40 - Industry and Company Analysis Flashcards
Food, beverage, and utility companies are examples of:
Food, beverage, and utility companies provide basic necessities of life and are considered to be defensive industries. In a recession, the demand for their products will not fall as much as for some of the other industry groups.
A conglomerate is in the following lines of business, with segment revenue as a percentage of total revenue: 30% banking, 30% automobiles, 25% apparel, and 15% heavy machinery. Based on the Global Industry Classification Standard, the sector classification for this company is most likely:
Automobiles and apparel are classified as consumer discretionary; banking is classified as financial services; and heavy machinery is classified as industrials. Based on revenues, a majority of the firm’s sales (55%) are derived from the consumer discretionary sector.
(Module 40.1, LOS 40.d)
When classifying companies into peer groups for analysis, an analyst should:
Annual reports are a good source of information when identifying peer groups because companies may identify their key competitors. It is often appropriate to include a company in more than one peer group. An analyst forming peer groups can use commercially available industry classification systems to identify which companies are in the same industry.
A firm’s earnings are most likely to be cyclical if:
Producers of luxury items tend to have cyclical earnings because consumers typically decrease their purchases of these items during economic recessions. The earnings of firms with high percentages of variable costs are not as likely to be cyclical as those of firms with high percentages of fixed costs (i.e., high operating leverage). A growth industry has demand that is strong enough that earnings remain relatively unaffected by the business cycle.
(Module 40.1, LOS 40.c)
Industry analysis is most likely to provide an analyst with insight about a company’s:
Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis.
Which of the following statements about the industry life cycle is most accurate?
Prices tend to decrease in the growth stage as firms begin to realize economies of scale in production. The stages of the industry life cycle, in order, are embryonic, growth, shakeout, mature, and decline. Industry growth is slow during the embryonic stage as firms develop products and attempt to gain customer acceptance.
The industry experience curve illustrates the relationship between:
The industry experience curve shows cost per unit relative to cumulative output. Cost per unit typically decreases over time due to higher utilization rates for fixed capital, improvements in the efficiency of labor, and better product design and manufacturing methods.
During the contraction phase of the business cycle, how will an active portfolio manager using an industry rotation strategy most likely treat stocks of companies in a cyclical industry?
A cyclical industry is one that is expected to outperform during an expansion and underperform in a contraction. The industry rotation strategy for a cyclical industry is to overweight during an expansion and underweight during a contraction. This does not imply that a manager will rotate entirely out of a cyclical industry.
(Module 40.1, LOS 40.a)
Commercial index providers typically classify companies by:
Commercial providers such as Standard and Poor’s and MSCI Barra classify companies according to their principal business activity and the products and services they provide.
(Module 40.1, LOS 40.b)
Cyclical industries
Customer discretionary (apparel, auto, houses, restaurants)
Basic Materials and processing
energy, financial services
industrial and producer durables (transportation, aerospace, defense, machinery, supplies)
tech
Non-cyclical
health care
utilities
telecommunications
consumer staples (food & beverages, alcohol, tobacco, personal care items)
