Version 1.2 Copyright © 2000 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department Harcourt, Inc Sea Harbor Drive Orlando, Florida Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Sixth Edition by Frank K. Reilly & Keith C. Brown Chapter 19

Copyright © 2000 by Harcourt, Inc. All rights reserved Industry Analysis The second step in the three-step fundamental analysis procedure The first step is the analysis of the stock market and the economy as a whole The last step will be the analysis of individual companies and stocks

Copyright © 2000 by Harcourt, Inc. All rights reserved Why Do Industry Analysis? Help find profitable investment opportunities Part of the three-step, top-down plan for valuing individual companies and selecting stocks for a portfolio

Copyright © 2000 by Harcourt, Inc. All rights reserved What Do We Learn From Industry Analysis? Is there a difference between the returns for alternative industries during specific time periods? Will an industry that performs well in one period continue to perform well in the future? That is, can we use past relationships between the market and an individual industry to predict future trends for the industry?

Copyright © 2000 by Harcourt, Inc. All rights reserved What Do We Learn From Industry Analysis? Do firms within an industry show consistent performance over time?

Copyright © 2000 by Harcourt, Inc. All rights reserved What Do We Learn From Industry Analysis? Do firms within an industry show consistent performance over time? Is there a difference in the risk for alternative industries?

Copyright © 2000 by Harcourt, Inc. All rights reserved What Do We Learn From Industry Analysis? Do firms within an industry show consistent performance over time? Is there a difference in the risk for alternative industries? Does the risk for individual industries vary or does it remain relatively constant over time?

Copyright © 2000 by Harcourt, Inc. All rights reserved Industry Performance Wide dispersion in rates of return in different industries Performance varies from year to year Company performance varies within industries Risks vary widely by industry but are fairly stable over time

Copyright © 2000 by Harcourt, Inc. All rights reserved Links Between the Economy and Industry Sectors Identify and monitor key assumptions and variables Economic trends are either –Cyclical - up and down with business cycle –Structural - major change Combined changes have implications for the industry being analyzed Switching from one industry group to another over the course of a business cycle is known as a rotation strategy

Copyright © 2000 by Harcourt, Inc. All rights reserved The Stock Market and the Business Cycle Figure 19.2

Copyright © 2000 by Harcourt, Inc. All rights reserved The Stock Market and the Business Cycle Figure 19.2 trough peak

Copyright © 2000 by Harcourt, Inc. All rights reserved The Stock Market and the Business Cycle Figure 19.2 Financial Stocks Excel trough peak Consumer Durables Excel Capital Goods Excel Basic Industries Excel Consumer Staples Excel

Copyright © 2000 by Harcourt, Inc. All rights reserved Cyclical Economic Factors Inflation Interest rates International economics Consumer sentiment

Copyright © 2000 by Harcourt, Inc. All rights reserved Structural Economic Changes and Alternative Industries Social Influences –Demographics –Lifestyles Technology Politics and regulations –Economic reasoning –Fairness –Regulatory changes affect numerous industries –Regulations affect international commerce

Copyright © 2000 by Harcourt, Inc. All rights reserved Theme Investing Based on identifying emerging trends, such as: –Technology –Aging population –Freer trade and developing-country growth Identification of themes provides insight into industry analysis

Copyright © 2000 by Harcourt, Inc. All rights reserved Earnings and Industry Analysis Estimating earnings per share –start with forecasting sales per share Industrial life cycle Input-output analysis Industry-aggregate economy relationship –earnings forecasting and analysis of industry competition competitive strategy competitive environment industry operating profit margin industry earnings estimate industry earnings multiplier

Copyright © 2000 by Harcourt, Inc. All rights reserved Sales Forecasting and Industry Life Cycle Pioneering development Rapidly accelerating industry growth Mature industry growth Stabilization and market maturity Deceleration of growth and decline

Copyright © 2000 by Harcourt, Inc. All rights reserved Sales Forecasting and Input-Output Analysis Identify suppliers and customers Future demand from customers Ability of suppliers to provide goods and services required Extended to global industries, include worldwide suppliers and customers

Copyright © 2000 by Harcourt, Inc. All rights reserved Sales Forecasting and the Industry-Economy Relationship Compare industry sales to aggregate economic series related to the goods and services provided by the industry

Copyright © 2000 by Harcourt, Inc. All rights reserved Forecasting Earnings Per Share Analysis of industry competition Analysis of competitive structure Porter’s concept of competitive strategy

Copyright © 2000 by Harcourt, Inc. All rights reserved Competitive Structure of an Industry Porter’s Competitive Forces –Rivalry among existing competitors –Threat of new entrants –Threat of substitute products –Bargaining power of buyers –Bargaining power of suppliers

Copyright © 2000 by Harcourt, Inc. All rights reserved End of Chapter 19 –Industry Analysis

Copyright © 2000 by Harcourt, Inc. All rights reserved Future topics Chapter 20 Company Analysis and Stock Selection Value Growth Strategies

Copyright © 2000 by Harcourt, Inc. All rights reserved