strategic analysis Flashcards
qualitative analysis
- look at biz
- circle of comeptence?
3.qualitative analysis
-economic fundamentals
-theoretical framework
-previous knowledge
-behavioral blases?
4.quantitave analysis
-price
-risk
-conclusion
questions for qualtiative analysis
-what does it do
-circle of comeptence?
-business divisions
who are clients, supplier, competitors
-barriers to entry? –> roce
-management team, track record, cap allocation, incentive system
-shareholder structure
-risks
-how should I value this biz
Due diligence process:PhilipFisher’s “scuttlebutt”
Know and understand
* The business. What? How? Where?
* Business divisions.
* Barriers to entry?
* Management team/ shareholder base
* Capital allocation
* What does the market think? Why?
The Company
* Financial statements
* Corporatepresentations
* Quarterlyresults+ webcasts
* Company’s webpage
* Management’spress interviews
* Other
Analysts/ Sector experts
Competitors
Clients/ suppliers
competitive advantages
-High returns oncapital employed (ROCE) act as a profit opportunity signal for potential competitors and will errode them sooner than later
-ROCE > WACC isunsustainable inthe longterm
-if the business has competitive advantages/ barriers to entry/ economic moats, the erosion of ROCE and convergence towards the WACC can bedelayed or decelerated,keeping high ROCE for a longer periodof time.
-economic moat refers to a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share
-with moats grow more profitably and compound growth to increase value of business
-higher value –> higher shareholder return
-if growth limited higher roce with barriers to entry turn into higher cash returns with right cap allocation strategy
-moats higher protection against market cycles increases predictability reduces uncertainty
compounding effect
-when moats and roce>wacc reinvest returns to keep growing value as long as market not saturated
-if growth not possible shareholder returns prefered
how to value a moat
-if reinvestment opportunity moat very valuable
-if reinvestment limited moat enables business to generate substantial cash return
-wide and durable barrier to entry with high compounding potential may justify a norrwer margin of safety
-moats are alive and dynamic so we must remain vigilant and analyse if they remain sustainable
comp advantage classification
-those that enable to extract a higher value from our customer i.e. give us pricing power (intangible assets, switching costs, network effect)
-those that enable sustainable lower costs than peers (better processes, unique assets, location, economies of scale)
intangible assets
-Brands, Patents, Regulatory licences
-monopoly enables it to extract a high value from its customers.
-The disadvantage is that moats based on intangible assets may be difficult to detect and analyse.
-The key is to find out how much value do they create for the company and how long can they be sustained.
brands
-popular brands many times aren’t barriers to entry
-Brands only generate barriers to entry if they affect the customer behavior in the following 2 ways:
➢ Increase the willingness of customers to pay more for the product.
➢ Generate captive clients. Example: Apple
-The risk here is that a brand losses its attractiveness
patents
▪ Legal protection awarded by the regulator that eliminates competition during a limited period of time
▪ They aren’t irrevocable, can be attacked
▪inability to substitute those patents with new ones, or the continuous attack by competitors, can erode the barrier to entry
licenses
▪ Make it difficult or impossible for new competitors to enter the market as long as they last.
▪This advantage is more powerful when the company needs regulatory approval to operate but its not obliged by the regulator on how it has to charge its
customers and establish prices
switching costs
▪ They arise when the benefit of changing from Company’s A product to Company’s B product is LOWER than the cost of doing so
▪ If a customer has lower chances of switching to competition, I can charge her more and obtain higher returns on capital employed(ROCE)
network effect
▪ The product or service’s value increases with the numbers of users
–>More users are attracted
–> Competition looses users
cost advantages
▪ Better processes, Location, Unique assets, Economies of scale
▪ Enable the company to have sustainable lower structural costs vs peers
▪They can erode quite rapidly–> important to determine if the advantage can be easily replicated
▪mos important in industries where price is most important in decision –> commodity businesses
better processes
▪ Generally it can be replicated, although it may take time.
▪A temporary moat is created if incumbent competitors can’t or don’t want to replicate the process
