investment lecture on industry analysis

8/3/2019 Investment Lecture on Industry Analysis

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2/25/2012 Slides by Muhammad Farooq1

INVESTMENTANALYSIS &

PORTFOLIO

MANAGEMENT


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2/25/2012Slides by Muhammad Farooq2

TODAYS TOPIC

INDUSTRY

ANALYSIS


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INDUSTRY ANALYSIS

LEARNING GOALS

What do you mean by Industry?

Why we conduct Industry Analysis?

Focused Areas forIndustry Analysis?

Careeropportunities inthe field?

Classification of Industry?

Key Characteristics inan Industry Analysis? Industry Life Cycle?

External Sources of Information forIndustry Analysis

Summary?

Questions in Industry Analysis?

Comprehensive Exercise


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INDUSTRY ANALYSIS

What do you mean by Industry?

A Business unit or set of units which deals

in production or selling of Products or

Services and recognized by Government for

granting facilities and incentives to

promote that Industry.


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INDUSTRY ANALYSIS

Why we conduct Industry Analysis?

Industry Analysis to be conducted to create

certain standards as a benchmark for

comparison ofperformance and worth of one

business unit or units in one point in time or

time series forTime Series, Cross Sectional

and combined Analysis.


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INDUSTRY ANALYSIS

Focused Areas forIndustry Analysis?

Manufacturing

Various sector of Manufacturing industries

Construction

Various builders and developers

Services

Various sector of services

Agriculture

Various sector of Agriculture produce

Trading

Various sector of trading


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INDUSTRY ANALYSIS

Career Opportunities?

Market Analyst Stock Market Analyst

Risk Manager

Investment Manager

Large, Medium & small organizations Private and Public limited companies

Government and international agencies

All types of businesses & fields


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INDUSTRY ANALYSIS

CLASSIFICATION OF INDUSTRY

1. Industry Classification by Product

2. Standard industry Classification3. Industry Classification by Business Cycle


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INDUSTRY ANALYSIS


1. Industry Classification by ProductAn analyst needs to have a clear goal in mind

so that he can properly classify firms into

industries for his specific purpose. If estimate

sales, he might want to consider similarproducts and if calculating comparative costs

of the industry, he might only consider those

firms with similarmanufacturing processes.


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INDUSTRY ANALYSIS


1. Standard industry ClassificationIn order to provide an organized reporting framework

for the vast amount of data collected by the federal

government, the Standard Industrial Classification

(SIC) was developed.

Classification covers the entire field of economic

activities and defines industries in accordance with

the composition and structure of the economy.


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INDUSTRY ANALYSIS


1. Standard industry ClassificationSIC is subdivided as follows:

Industrial Division: IndustriesA: Agriculture, forestry and fishing

B: Mining

C: Construction

D: Manufacturing

E: Transportation, communication, electric, Gas etc

F: Wholesale trade, durable goods

G: Retail Trade

H: Services


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INDUSTRY ANALYSIS


1. Industry Classification by Business CycleAnother way of classifying industries is in a cyclical

framework, that is by how they react to upswings and

downswings in the economy. The general classifications in

this framework are growth, cyclical, defensive, and cyclical

growth.1. Growth industries: Auto, Computers, Pharma, cell phone etc

2. Cyclical Industries: Refrigerators and drill presses Eco

Prosperity

3. Defensive Industries: Food & Shelter related


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INDUSTRY ANALYSISKEY CHARACTERISTICS OF INDUSTRY

1. Past Sales and Earning performance2. Attitude of Government Toward industry

3. LaborConditions

4. Competitive conditions


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INDUSTRY ANALYSIS

Key Characteristics in An Industry Analysis?

1. Past Sales and Earning performance

Industry analysis needs two important

factors upon which future may be

forecasted. These two things are main

sources of profits and business growthwhich must be carefully calculated.

1. Sales : Past sales of 2 to 5 years

2. Earning: Earning pershare etc


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INDUSTRY ANALYSIS


1. Attitude of Government Toward industryAs govt. becomes more influential in attempting

to regulate business and to advocate consumer

protection, the performance of the industry might

well be affected and govt. may promulgate newlaws to promote local industry and restrict new

entrants from foreign.

Levy taxes and give incentives to industry for

flourish.


