Todays Agenda

Industry analysis Return concepts

Kindly note my email address and phone number

mimrankhan79@hotmail.com 0301-8278893

Industry classification
Classification by Industrial Life cycle
Pioneer
product acceptance is questionable and implementation of business strategy is unclear. There is high risk and many failures

Growth
Product acceptance is established. Roll-out begins and growth accelerates in sales and earnings. Proper execution of strategy remains an issue

Mature
Industry trend line corresponds to the general economy. Participations compete for share in a stable industry

Decline
Shifting tastes or technologies have overtaken the industry, and demand for its products steadily decreases

Industry classification
Classification by Business Cycle Behavior
Growth
Above-normal expansion in sales and profits occurs independent of the business cycle

Defensive
Stable performance during both ups and downs of business cycle

Cyclical
Profitability tracks the business cycle, often in an exaggerated manner

External Factors
The first stage of the top-down analysis considers the economic variables that affect industry performance, and the life cycle and business cycle techniques provide direction in this regard External issues fall into five broad categories Technological
For established industries, the question is: Does the industry face obsolescence from competing technologies? (Typewriters were quickly replaced by word processors in the early 1908s). Infant industries introducing new technologies pose a different question: Will the market accept innovation?

Government
Government plays a large role in many industries. New regulations, or changes to old laws, can impact an industrys sales and earnings. In certain cases, government policies create new industries (e.g., the automobile protective safety bag industry)

External Factors
External issues fall into five broad categories Social changes
Changes in lifestyle spark many industries. The rise of two-earner families fueled growth in the convenience food and restaurant industries. Concern over animal rights hurt the fur retailing industry

Demographics

and

Demographics shifts are watched by analysts. The greying of America supports nursing home stocks. It is also a factor in the rebound of the golf equipment industry, as baby boomers reduce strenuous activity in their later years

Foreign influence
The United States is the largest economy but its industries are subject to foreign influences. Overseas textile firms decimated the U.S. textile industry. Higher income levels in developing nations, meanwhile, contributed to huge overseas demand for U.S. movies and musical recordings

External Factors
External issues fall into five broad categories Social changes
Changes in lifestyle spark many industries. The rise of two-earner families fueled growth in the convenience food and restaurant industries. Concern over animal rights hurt the fur retailing industry

Demographics

and

Demographics shifts are watched by analysts. The greying of America supports nursing home stocks. It is also a factor in the rebound of the golf equipment industry, as baby boomers reduce strenuous activity in their later years

Foreign influence
The United States is the largest economy but its industries are subject to foreign influences. Overseas textile firms decimated the U.S. textile industry. Higher income levels in developing nations, meanwhile, contributed to huge overseas demand for U.S. movies and musical recordings

Demand Analysis
The ultimate purpose of preparing an economic analysis, industry life cycle placement, and external factor review is an assessment of future demand for the industrys products
Top down economic analysis Industry life cycle External factors

Once a trend has been forecast, the analysts next step is studying the industrys customers. Where does the demand originate? Whos buying and why?
A forecast of aggregated demand is helpful, but a full understanding of what drives an industrys revenue is achieved through learning the customers. Segmenting the customers into submarkets, on the other hand, enables the analyst to study a smaller number of factors that contribute to demand.

Demand Analysis
Established Industries
For established industries, the analyst should contact long-time customers to figure what drives demand in each submarket

Growth Industries
A growth industry has yet to penetrate all its future submarkets. In addition to researching the existing customer base, the analyst considers new outlets for the industrys products

Untested Industries
Some publicly-traded companies furnish a truly new product or service. Given a minimal level of product acceptance, these firms have little or no track record from which the analyst can build a sales forecast. Although the risk profile of these stocks is higher than most, the decision process is not entirely speculative

Supply Analysis
In reviewing industries, analysts spend most of their time studying demand trends. They usually assume the supply side of the equation takes care of itself. If industry revenues are rising, more investment pours in. if revenues are declining, existing capacity services the falling demand Projecting Supply Availability
Supply is a function of unused capacity and the ability to bring on new capacity. Interpreting these variables well enough to make a reasonable forecast is complicated. The supply projection is easiest when the industry has only a few competitors, generating output as a discrete number of sizable facilities.

Profitability, Pricing and the industry study

A security analyst wants to select profitable industries. Whats the point of investing in growth industries if sales go up, but profits go down? A supply/demand forecast gives an indication of future profitability
If supply appears to be inline with demand, industry earnings will probably stay on their trend line An industry with a high degree of concentration inhibits price movements. Assuming that demand and supply are in reasonable balance, the major players have an incentive to engage in monopolistic behavior Monopolies promote artificial pricing, and an industrys ease of entry is a key variable in holding prices to the free market model Certain industries rely heavily on one or two inputs. Price changes in these inputs affect products costs and profitability. Sometimes, the industry can pass through increased costs in the form of higher prices