive factors facing industries include all of the following except: bargaining power of suppliers threat of government regulation rivalry between existing competitors threat of substitute products

(b, difficult)

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12.

Which of the following is limitation of the life cycle approach to security analysis? It focuses on sales rather than stock prices. It focuses on the past more than the present. It does not consider the risk in the different cycles. It does not consider quantitative factors.

a. b. c. d.

(a, moderate) 13. a. b. c. d. At what stage in the industrial life cycle do financial policies become firmly established? Pioneering stage Expansion stage Stabilization stage Declining stage

(b, moderate) 14. a. b. c. d. The U.S. is moving from an ---------- society to an ----------- society. agricultural; industrial agricultural; information industrial; information industrial; international

(c, moderate) 15. When conducting industry analysis, investors should consider the historical record of all the following except: sales growth. earnings growth. interest rates. price performance.

a. b. c. d.

(c, moderate)

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16. Which of the following statements about the industry life cycle is incorrect? a. b. c. d. All industries can be classified very accurately into a specific phase. Companies may stay in one phase for a significant period of time. The general framework may not apply to some industries. This approach does not explicitly lead to a stock price determination.

(a, difficult) 17. a. b. c. d. The most important point of Michael Porter's analysis is that industry profitability is a function of economy. interest-rate level. industry structure. industry beta.

(c, moderate) 18. a. b. c. d. Which of the following is NOT among the qualitative factors that should be analyzed to assess an industry's future? Historical performance Competition Growth rate of sales Structural changes

(c, moderate) 19. a. b. c. d. Regarding the qualitative aspects of industry analysis, the breakup of AT&T in 1984 would be considered a: structural change. government effect. competitive effect. cyclical effect.

(b, easy)

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Using Sector/Industry Analysis As An Investor 20. a. b. c. d. Gold mining is a good example of a: growth industry. defensive industry. cyclical industry. countercyclical industry.

(d, moderate) 21. a. b. c. d. Which of the following types of industries is likely to be least affected in a recession? Cyclical Interest-rate sensitive Growth Defensive

(d, easy) 22. a. b. c. d. Which of the following industry categories is said to be "bought to be sold?" cyclical defensive growth countercyclical

(a, moderate) 23. a. b. c. d. Which of the following is not considered an interest-rate sensitive industry? building industry banking industry financial services industry tobacco industry

(d, easy)

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24. a. b. c. d.

Which of the following sectors was adversely affected by the recent accounting changes requiring the expensing of stock options? manufacturing technology energy utilities

(b, moderate)

True-False Questions
What Is An Industry? 1. The Value Line Investment Survey covers approximately 90 ndustries.

T, moderate) 2. The NAICS puts companies to industries based on the activity in which they are primarily engaged.

(T, moderate) 3. A source of industry rankings in terms of expected performance over the next 12 months is The Value Line Investment Survey.

(T, moderate) The Importance of Sector/Industry Analysis 4. It is a relatively simple matter of finding industries that will perform well in the short run.

(F, moderate) Analyzing Sectors/Industries 5. In the expansion stage, products become more standardized.

(F, difficult)

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6.

One limitation of the life cycle approach is that not .all companies fall into a specific category.

(T, easy) 7. The expansion stage of the industry life cycle is probably of most interest to investors.

(T, moderate) 8. Since performance is not always consistent, an industry's track record should not be of much concern to investors.

(F, moderate) 9. The pioneering stage offers the greatest risk for investors.

(T, easy) Using Sector/Industry Analysis As An Investor 10. The food industry is a good example of a countercyclical industry.

(F, moderate) 11. Growth industries often perform well during economic setbacks.

(T, moderate) 12. Countercyclical and defensive are different terms for the same industry type.

(F, moderate) 13. Buying stocks in low P/E industries produces higher average returns in up markets but also higher average losses in down markets.

(F, moderate)

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Short-Answer Questions Analyzing Sectors/Industries 1. How can historical performance help the analyst assess the future prospects for an industry?

(moderate) Answer: Historical performance tells the analyst where the industry has been. It \

provides a starting point. The analyst adds judgment and information about new products, markets, competition, etc. to reach an opinion about the future prospects of the industry for the future. 2. In which stage of the industry life cycle is it most difficult for the analyst to assess industry prospects and identify the leading companies?

(moderate) Answer: The pioneering stage is most difficult because the long-run viability of the industry has not yet been proven. What seems like the way of the future may turn out to be a passing fancy. Companies have not proven which ones will be able to rise above the competition and prevail in the long run.

3. (easy)

What are four basic aspects of qualitative assessment of industries?

Answer:

Historical performance, competition, government effects, and structural changes.

4. (easy)

What are the five competitive factors identified in the Michael Porter model?

Answer:

The threat of new entrants, bargaining power of buyers, rivalry between existing competitors, threat of substitute products or services, and bargaining power of suppliers.

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5.

Give several examples of government effects on industries.

(moderate) Answer: For example, deregulation in the financial services industry has removed barriers to competition among institutions; allowing supermarket banking, where the customer can have checking and savings, borrow money, make securities investments, and buy insurance all under one roof. Another example is the public and government sentiment against tobacco products, which has led to increased federal taxes and law suits filed by state governments against tobacco companies.

6.

When should companies in cyclical industries be bought?

(moderate) Answer: An investor would like to buy cyclical stocks in a recession when earnings prices are low relative to historical standards. Interestingly, P/E ratios are often high because earnings are depressed relatively more than prices. When the economy strengthens, so will company earnings and prices.

Using Sector/Industry Analysis As An Investor 7. (easy) Answer: Defensive industries are least affected by recessions and economic downturns; whereas, countercyclical industries go against the business cycle. Differentiate between defensive industries and countercyclical industries.

8.

Would it be useful to the analyst to compare industry data to basic economic data such as the GDP or consumer spending?

(moderate) Answer: An analyst often looks for industries that are growing faster than the economy as a whole or gaining a increasing share of consumer dollars. A relevant economic measure can be found for specific industries.

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. Critical Thinking/Essay Questions 1. What industries do you think will be the growth industries of the next decade? (moderate) Answer: This one is certainly open-ended and open to debate. A few possibilities include computer hardware and software, communications in various forms, anything related to the Internet, robotics, genetic engineering, financial services, and medical services. Global and domestic possibilities abound. The greatest ones will be products or services that do not yet exist.

2.

Portfolio diversification often focuses on cross-industry diversification to pick up correlation coefficients and risk-expected return characteristics that create the portfolio effect. Suggest a realignment of "industry" classifications to reflect fundamental relationships sought through the more casual traditional industries.

(difficult) Answer: "Industries" might be defined in terms of riskiness relative to the market (i.e. betas) or to specific economic variables (i.e. correlation coefficients) rather than on the types of products they produce. The resulting new "industries" might be much the same as the old ones, but there might be greater ease in asset allocation. Mutual fund annual reports would categorize companies according to betas or correlation coefficients rather than according to traditional industries (e.g. aerospace, pharmaceuticals, etc.).

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