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investments > Chapter 12 - macroeconomic and industry analysis > Flashcards

Chapter 12 - macroeconomic and industry analysis Flashcards

1
Q

fundamental analysis

A

The analysis of determinants of firm value, such as prospects for earnings and dividends

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2
Q

exchange rate

A

The rate at which domestic currency can be converted into foreign currency

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3
Q

Gross domestic product (GDP)

A
  • The market value of goods and services produced over a period of time
  • Total production of goods and services
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4
Q

unemployment rate

A

The ratio of the number of people classified as unemployed to the total labor force

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5
Q

capacity utilization rate

A

the ratio of actual output from factories to potential output

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6
Q

inflation

A

The rate at which the general level of prices for goods and services is rising

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7
Q

what is the relationship between interest rates and valuations?

A

High interest rates reduce the PV of FCF

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8
Q

budget deficit

A

The amount by which government spending exceeds government revenues

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9
Q

what can government borrowing do to interest rates?

A

Large government borrowing can force up interest rates by increasing the total demand for credit in the economy

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10
Q

sentiment

A

Optimism or pessimism concerning the economy

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11
Q

Fundamental factors that determine the level of interest rates:

A
  • supply of funds from savers, primarily households
  • demand for funds from businesses to finance physical investments in plant, equipment, and inventories
  • government’s net supply/demand for funds as modified by actions of the federal reserve bank
  • expected rate of inflation
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12
Q

what is the relationship between the real interest rate and the supply of household savings?

A
  • The higher the real interest rate, the greater supply of household savings
  • Therefore, the supply curve slopes up
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13
Q

what is the relationship between the real interest rate and business investment?

A
  • The lower the real interest rate, the more businesses will want to invest in physical capital
  • Therefore, the demand curve slopes dow
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14
Q

demand shock

A
  • An event that affects the demand for goods and services in the economy
  • Usually characterized by aggregate output moving in the same direction as interest rates and inflation
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15
Q

examples of demand shocks

A

Reductions in tax rates, increases in money supply, government spending, or foreign export demand

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16
Q

supply shock

A

An event that influences production capacity and costs in the economy
Usually characterized by aggregate output moving in the opposite direction of inflation and interest rates

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17
Q

examples of supply shocks

A

Changes in energy prices; freezes, floods, or droughts that might destroy crops; changes in education level; or changes in the wage rate at which the labor force is willing to work

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18
Q

business cycles

A
  • Recurring cycles of recession and recovery
  • characterized by a peak and a trough
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19
Q

peak

A

The transition from the end of an expansion to the start of a contraction

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20
Q

trough

A

The transition point between recession and recovery

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21
Q

cyclical industries

A

Industries with above-average sensitivity to the state of the economy

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22
Q

examples of cyclical industries

A

Producers of durable goods (automobiles/large household appliances) and capital goods (goods used by other firms to produce their own products)

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23
Q

defensive industries

A

Industries with below-average sensitivity to the state of the econony

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24
Q

examples of defensive industries

A

Food producers/processors, pharmaceutical firms, and public utilities

25
Q

leading indicators

A

Economic series that tend to rise or fall in advance of the rest of the economy

26
Q

examples of leading indicators

A

Average weekly hours of production workers, initial claims for unemployment insurance, manufactures’s new orders, ISM Index of New Orders, new orders for nondefense capital goods, new private housing units authorized by local buildin gpermits, Yield curve: 10-year T-bond and federal funds rate spread, stock prices, leading credit index, index of consumer expectations for business conditions

27
Q

coincident indicators

A

move in tandem with the economy

28
Q

examples of coincident indicators

A

Employees on nonagricultural payrolls, personal income less transfer payments, industrial production, manufacturing and trade sales

29
Q

lagging indicators

A

tend to rise or fall somewhat after the economy

30
Q

examples of lagging indicators

A

Average duration of unemployment, ratio of manufacturing and trade inventories to sales, change in index of labor cost per unit of output, average prime rate charged by banks, commercial/industrial loans outstanding, ratio of consumer installment credit outstanding to personal income, change in CPI for services

31
Q

NAICS codes

A

Classification of firms into industry groups using numerical codes to identify industries

