industry and company analysis

Question 1

What is the use of industry analysis?

Answer 1

• To understand a company’s business and business environment.
• To identify active investment opportunities.
• To attribute portfolio performance.

Question 2

What is a cyclical company?

Answer 2

It is a type of business that perform very well when the economy is booming but perform relatively poorly during recessions.

Question 3

What is a noncyclical company?

Answer 3

It is a type of business whose performance is relatively independent of the business cycle.

Question 4

Give examples of cyclical vs noncyclical companies.

Answer 4

• Cyclical: AUtos, industrials, and technology
• Noncyclical: Health care and utilities.

Question 5

What are defensive companies?

Answer 5

Companies whose profits are least affected by fluctuation in overall economic activity.

Question 6

What are growth companies?

Answer 6

They are companies whose specific demand dynamics override economic factors in determining their performance.

Question 7

What are the limitations to the classification of companies?

Answer 7

• The classification of companies is kind of arbitrary.
• Economic downturns affect all companies.
• Different countries and regions may be undergoing different stages of the business cycle.
• Comparing companies in the same industry that are currently operating in very different economic conditions may help identify investment opportunities.

Question 8

What are the statistical similarities?

Answer 8

It groups companies on the basis of correlations of historical returns.

Question 9

What is the limitation of the statistical approach?

Answer 9

• The composition of industry groups may vary significantly over time and across geographical regions.
• There is no guarantee that past correlations will continue to hold going forward.
• A relationship may arise by chance.
• A relationship that is actually significant may be excluded.

Question 10

What are industry classification systems?

Answer 10

They help analysts in studying trends, value companies, and make goal comparisons of companies in the same industry.

Question 11

What are basic materials and processing companies?

Answer 11

They produce building materials, chemicals, paper, and forest products, containers and packaging, and metal, mineral, and mining companies.

Question 12

What are consumer discretionary companies?

Answer 12

It includes automotive, apparel, hotel, and restaurant businesses.

Question 13

What are consumer stapes business?

Answer 13

Manufactures of food, beverages, tobacco, and personal care products.

Question 14

What are energy companies?

Answer 14

Companies that have energy exploration, refining, and production companies. Some companies supply equipment to energy companies.

Question 15

What are financial services companies?

Answer 15

It includes banking, insurance, real estate, asset management, and brokerage companies.

Question 16

What are healthcare companies?

Answer 16

Companies that manufacture pharmaceutical and biotech products, medical devices, health care equipment, and medical supplies. They can also provide health care services.

Question 17

What are industrial/Producer durables products?

Answer 17

They are companies: that manufacture heavy machinery and equipment, aerospace and defense, transportation services, and commercial services and supplies.

Question 18

What are technology companies?

Answer 18

They are companies that are involved in the manufacture and sales of computers, software, semiconductors, and communications equipment; internet services; electronic entertainment; technology consulting.

Question 19

What are telecommunication companies?

Answer 19

They are companies that provide fixed-line and wireless communication services.

Question 20

What are utility companies?

Answer 20

Companies that provide electricity, gas, and water utilities. Telecommunication companies are also sometimes included in this category.

Question 21

What is a peer group?

Answer 21

It is a group of companies engaged in similar business activities whose economics and valuation are influenced by closely related factors.

Question 22

What are the steps to form a peer group?

Answer 22

• Examine commercial classification systems to identify companies in the same industry.
• Review the subject company’s annual report to identify any mention of competitors.
• Review competitors’ annual reports to identify other potential comparable companies.
• Review industry trade publications to identify comparable companies.
• Confirm that comparable companies have primary business activities that are similar to those of the subject company.

Question 23

What is Porter’s five forces framework?

Answer 23

• Threat of substitute products
• Bargaining power of customers
• Bargaining power of suppliers
• Threat of new entrants
• Intensity of rivalry

Question 24

What is the use of Porter’s five forces?

Answer 24

They help to describe the intensity of competition in an industry.

Question 25

What is an industry with high concentration?

Answer 25

It is when there is a small number of firms that control a large part of the market.

Question 26

What are the things that you should bear in mind when analyzing the industry?

Answer 26

- Higher/stronger barriers to entry reduce competition. - Greater concentration implies lower competition, while market fragmentation implies higher competition. - Unused capacity in an industry, especially over an extended period, results in intense price competition. - Stable market shares for industry firms imply less competition. - Greater price sensitivity in customer purchasing decisions results in greater competition. - More mature industries tend to exhibit slower growth.

Question 27

What is the comportment of barriers to entry?

Answer 27

- Higher/stronger barriers to entry reduce competition,. High barriers to entry mean that existing companies are able to enjoy economic profits for a long period of time. Companies have greater pricing power. - Low barriers to entry means that new competitors can easily enter the industry, which makes the industry highly competitive. Companies in relatively competitive industries have little pricing power.

Question 28

What happens when an industry is relatively concentrated?

Answer 28

- It is relatively easy for a few firms to coordinate their activities. - Larger firms have more to lose from destructive price behavior. - The fortunes of large firms are more tied to those of the industry as a whole.

Question 29

What is the result of excess capacity in an industry?

Answer 29

It results in intense price competition because it results in weak pricing power, as excess supply chases demand; conversely gives companies more pricing power, as demand exceeds supply.

Question 30

What do stable market shares indicate in an industry?

Answer 30

It indicates less competitive industries.

Question 31

What can affect the market share stability?

Answer 31

- Barriers to entry. - New products. - Products differentiation.

Question 32

What is the impact of high price sensitivity on customer purchasing decisions in an industry?

Answer 32

It results in greater competition.

Question 33

What is the embryonic stage in a company? What are its key attributes?

Answer 33

- They focus on raising product awareness and developing distribution channels. - Attributes: slow growth, high prices, significant investment, high risk.

Question 34

What is the growth stage in a company? What are its key attributes?

Answer 34

- They focus on building customer loyalty and reinvest heavily in the business. - Attributes: Rapidly increasing demand, improving profitability, falling prices, low competition.

Question 35

What is the shakeout stage in a company? What are its key attributes?

Answer 35

- Companies focus on reducing costs and building brand loyalty. - Attributes: Slowing growth, intense competition, declining profitability.

Question 36

What is the mature stage in a company? What are its key attributes?

Answer 36

- Companies should focus on extending successful product lines. - Attributes: little or no growth, industry consolidation - high barriers to entry.

Question 37

What is the decline stage in a company? What are its key attributes?

Answer 37

- Technological substitution, social changes, or global competition may eventually cause an industry to decline. - Attributes: negative growth, excess capacity, high competition.

Question 38

What are the limitations of industry life cycle analysis?

Answer 38

- Technological changes. - Regulatory changes - Social changes - Demographics

Question 39

What is cost differentiation?

Answer 39

Companies strive to cut down their costs to become the lowest-cost producers in an industry.

Question 40

What is product/service differentiation?

Answer 40

Companies strive to differentiate their products from those of competitors in terms of quality, type, or means of distribution.