Ch 13 - Industry Classification Flashcards
Ways to categorise shares:
Market cap
Marketability
P/E ratio
Size
Dividend yield
Level of gearing
Exposure to overseas earnings
Cyclical vs defensive shares (exposure to economic cycle)
Country
Stock exchange
ESG ratings
Industry
Reasons for categorisation by industry:
Practical for analysts to specialise in one area
Correlation of investment performance
It is practical for analysts to specialise in one industry because:
Fuck PECS
Factors affecting one company are likely to be relevant to others in the same industry
Assists in portfolio classification and management
No one can expect to be an expert in all areas
Info will come from common source and presented in a similar way
Grouping of equities gives structure to the decision-making process
Share prices are correlated because:
a SMR
Similar financial structures and so are similarly affected by changes in interest rates
Supply to the same markets so are similarly affected by changes in demand
Same resources so have similar input costs
Difficulties of catergorisation by industry:
Conglomerate companies (several sectors)
Multinationals (several marketplaces)
Differences between companies within the same sector - e.g. due to size or operate within niches of the market
FTSE industry classification system
MUTE FIGHTS
Oil and gas
Large global companies
Commodity price dependent (and priced in dollars) - Risky
Independent of the rest of the stock market
Basic Materials
Mainly produce “intermediate”” goods -Chemical, mining, industrial metals, and forestry & paper
May be significantly affected by the state of the economy and commodity prices
Industrials
Produce mainly capital goods
Aircraft’s
Ships
Machinery
Electronic and electrical equipment
Features of Basic Materials and Industrials
- Dependent on level of investment spending - hence strength of economy
- Cyclical in nature
- Company profits tend to move ahead of trade cycle
- Dependency on government spending
- Volatility of profits due to volatile demand
- High profit margins when conditions are good
- Low gearing due to volatile profits
- Possibility of exposure to overseas markets
Consumer Goods
Manufacture consumer durables (cars, furniture, TV) and non-durables (food and drink, pharmaceuticals, tobacco and health)
- Cyclical for durables and defensive for non-durables
- Increasingly capital intensive
- Moderate to high gearing
- Low profit margins due to high competition
Healthcare
Covers healthcare providers, medical equipment and supplies, as well as pharmaceuticals
Non-cyclical
Consumer Services
Food and drug retailers, general retailers, media and travel & leisure companies
Impact of economic cycle will be greater on the cyclical companies
Labour-intensive
More defensive companies in the group may have high gearing
Domestic market is the most important
Telecommunications
Fixed line telecommunications and mobile telecommunications
Type of utility - But less regulated and hence more volatile
Utilities
Supply continuously demanded services to households and business premises, electricity, water and gas distribution
- Political risk, price controls and changes in regulation
- Extensive capital infrastructure - capital intensive
- Natural monopolies
- Low growth prospects
- Low financial gearing
- Largely dependent on domestic market
- Stable market share and essential services