32
Q

breakdown of NAICS codes

A
  • 1st 2 digits denote very broad industry classifications
  • The next digits define the industry grouping more narrowly
  • 1st 5 digits are common across all USMCA countries
  • 6th digit is country-specific
  • Forms with the same 4-digit codes are commonly taken to be in the same industry
33
Q

3 factors that determine the sensitivity of a firm’s earning to the business cycle

A
  • Sensitivity of sales
  • Operating leverage (the division between fixed and variable costs)
    - Firms with greater amounts of variable costs will
    be less sensitive
  • Financial leverage (the use of borrowing)
    - Interest payments on debt must be paid
    regardless of sales
34
Q

sector rotation

A

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts

35
Q

sector rotation near the peak

A

invest in firms engaged in natural resource extraction and processing (minerals or petroleum)

36
Q

sector rotation following a peak (contraction/recession)

A

invest in defensive industries

37
Q

sector rotation at the height of the contraction

A

financial firms will be hurt by shrinking loan volume and higher default rates

38
Q

sector rotation toward the end of the recession

A

contraction induce lower inflation and interest rates, which favor financial firms

39
Q

sector rotation at the trough

A

the economy is poised for recovery/expansion, invest in cyclical industries, and firms might be purchasing new equipment, invest in capital goods industrious (equipment, transportation, or construction)

40
Q

full sector rotation from trough to peak

A

technology→ consumer discretionary→ materials→ industrials→ energy

41
Q

full sector rotation from peak to trough

A

health care→ consumer staples→ utilities→ financials

42
Q

industry life cycle

A
  • Start-up: extremely rapid growth
  • Consolidation: growth that is less rapid but still faster than the general economy
  • Maturity: growth no faster than the general economy
  • Relative decline: growth that is less rapid than the general economy or shrinks
43
Q

start-up

A
  • extremely rapid growth
  • New tech/product
  • Difficult to predict which firms will be industry leaders
44
Q

consolidation

A
  • growth is less rapid but still faster than the general economy
  • Product becomes established
  • Industry leaders begin to emerge
  • Market share is easier to predict
45
Q

maturity

A
  • growth no faster than the general economy
  • Product has become far more standardized
  • Narrower profit margins and further pressure on profits
  • Relatively stable CF but little opportunity for expansion
46
Q

relative decline

A
  • growth that is less rapid than the general economy or shrinks
  • Potential for obsolescence of the product, competition from new products or new low-cost suppliers
47
Q

Lynch’s industry classification system

A
  • Slow growers
  • Stalwarts
  • Fast growers
  • Cyclicals
  • Turnarounds
  • Asset plays
48
Q

slow growers

A

large/aging companies that will grow only slightly faster than the general economy

49
Q

stalwarts

A

large, well known firms (Coca-Cola), grow faster than the slow growers, tend to be noncyclical

50
Q

fast growers

A

small/aggressive new firms with annual growth rates of 20%-25%

51
Q

cyclicals

A

sales/profits that regularly expand/contract with the business cycle

52
Q

turnarounds

A

in bankruptcy or soon might be, if they recover, can offer tremendous investment returns

53
Q

asset plays

A

have valuable assets not currently reflected in the price

54
Q

five determinants of competition

A
  • Threat of new entry
  • Rivalry between existing competitors
  • Pressure from substitute products
  • Bargaining power of buyers
  • Bargaining power of suppliers
55
Q

threat of new entry

A
  • New entrants put pressure on price and profits
  • Barriers to entry can be a key determinant of industry profitability
  • Secured distribution channels, brand loyalty, proprietary knowledge or patent protection, existing experience
56
Q

rivalry between existing competitors

A

With several competitors, there will generally be more price competition and lower margins as competitors seek to expand their market share

57
Q

pressure from substitute products

A

The industry faces competition from firms in related industries

58
Q

bargaining power of buyers

A

If a buyer purchases a large fraction of an industry’s output, it will have bargaining power and can demand price concessions

59
Q

bargaining power of suppliers

A

If a supplier of a key input has monopolistic control over the product, it can demand higher prices for the good and squeeze profits out of the industry

investments (14 decks)

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