Module 40.1 Industry Analysis

Question 1

What is industry rotation?

Answer 1

overweighting and underweighting industries based on the current phase of the business cycle.

Question 2

What is a firms sector and principal business activity?

Answer 2

sector - a group of similar industries, hospitals, doctors, pharmaceutical firms, and other industries are “healthcare sector”

principal business activity - firms that are grouped by products and services.

Question 3

What are the four limitations to using a statistical grouping of highly correlated stocks?

Answer 3

1) historical correlations may not be the same as future correlations
2) the groupings of firms may differ over time and across countries
3) the grouping of firms is sometimes non-intuitive
4) the method is susceptible to statistical error

Question 4

What is a cyclical firm?

Answer 4

whose earnings highly dependent on the stage of the business cycle.

Question 5

What are defensive industries vs. growth industries?

Answer 5

defensive - least affected by the stage of the business cycle and include utilities, consumper stapes, and basic services.

growth - have demand so strong they are largely unaffected by the stage of the business cycle.

Question 6

What is a peer group?

Answer 6

set of similar companies an analyst will use for valuation comparisons.

Question 7

What are the six steps to forming a peer group?

Answer 7

1) use commercial classification to determine industry
2) examine firms annual reports for competitors
3) examine competitors annual reports to see if other competitors are named
4) use industry trade publications to identify competitors
5) confirm that comparable firms have similar sources of sales and eranings
6) adjust financial statements for any financing subsidiary data

Question 8

What are the 10 elements of thorough industry analysis?

Answer 8

1) evaluate macroeconomic variable relationships
2) estimate industry variables
3) compare with other analyst forecasts
4) determine the relative valuation of different industries
5) compare the valuations of industries across time
6) analyze industry prospects based on strategic groups
7) classify the industry life cycle
8) position the industry on experience curve
9) consider the forces that affect industries
10) examine the forces that determine competition

Question 9

What are Michael Porters five forces of industry competition?

Answer 9

1) rivalry among existing competitors
2) threat of new entry
3) threat of substitutes
4) power of buyers
5) power of suppliers