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INDUSTRY ANALYSIS


1. LaborConditionsIn free economy unions plays important role in

industry performance. If union is on strike the

fixed cost will be a strong burden on the cost and

demands from labor and union protectionexpenses will definitely increase the product cost

which ultimately effect the profitability ofthe firm

and industry in total.


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INDUSTRY ANALYSIS


1. Competitive conditionsSignificant factor in industry analysis is the competitive

conditions in the industry and to determine the competitive

conditions is to observe whether any barriers to entry exist.

Three general barriers are:1. Product differentiation edge that forestalls the entry of

competition.

2. Absolute cost advantages

3. Advantages arising from economies of scale


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INDUSTRY ANALYSISINDUSTRY LIFE CYCLE

PIONEERING STAGE

EXPANSION STAGE

STABLIZATION STAGE


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INDUSTRY ANALYSIS

INDUSTRY LIFE CYCLE

1. Pioneering StageDue to new and increase in demand of

products, new firms established, current firms

grow fast, as a result great opportunity of

profits increase. Due to heavy competition,cost effectiveness, many of firms fight for

survival and as a result close their businesses

at early or pioneer stage.


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INDUSTRY ANALYSIS

INDUSTRY LIFE CYCLE

1. Expansion StageBy passing pioneering stage, few companies

continue to get stronger, both in share of the

market and financially. Their competition in

the expansion stage usually brings aboutimproved products at a lower price. Firms

continue to expand with moderate rate of

growth and get stronger, steadier and

efficient.


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INDUSTRY ANALYSIS

INDUSTRY LIFE CYCLE

1. Stabilization StageStabilization stage is experienced afterexpansion

and certain feature added:

1. Stagnant ingrowth

2. Lesserprofits

3. High dividends

4. Strong structures

5. Lesserrisk


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INDUSTRY ANALYSIS

External Sources of Information for

Industry analysis

FEDERAL GOVERNMENT

INVESTMENT SERVICES


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INDUSTRY ANALYSIS


Industry analysis1. Federal Government

Federal Govt. publishes a wide variety of data that can be useful

during the industry phase of analysis like:

1. Federal Reserve Bulletins,

2. Survey of current business

3. Etc.


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INDUSTRY ANALYSIS


Industry analysis1. Investment Services

Many investment services are available to furnish the investor or

analyst with valuable industry and corporate information. The

ones we highlight are perhaps the best known:

1. Standard & Poors

2. The Value Line

3. Forbes

4. Trade Publications

5. Funkand Scott Index


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INDUSTRY ANALYSIS

Techniques used in Economic Analysis?

ECONOMIC AND INDUSTRY ANALYSIS1. Business performance & Worth

1. Return on Investment ROI

2. Return on Assets ROA

3. Inventory Turnover

4. Price Earning Ratio5. Debt Ratio

6. Capital Structure

7. Current & quick Ratios

8. GP & NP Margin

9. Dividend Payout Ratio


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INDUSTRY ANALYSIS

Questions in Industry Analysis?

1. If you were attempting to forecast the sales of thecandy industry, what classification scheme would

you use?

2. What is a cyclical industry?

3. Of what value is the past sales and earningsperformance of an industry forecasting the future

prospects ofthe industry?

4. Of what use is the industry-life-cycle approach to

an industry analyst?


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INDUSTRY ANALYSIS

Summary of Discussion

In this discussion we studied industryclassification, then key characteristics of

industry analysis like: past sales and

earning performance, attitude of Govt.,

labor conditions and competitiveconditions:, then studied industry life cycle

and sources of industry information.


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INDUSTRY ANALYSIS

ASSIGNMENT

DUE DATE: IN COMING 2ND LECTUREWe have said that generally mature industries will tend to

have higher dividend payout ratios than rapidly growing

industries. The newer, rapidly growing industries will tend to

invest funds in themselves rather than pay them out to

shareholders. Select an example o f each type of industry andusing disclosure, Test this contention b calculating relevant

ratios for three companies in each industry you selected for

consecutive 3 years from 2005, 2006, 2007 or data available

but in time series.


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INDUSTRY ANALYSIS

THIS IS END OF THE LECTURE

PUT YOUR MAXIMUM

EFFORTS TO ACHIEVEYOUR GOALS IN LIFE


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HAVE A NICE NIGHT AND WEEK

ALLAH HAFIZ

investment lecture on industry analysis

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