Investment Lecture on Industry Analysis
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Transcript of Investment Lecture on Industry Analysis
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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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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
CLASSIFICATION OF INDUSTRY
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
CLASSIFICATION OF INDUSTRY
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
CLASSIFICATION OF INDUSTRY
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
CLASSIFICATION OF INDUSTRY
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
Key Characteristics in An 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
Key Characteristics in An 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
Key Characteristics in An 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
External Sources of Information for
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
External Sources of Information for
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