Professional Documents
Culture Documents
to accompany
Chapter 14
Chapter 14
Industry Analysis
Questions to be answered:
• Is there a difference between the returns for
alternative industries during specific time
periods? What is the implication of these
results?
• Is there consistency in the returns for
individual industries over time? What do these
results imply regarding industry analysis?
Chapter 14
Industry Analysis
• Is the performance for firms within an
industry consistent? What is the implication
of these results for industry and company
analysis?
• Is there a difference in risk among
industries? What are the implications of
these results for industry analysis?
Chapter 14
Industry Analysis
• What happens to risk for individual industries
over time? What does this imply for industry
analysis?
• What are two variables that need to be
estimated whether you use cash flow models
or relative valuation ratios?
Chapter 14
Industry Analysis
• Given the present value of cash flow valuation
techniques, how does an analyst determine the
value of an industry using the DDM and
assuming constant growth or two stage growth?
• How does an analyst determine the value of an
industry using the free cash flow to equity
(FCFE) model with constant growth or two
stage growth?
Chapter 14
Industry Analysis
• What are the steps involved in estimating
earnings per share for an industry?
• What are the stages in the industrial life cycle
and how does the life cycle stage affect the sales
estimate for an industry?
• What are the five basic competitive forces that
determine the intensity of competition in an
industry and thus, its rate of return on capital?
Chapter 14
Industry Analysis
• How does the estimating procedure for the
operating profit differ for the aggregate
market versus an industry?
• What are the two alternative procedures for
estimating an industry earnings multiplier?
Chapter 14
Industry Analysis
• What is involved in a macroanalysis of the
industry earnings multiplier?
• What are the steps in the microanalysis of an
industry earnings multiplier?
• After you estimate an industry earnings
multiplier, how do you determine if the
industry’s multiplier is relatively high or
low?
Chapter 14
Industry Analysis
• How do industries differ in terms of what
dictates their return on assets?
• What are some of the unique factors that
must be considered in global industry
analysis?
Why Do Industry Analysis?
• Help find profitable investment
opportunities
• Part of the three-step, top-down plan for
valuing individual companies and selecting
stocks for a portfolio
What Do We Learn
From Industry Analysis?
• Is there a difference between the returns for
alternative industries during specific time
periods?
• Will an industry that performs well in one
period continue to perform well in the future?
That is, can we use past relationships between
the market and an individual industry to
predict future trends for the industry?
What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
• Is there a difference in the risk for
alternative industries?
What Do We Learn
From Industry Analysis?
• Do firms within an industry show consistent
performance over time?
• Is there a difference in the risk for
alternative industries?
• Does the risk for individual industries vary
or does it remain relatively constant over
time?
Industry Performance
• Wide dispersion in rates of return in different
industries
• Performance varies from year to year
• Company performance varies within industries
• Risks vary widely by industry but are fairly
stable over time
The Business Cycle and Industry
Sectors
• Economic trends can and do affect industry
performance
• By identifying and monitoring key
assumptions and variables, we can monitor
the economy and gauge the implications of
new information on our economic outlook
and industry analysis
The Business Cycle and Industry
Sectors
• Cyclical or Structural Changes
– Cyclical changes in the economy arise from the ups
and downs of the business cycle
– Structure changes occur when the economy
undergoes a major change in organization or how it
functions
peak
trough
The Stock Market and
the Business Cycle
Basic Exhibit 14.2
Industries
Excel
Consumer
Consumer peak Staples Excel
Durables
Excel
Capital
trough Goods Excel
Financial
Stocks Excel
Structural Economic Changes
and Alternative Industries
• Social Influences
– Demographics
– Lifestyles
• Technology
• Politics and regulations
– Economic reasoning
– Fairness
– Regulatory changes affect numerous industries
– Regulations affect international commerce
Evaluating the Industry Life
Cycle
Five Stage Model
• Pioneering development
• Rapidly accelerating industry growth
• Mature industry growth
• Stabilization and market maturity
• Deceleration of growth and decline
Analysis of Industry Competition
Competition and Expected Industry Returns
– Porter’s concept of competitive strategy is
described as the search by a firm for a favorable
competitive position in an industry
– To create a profitable competitive strategy, a
firm must first examine the basic competitive
structure of its industry
– The potential profitability of a firm is heavily
influenced by the profitability of its industry
Competitive Structure of an
Industry
• Porter’s Competitive Forces
– Rivalry among existing competitors
– Threat of new entrants
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers
Estimating Industry Rates of Return
• Present value using required rate of return for the
equity in the industry
• Two-step P/E ratio approach uses expected value
at the end of investment horizon and compute the
expected dividend return during the period
• Valuation using the reduced form DDM
D1 Pi = the price of industry i at time t