Industry Specific Analysis

Chapter 9

Robinson, Munter, Grant

Grant, Munter & Robinson

Chapter 9 2

Learning Objectives

• Understand the role of industry benchmarks• Understand how industry membership can

affect financial statements• Understand the importance of industry

identification• Be aware of nonfinancial analysis measures

used for specific industries

Grant, Munter & Robinson

Chapter 9 3

Analysis

• Time series– Compare subject firm to itself over time

• Cross-sectional– Compare subject firm to an appropriate

benchmark within the same period of time• Industry Averages

Grant, Munter & Robinson

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Conglomerates

• Difficult to benchmark because they operate in multiple industries

• Must disclose segment data for– Lines of business that contribute at least 10% of

revenues, assets or net income– At least 75% of total revenues

• These disclosures can be used for industry specific analysis

Grant, Munter & Robinson

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Accounting RequirementsUS GAAP (FAS 131)

• Requires each segment to disclose• Sales revenues• Operating profit• Assets• Some expense items

Grant, Munter & Robinson

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Accounting RequirementsIAS 14

Primary segment disclosures• Revenues and operating profit• Assets and liabilities• Capital expenditures• Depreciation and amortization• Other non-cash expenditures

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Accounting RequirementsIAS 14

Secondary segment disclosures• Revenue• Assets • Capital expenditures

• Inter-segment pricing for both primary and secondary segments

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Industry comparison examplePepsiCo Coca-Cola

NA Beverage

Int’l Beverage

NA Beverage

Int’l Beverage

Revenue 3,842 2,582 7,526 12,386

Net Income 927 221 1,480 4,594

Operating assets

1,325 1,747 4,738 6,611

ROS 24.1% 8.6% 20.0% 37.1%RAO 70.0% 12.7% 31.2% 69.5%

Grant, Munter & Robinson

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Retail

• Wal-Mart Stores– Sales are largely cash-based

• Largest assets: Inventory, Property• Largest liabilities: Accounts payable, long-

term debt• Largest expense: Cost of goods sold

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RetailSpecific information

• Affected by: – Consumer confidence, – CPI– Disposable income – Real GDP growth– Interest rates

• Same store sales indicates the amount of the sales growth that is coming from new stores versus existing stores.

Grant, Munter & Robinson

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Health Care Management• United Health Group provides health care

management and insurance• Service firm – no inventory• Goodwill indicates expansion through

acquisition• Medical cost payable is largest liability

– Unearned premiums is a current liability• Revenues primarily from premiums earned• Largest expense is for medical costs

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Health Care ManagementSpecific information

Health care facilities• CPI• Federal budget

– Medicaid/Medicare spending• Unemployment

– Uninsured

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Health Care ManagementSpecific information

Insurance • Net investment yield• Interest rates• Demographics• Premium growth and Reinsurance rates• Lapse ratio, Net premiums written to

surplus, Combined ratio

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Chapter 9 14

Publishing

• The New York Times Company• Large accounts receivable

– Advertising and subscription revenue• Largest assets are property and equipment• “Costs in excess of net assets acquired” is

goodwill • Liability for Un-expired subscriptions

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Chapter 9 15

PublishingSpecific information

• Demographic trends– Preference for books, newsprint, magazines vary

by age group• Health of the education sector

– Text book sales• Volatility of paper prices• May provide sales mix information

– Advertising vs. circulation– Newspaper, broadcasting, internet sales

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Restaurants• McDonald’s Corporation• Property & Equipment is the largest asset• Reliant upon long-term financing• Large retained earnings• Revenues from company-owned stores and franchise

fees• Food and packaging costs are only about 1/3 of

revenues• Labor-related costs are nearly 75% of food/packaging

costs

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RestaurantsSpecific information

• Financial statement information– Average weekly sales– Same store sales

• Nonfinancial statement measures– Consumer confidence– CPI– Interest rates– Real disposable income– Real GDP growth

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Waste Management

• Republic Services, Inc.• Property & equipment is largest asset

– Large depreciation expense• Followed closely by Intangible assets

– Large amortization expense• Significant long-term debt

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Waste ManagementSpecific information

• Daily municipal solid waste per capita• GDP• Landfill and incinerator capacity of

company• Landfill disposal charges• US population growth

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Utilities• First Energy Corp.• Regulated industry

– Unique financial statement presentation– Assets may be presented in reverse order

• Heavily invested in PP&E• Goodwill from acquisitions• Liability for decommissioning nuclear

power plants

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UtilitiesSpecific information

• Regulatory Assets– Expenses deferred until the next general rate increase

• Interest rates• GDP• Cooling/heating degree days (from 65°)• Industrial production• Household formation and housing starts• Risks from commodities markets

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Insurance• The Progressive Corporation• Invested premiums dominate assets

– Reported in more detail• Deferred expenses for commissions, underwriting

and other costs of acquiring policies– Amortized over the life of the policy

• Unique liabilities– Unearned premiums– Loss reserve

• Premium revenue and related loss expense on income statement

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InsuranceSpecific information

• Legal requirements of coverage• Net investment yield• Interest rates• Demographics• Premium growth and Reinsurance rates• Lapse ratio, Net premiums written to

surplus, Combined ratio

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Computer Hardware• Dell Computer Corporation• Inventories are relatively small• Receivables are relatively large• Accounts payable is large

– Days payable ≈ 53• Small amount of long-term debt• Separate R&D on the income statement

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Computer HardwareSpecific information

• Business capital spending • Consumer confidence• Currency exchange• Global sales report (Semiconductor industry)• Leading economic indicators• Real GDP growth• Exchange rate fluctuations

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Airlines

• Continental Airlines• Service industry• Flight equipment is dominant asset• Routes, gates and slots (cost of acquiring)

– Capitalized and amortized• Air traffic liability is unearned revenue• Wages and fuel dominate operating expenses

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AirlinesSpecific information

• Revenue passenger mile (RPM)• Available seat-mile• Load factor• Consumer confidence• Disposable income and Corporate profits• Jet fuel prices• Number of aircraft in fleet

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Financial Institutions

• Citigroup, Inc.• Service industry (diversified)• 90% of assets are cash, deposits, investments

or other receivables and loans• Customer deposits are a liability• Loan interest is primary revenue source

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Financial InstitutionsSpecific information

• Interest rates• Disposable income• Consumer confidence• Consumer borrowing patterns• Housing and large expenditures• Delinquencies and bankruptcies• Efficiency ratio

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Summary

• Understand industry benchmarks• Understand how industry membership can

affect financial statements• Understand the importance of industry

identification• Be aware of nonfinancial analysis measures

used for specific industries