Equities: Intro to Industry and Company Analysis Flashcards
Industry grouping methods x3 =
- similar products and services
- sensitivity to business cycles (cyclical and non cyclical)
- statistical methods - to group industries that are correlated to each other
Government Classifications =
ISIC - by united nations
Statistical Classification of Economic activities in the European Community
Aus. and NZ Standard Industrial Classification
NAICS - North America
Cyclical, Defensive, Growth =
non cyclical sectors can be split up in to defensive - most unlikely to be affected by the stage of the business cycle - and growth - have demand so strong as to not be affected by the stage of the business cycle
Peer Group =
set of similar companies an analyst will use for valuation comps
similar business activity, demand drivers, cost structure drivers and availability of capital
analysts would:
- use commercial classifications to see if firms are in the same industry
- examine annual reports to see if they mention key competitors
- use industry trade publications
- confirm comparable firms have similar sources of sales and earnings and demand and geographic markets
- adjust financial statements of non financial companies for any finanfial subsidiary’s data
Strategic groups =
sub segment within an industry, due to delivery or complexity of their products or barriers to entry
ie full services hotels in the wider hotel sector
life-cycle stage =
embryonic
growth
shakeout
mature
declining
Experience curve =
shows the cost per unit relative to output
the curve declines because of increases in productivity and economies of scale, particularly in industries of higher fixed costs
Porter’s 5 forces =
THAT DETERMINE INDUSTRY COMPETITION
- rivalry among existing competitors
- threat of new entrants
- threat of substitute products
- bargaining power of buyers
- bargaining power of suppliers
Porter’s 5: 1 & 2 in depth =
competition between existing participants and barriers to entry
- higher barriers to entry reduce competition
- greater concentration reduces competition,
- market fragmentation increases competition
- unused capacity results in intense price competition
- stability in market share reduces competition (ie due to customer loyalty)
- more price sensitivity in customer buying decisions (greater price elasticity of demand) increases competition
- greater maturity of an industry results in slowing growth
High industry concentration does not…
guarantee pricing power.
ie if you have 50% of the market share, but the other 50% is held by one competitor, you will have little pricing power…
compared to a market where you have only 10% but competitors have 2%
less differentiated products mean more competition
Undercapacity results in…
greater pricing power and high returns on capital.
*capacity is fixed in the short run but variable in the long run
*capacity is not necessarily physical
More stable market shares indicate…
less intense competition in the industry.
factors that affect market share stability include:
- barriers to entry
- introductions of new products/innovations
- switching costs for consumers in changing from one firm’s product to another
note that high switching costs contribute to market share stability and pricing power
Stages of the industry life cycle =
note:
EMBRYONIC - high prices, slow growth, high risk of failure, large investment required
GROWTH
SHAKEOUT - industry growth and profitability slow due to strong competition
MATURE - little industry growth and increased consolidation (high barriers to entry and stable pricing)
External influences for analyst consideration =
- macroeconomic factors
- technology
- demographic factors
- governments
- social influences
Competitive strategy: low cost vs differentiation =
porter has two important competitive strategies:
- cost leadership/low cost - firm seeks to have lowest production costs. This can be to protect market share, or to gain (predatory pricing)
- product/ser
