Industry and Company Analysis Flashcards
Three main methods for classifying companies:
- by products and/or services offered
- by business-cycle sensitivities
- non-cyclical
Non-cyclical def
- earnings are relatively stable over the bus cycle
- their goods/services are note affected much by bus cycle
- ex. F&B, household and personal care products, healthcare, utilities
Global Industry Classification Standard (GICS):
- number of tier structures to classify companies
- how many sectors, industry groups, industries, and sub-industries are tracked?
- 4 tier structure: based on the source from which a frim makes most of its revenue
- 11 SECTORS, 24 industry groups, 69, industries, 158 sub-industries
Industry Classification Benchmark (ICB)
- number the tier structures to classify companies
- how many industries, supersectors, sectors, and subsectors
- 4 tier structure: based on the source from which a frim makes most of its revenue
- 11 INDUSTRIES, 20 supersectors, 45 sectors, 173 subsectors
Porters’ Five Forces:
- Supplier Bargaining Forces
- Product/Service Substitution Threats
- Customer Bargaining Forces
- Threat of New Entrants (which is affected by Barriers to Entry)
- Internal Competitive Forces (rivalry)
Firms with high barriers to entry might also have high _____
- high barriers to exit
- auto manufacturing, commercial aircraft manufacturing, and oil refining industries have significant barriers to entry
- buy these industries are highly competitive with limited pricing power
Concentrated industries with:
- strong pricing power
qualities and examples
Strong pricing power:
- relatively low capital requirements
- differentiated products
- less number of players
- less price competition
ex: pepsi v coke, US defense, US railroads, alcoholic beverage industry
Concentrated industries with:
- weak pricing power
qualities and examples
Weak pricing power
- capital intensive and sell commodity like products
- fierce competition between them
relative market share matters more than absolute market share
- little to no differentiation in products
ex. commercial aircraft (Boeing, Airbus), Integrated oil (Exxon, Mobil, BP)
Fragmented industries with:
- strong pricing power
qualities and examples
Strong pricing power
- highly price-competitive
- if one or two players are big, they compete with smaller firms and not each other
- each player has a smaller absolute market share
- if customers are not price-sensitive, then players have high pricing power
ex. Home Depot and Lowes, and Asset mgmt companies (Fidelity)
Fragmented industries with:
- weak pricing power
qualities and examples
ex. consumer packaged goods, airlines, retail, home building, restaurants
What does stable market share imply about industry competitiveness
stable market share implies less competitive industries
Factors that impact market share
barriers to entry, switching costs, new product introductions, complexity of products, and pace of innovation
Industry Life-Cycle
5 stages:
- Embryonic
- Growth
- Shakeout
- Mature
- Decline
Embryonic stage
- new idea, slowly taking off. will it succeed?
- slow growth and high prices
- product still not positioned in the market
- buyers unaware
- distribution channels need to be developed
- high risk of failure
- no economies of scale
Growth stage
the idea took off, customers accepted the idea of this industry
- rapidly increasing demand, new customers
- falling prices as economies of scale are achieved
- low barriers to entry, threat of new entrants
- low competition leads to increased market share and profitability
