Industry analysis

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					Industry Analysis
          Industry and Company
              Performance
l   Wide dispersion in rates of return in different industries
l   Performance varies from year to year
l   Research shows that there is almost no association in individual
    industry performance year to year or over sequential rising or
    falling markets
l   Variables that affect industry performance change over time
l   There is wide dispersion in the performance of companies
    within an industry
l   This reinforces the need for company analysis in addition to
    industry analysis
    The Business Cycle and Industry Sectors
l   Economic trends affect industry performance (Inflation, Interest
    Rates, International Economics, Consumer Sentiment)
     l Change in interest rates affects firms with substantial
       amount of debt such as (utilities, banks, and airlines)
     l Change in interest rates affect demand for Consumer
       durables, Housing, Automobiles, Deferrable purchases
     l Higher oil prices may help oil producing and exploration
       firms but hurt utilities and airlines
     l Change in Inflation affects firms with natural resources (Oil,
       Precious metals)
l   Cyclical or Structural Changes
     l Cyclical changes in the economy arise from the ups and
       downs of the business cycle
     l Structure changes occur when the economy undergoes a
       major change in organization or how it functions
l   Rotation strategy is when one switches from one industry
    group to another over the course of a business cycle
     l Cyclical firms are more sensitive to changes in the level of
       economic activity while Non-cyclical firms are less sensitive…
       The Stock Market and
        the Business Cycle
                                Basic
                              Industries
                                Excel


                                            Consumer
               Consumer        peak        Staples Excel
               Durables
                 Excel



                            Capital
               trough     Goods Excel
  Financial
Stocks Excel
   Structural Economic Changes
    and Alternative Industries
l Social   Influences
  l Demographics
  l Lifestyles

l Technology
l Politics   and Regulations
  l Economic     reasoning
  l Fairness
  l Regulatory    changes affect numerous
    industries
 Evaluating the Industry Life
            Cycle
Five Stage Model
l Pioneering
  development
l Rapidly accelerating
  industry growth
l Mature industry
  growth
l Stabilization and
  market maturity
l Deceleration of
  growth and decline
     Analysis of Industry Competition
           Competition and Expected Industry Returns
l   Porter’s concept of competitive strategy is described as the
    search by a firm for a favorable competitive position in an
    industry
l   To create a profitable competitive strategy, a firm must first
    examine the basic competitive structure of its industry
l   The potential profitability of a firm is heavily influenced by the
    profitability of its industry
l   Porter’s Competitive Forces
     l Rivalry among existing competitors
     l Threat of new entrants
     l Threat of substitute products
     l Bargaining power of buyers
     l Bargaining power of suppliers
     Estimating Industry Rates of
               Return
l   Present value using required rate of return for the
    equity in the industry
l   Two-step P/E ratio approach uses expected value at
    the end of investment horizon and compute the
    expected dividend return during the period
l   Valuation using the reduced form DDM
                 Pi = the price of industry i at time t
                 D1 = the expected dividend for industry i in period 1
                 equal to D0(1+g)
                 k = the required rate of return on the equity for industry i
                 g = the expected long-run growth rate of earnings and
                 dividend for industry i
 Estimating the Required Rate of
             Return
l Influenced by the risk-free rate
l Expected inflation rate
l Risk premium for the industry versus the
  market
  l businessrisk, financial risk, liquidity risk,
    exchange rate risk, country political risk
l Orcompare systematic risk (beta) for the
 industry to the market beta of 1.0
 Estimating the Expected Growth
              Rate
l Earningsand dividend growth are
 determined by the retention rate
 and the return on equity
 lEarnings retention rate of industry
  compared to the overall market
 lReturn on equity is a function of
   lthe net profit margin
   ltotal asset turnover
   la measure of financial leverage
Industry Valuation Using the Free
Cash Flow to Equity (FCFE) Model

  FCFE is defined as follows:
  Net income
  + Depreciation
  - Capital expenditures
  - D in working capital
  - Principal debt repayments
  + New debt issues
Industry Valuation Using the Free
Cash Flow to Equity (FCFE) Model

l The   Constant Growth FCFE Model




l The   Two-Stage Growth FCFE Model
The Earnings Multiple Technique
l   Estimating earnings per share
     l start with forecasting sales per share
       l Industriallife cycle
       l Input-output analysis
       l Industry-aggregate economy relationship
    l earnings forecasting and analysis of industry
      competition
       l competitive strategy
       l competitive environment
       l industry operating profit margin
       l industry earnings estimate
       l industry earnings multiplier
      Industry Profit Margin Forecast
l   Industry’s operating profit margin (EBITDA / Sales)
     l Depreciation expense (subtract depreciation from profit
       margin to determine industry’s net before int. and taxes)
     l Interest expense (Calculate the annual total asset turnover
       (TAT); Use your current sales estimate and an estimate of
       TAT to estimate total assets next year; Calculate the annual
       long-term (interest bearing) debt as a percent of total
       assets; Estimate long-term debt for the next year; Calculate
       the annual interest cost as a percent of long-term debt and
       analyze the trend; Estimate next year’s interest cost of debt
       for this industry based upon your prior estimate of market
       yields; Estimate interest expense based on the Interest Cost
       of Debt on Outstanding Long-Term Debt)
     l Tax rate (Regression analysis and plot; after estimating the
       tax rate, multiply the EBT per share by (1 - tax rate) to
       estimate earnings per share; derive an estimate of industry’s
       net profit margin as a check on your EPS estimate)
Estimating an Industry Earnings Multiplier
l   Macroanalysis
    l relationship between multiplier for the industry and the
      market
    l variables that influence the multiplier:
        l required rate of return (k) [nominal risk-free rate plus a risk
          premium]
        l expected growth rate of earnings and dividend
        l dividend payout ratio
l   Microanalysis
    l Estimate the variables that influence the industry earnings
       multiplier and compare them to the comparable values for
       the market P/E
    l Industry multiplier versus the market multiplier
    l Comparing dividend-payout ratios
    l Estimating the required rate of return (k)
    l Estimating the expected growth rate (g)
        g = Retention Rate (b) X Return on Equity (ROE) = (b) X (ROE)
Other Relative Valuation Ratios
l Price-to-book  value ratios (P/BV)
l Price-to-cash flow ratios (P/CF)
l Price-to-sales ratios (P/S)
           The Internet
     Investments Online
http://www.lf.com
http://healthcaredistribution.org
http://retailindustry.about.com
http://valuationrespurces.com
http://www.nacds.org

				
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posted:7/22/2013
language:English
pages:17