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equity investments > industry and company analysis > Flashcards

industry and company analysis Flashcards

1
Q

What is the use of industry analysis?

A
  • To understand a company’s business and business environment.
  • To identify active investment opportunities.
  • To attribute portfolio performance.
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2
Q

What is a cyclical company?

A

It is a type of business that perform very well when the economy is booming but perform relatively poorly during recessions.

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3
Q

What is a noncyclical company?

A

It is a type of business whose performance is relatively independent of the business cycle.

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4
Q

Give examples of cyclical vs noncyclical companies.

A
  • Cyclical: AUtos, industrials, and technology
  • Noncyclical: Health care and utilities.
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5
Q

What are defensive companies?

A

Companies whose profits are least affected by fluctuation in overall economic activity.

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6
Q

What are growth companies?

A

They are companies whose specific demand dynamics override economic factors in determining their performance.

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7
Q

What are the limitations to the classification of companies?

A
  • The classification of companies is kind of arbitrary.
  • Economic downturns affect all companies.
  • Different countries and regions may be undergoing different stages of the business cycle.
  • Comparing companies in the same industry that are currently operating in very different economic conditions may help identify investment opportunities.
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8
Q

What are the statistical similarities?

A

It groups companies on the basis of correlations of historical returns.

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9
Q

What is the limitation of the statistical approach?

A
  • The composition of industry groups may vary significantly over time and across geographical regions.
  • There is no guarantee that past correlations will continue to hold going forward.
  • A relationship may arise by chance.
  • A relationship that is actually significant may be excluded.
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10
Q

What are industry classification systems?

A

They help analysts in studying trends, value companies, and make goal comparisons of companies in the same industry.

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11
Q

What are basic materials and processing companies?

A

They produce building materials, chemicals, paper, and forest products, containers and packaging, and metal, mineral, and mining companies.

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12
Q

What are consumer discretionary companies?

A

It includes automotive, apparel, hotel, and restaurant businesses.

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13
Q

What are consumer stapes business?

A

Manufactures of food, beverages, tobacco, and personal care products.

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14
Q

What are energy companies?

A

Companies that have energy exploration, refining, and production companies. Some companies supply equipment to energy companies.

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15
Q

What are financial services companies?

A

It includes banking, insurance, real estate, asset management, and brokerage companies.

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16
Q

What are healthcare companies?

A

Companies that manufacture pharmaceutical and biotech products, medical devices, health care equipment, and medical supplies. They can also provide health care services.

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17
Q

What are industrial/Producer durables products?

A

They are companies: that manufacture heavy machinery and equipment, aerospace and defense, transportation services, and commercial services and supplies.

18
Q

What are technology companies?

A

They are companies that are involved in the manufacture and sales of computers, software, semiconductors, and communications equipment; internet services; electronic entertainment; technology consulting.

19
Q

What are telecommunication companies?

A

They are companies that provide fixed-line and wireless communication services.

20
Q

What are utility companies?

A

Companies that provide electricity, gas, and water utilities. Telecommunication companies are also sometimes included in this category.

21
Q

What is a peer group?

A

It is a group of companies engaged in similar business activities whose economics and valuation are influenced by closely related factors.

22
Q

What are the steps to form a peer group?

A
  • Examine commercial classification systems to identify companies in the same industry.
  • Review the subject company’s annual report to identify any mention of competitors.
  • Review competitors’ annual reports to identify other potential comparable companies.
  • Review industry trade publications to identify comparable companies.
  • Confirm that comparable companies have primary business activities that are similar to those of the subject company.
23
Q

What is Porter’s five forces framework?

A
  • Threat of substitute products
  • Bargaining power of customers
  • Bargaining power of suppliers
  • Threat of new entrants
  • Intensity of rivalry
24
Q

What is the use of Porter’s five forces?

A

They help to describe the intensity of competition in an industry.

25
Q

What is an industry with high concentration?

A

It is when there is a small number of firms that control a large part of the market.

26
Q

What are the things that you should bear in mind when analyzing the industry?

A
  • Higher/stronger barriers to entry reduce competition.
  • Greater concentration implies lower competition, while market fragmentation implies higher competition.
  • Unused capacity in an industry, especially over an extended period, results in intense price competition.
  • Stable market shares for industry firms imply less competition.
  • Greater price sensitivity in customer purchasing decisions results in greater competition.
  • More mature industries tend to exhibit slower growth.
27
Q

What is the comportment of barriers to entry?

A
  • Higher/stronger barriers to entry reduce competition,. High barriers to entry mean that existing companies are able to enjoy economic profits for a long period of time. Companies have greater pricing power.
  • Low barriers to entry means that new competitors can easily enter the industry, which makes the industry highly competitive. Companies in relatively competitive industries have little pricing power.
28
Q

What happens when an industry is relatively concentrated?

A
  • It is relatively easy for a few firms to coordinate their activities.
  • Larger firms have more to lose from destructive price behavior.
  • The fortunes of large firms are more tied to those of the industry as a whole.
29
Q

What is the result of excess capacity in an industry?

A

It results in intense price competition because it results in weak pricing power, as excess supply chases demand; conversely gives companies more pricing power, as demand exceeds supply.

30
Q

What do stable market shares indicate in an industry?

A

It indicates less competitive industries.

31
Q

What can affect the market share stability?

A
  • Barriers to entry.
  • New products.
  • Products differentiation.
32
Q

What is the impact of high price sensitivity on customer purchasing decisions in an industry?

A

It results in greater competition.

33
Q

What is the embryonic stage in a company? What are its key attributes?

A
  • They focus on raising product awareness and developing distribution channels.
  • Attributes: slow growth, high prices, significant investment, high risk.
34
Q

What is the growth stage in a company? What are its key attributes?

A
  • They focus on building customer loyalty and reinvest heavily in the business.
  • Attributes: Rapidly increasing demand, improving profitability, falling prices, low competition.
35
Q

What is the shakeout stage in a company? What are its key attributes?

A
  • Companies focus on reducing costs and building brand loyalty.
  • Attributes: Slowing growth, intense competition, declining profitability.
36
Q

What is the mature stage in a company? What are its key attributes?

A
  • Companies should focus on extending successful product lines.
  • Attributes: little or no growth, industry consolidation
  • high barriers to entry.
37
Q

What is the decline stage in a company? What are its key attributes?

A
  • Technological substitution, social changes, or global competition may eventually cause an industry to decline.
  • Attributes: negative growth, excess capacity, high competition.
38
Q

What are the limitations of industry life cycle analysis?

A
  • Technological changes.
  • Regulatory changes
  • Social changes
  • Demographics
39
Q

What is cost differentiation?

A

Companies strive to cut down their costs to become the lowest-cost producers in an industry.

40
Q

What is product/service differentiation?

A

Companies strive to differentiate their products from those of competitors in terms of quality, type, or means of distribution.

equity investments (5 decks)

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