Chapter 14: Industry classification

Question 1

Industry classification list

Answer 1

F - Financials
T - Technology

M - basic Materials
U - Utilities
G - consumer Goods

I - Industrials
S - consumer Services

H - Health care
O - Oil & gas (energy)
T - Telecommunications

Change to MUGSHOT FIT

Question 2

Financials: (7)

Answer 2

1. financial companies are quite mixed, although most are capital intensive
2. banks are highly geared and have volatile profits
3. general insurers also have volatile profits and virtually no borrowings
4. life insurers have stable profits and low gearing
5. labour costs are important for many companies in the group
6. companies often operate under considerable regulation
7. the domestic market is most important but there is increasing internationalisation

Question 3

Describe Oil and gas and list 4 characteristics:

Answer 3

These companies are involved in the extraction and supply of oil and gas products used throughout the economy.

They are usually:

1. large companies
2. commodity price dependent
3. high risk
4. global

oil and gas companies are risky, independent of the rest of the stock market and depend on dollar denominated oil and gas prices

Question 4

Describe Basic materials:

Answer 4

This group includes the chemical industry and the mining industry, as well as companies producing steel and other metals, and those engaged in forestry and paper.

As such, these companies are mainly producing ‘intermediate’ goods.

significantly affected by the state of the economy and commodity prices

Question 5

Distinct features of Industrials: (8)

Answer 5

1. dependency on the level of investment spending
2. cyclical in nature
3. company profits tend to move ahead of the trade cycle
4. dependency on government spending
5. Volatility of profits
6. high profit margins when conditions are good
7. lower gearing because of volatile profits
8. possibility of exposure to overseas markets and competition

Question 6

Describe consumer goods:

Answer 6

Companies in the consumer goods groups manufacture consumer durables and non-durables:

• Durables include cars, furniture, televisions and ‘white goods’ such as washing machines.
• Non-durables include food and drink and tabacco

refine with notes

consumer goods companies tend to be less cyclical but depend greatly upon brand names.

Question 7

Other key features of Consumer goods: (3)

Answer 7

1. increasingly capital-intensive
2. moderate to high gearing
3. low profit margins

Question 8

Describe Healthcare:

Answer 8

This group covers healthcare providers, medical equipment and supplies, as well as pharmaceuticals.
- non cyclical

Question 9

Describe Consumer services:

Answer 9

The companies in this group include food, drug and general retailers, media companies and companies in the travel and leisure industries, such as passenger airlines, casinos, hotels, bars and restaurants.

Question 10

Other key features of Consumer services: (3)

Answer 10

1. labour-intensive
2. the more defensive companies in the group may have high gearing.
3. the domestic market is the most important

Question 11

Describe Telecommunications

Answer 11

This group covers the providers of fixed line and mobile telephone services.
- type of utility, but less regulated and hence more volatile

Question 12

Describe Utilities

Answer 12

Utilities are involved in the supply of continuously demanded services to households and business premises.

Examples include electricity, water and gas distribution.

Demand is very stable because the services that they provide are essential, or nearly essential, and because their market share will be stable (often at 100%).

less affected by economic cycles

Question 13

Other key features of Utilities: (6)

Answer 13

1. They usually require an extensive physical infrastructure making them capital intensive.
2. Most utility companies are natural monopolies (high infrasture costs like telecommuniations)
3. Subject to tight government regulation of prices and vulnerable to other forms of political risk
4. They generally have low growth prospects, leading to a high gross dividend yield
5. Despite their stable demand and large capital requirements, financial gearing is low.
6. They are largely dependent on the domestic market, although some companies are diversifying internationally

Question 14

Describe Technology

Answer 14

These are the companies involved in the ‘new’ industries of information technology hardware, software and the provision of computer services.

Many of the companies have yet to make profits or pay dividends.

Dividend yields on these companies are therefore low, and their assets can be largely intangible.

low profits and dividends and largely intangible assets

Question 15

The features of companies in the Financials group are quite varied between different sectors:

Answer 15

1. banks are highly-geared and have volatile profits
2. general insures also have volatile profits and virtually no borrowings.
3. life insurers have stable profits and low gearing.
4. labour costs are important for many companies in the group
5. the domestic market is most important but there is increasing internationalisation

Question 16

The two effects on banks of higher interest rates:

Answer 16

1. their profits will tend to be reduces because they will have to increase their provision for bad debts.
2. profits will tend to increase due to the ‘endowment’ effect, i.e. they benefit from higher interest on lending whilst the interest on some of their borrowing (e.g. your current account balance) remain at zero or at very low levels.