Ch 2: Industry risks Flashcards
Why do industry risks matter?
The specifics of the industry and its regulations shape the companies and their competitiveness.
The industry might set up an upper limit on the company’s credit rating, profits and/or introduce certain volatility.
Define industry risk.
Industry risk is the risk of losing revenue or market share due to
- product obsolescence,
- industry changes,
- business cycles,
- demand changes,
- technology changes,
- entry barriers changes,
- competition changes,
- new products,
- etc.
Describe the approach of assessing industry risks.
Assess the industry’s short- and long-term sales growth potential and trends. A good measure for industry’s growth and size is the revenue generated by the entire industry and its (consistent) growth rate.
Assess the events and the competitors that challenge these prospects.
Assess how strong/weak the company in question is within the industry and compared to competitors.
Identify industry leaders - these companies set the trends, they are good for comparison and for understanding the range of business strategies and performance possibilites within the sector.
Pay attention to how each company spends its cash during the different business cycles.
Name the 4 types of industries.
Growth
Mature
Niche
Global
What are the characteristics of a growth industry?
It has to be healthy growth industry, i.e. growing with a consistent rate.
Demand is larger than supply, hence the pricing power is with the producer.
E.g. tech
What are the characteristics of a mature industry?
It is a well established industry with well developed products.
The balance is shifting between demand and supply and so does the pricing power.
E.g. autos
What are the characteristics of a niche industry?
A niche industry is a small industry within a larger industry. Therefore the niche industry depends on the larger industry.
There is enormous competition.
There are large risks w.r.t. growth prospects and pricing power.
What are the characteristics of a global industry?
The industry is similar ot a mature industry, since it is only you need to be large to be a global firm.
There are more opportunities, risks and complexity compared to domestic matured industries.
There are global risks and opportunities.
Sovereign and country risks are of high importance. Tariffs and local regulations can affect global and local supply chains.
Global firms have the advantages of economics of scale (lower costs), diverse international products and good regulatory knowledge.
What are the characteristics of a global industry?
The industry is similar ot a mature industry, since it is only you need to be large to be a global firm.
There are more opportunities, risks and complexity compared to domestic matured industries.
There are global risks and opportunities.
Sovereign and country risks are of high importance. Tariffs and local regulations can affect global and local supply chains.
Global firms have the advantages of economics of scale (lower costs), diverse international products and good regulatory knowledge.
Global firms have to deal with global and local business cycles.
What are the characteristics of a business cycle?
A business cylce can be
- long/short,
- steep/less severe (with digitalization the business cycles have become faster)
Name the risks and the best practices for cyclical industries.
Cyclical industries are riskier than non-cyclical. They experience large swings in demand and supply when the cycle turns.
Financially strong cyclical companies build up financial resources (cash reserves, equity cushion, available debt capacity) during peaks of the cycles.
Name industries affected early in the cycle.
Autos
Hotels, Gaming & Leisure
Building Materials
Homebuilders & Developers
Real Estate
Retail & Restaurants
Name industries affected late in the cycle.
Metals & Mining
Chemicals
Oil & Gas
Telecommunications
Capital Goods
Transportation
Technology
Name industries that are stable during a cycle.
Healthcare
Consumer Products
Utilities
Name seasonal industries and their characteristics.
Retail, toys, utilities, agriculture, energy, etc.
The analysis requires long-term perspective and adjusting for seasonality in the financial and operational performance.
Management matters a lot!
