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Industry analysis 1 WARNING This material has been reproduced and communicated to you by or on behalf of Curtin University in accordance with section 113P of the Copyright Act 1968 (the Act) The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. 2Material in this presentation is adapted and based on the CFA Institute Investment Series books Notes for Industry Analysis Chapter 9 of prescribed textbook will be useful as background reading for question 4 of your assignment Investments : Principles of Portfolio and Equity Analysis by Michael G. McMillan, , Wendy L. Pirie, , Gerhard Van de Venter, , Lawrence E. Kochard, , and Jerald E. Pinto This is not an exhaustive summary it is simply some background for things that you should consider when undertaking an industry and company analysis I do not expect you to copy this template – rather this is a guide for how you might structure your discussion and research to answer question 4 a Material in this presentation is adapted and based on the CFA Institute Investment Series books. 3 Industry Analysis Industry analysis is the analysis of a specific branch of manufacturing, service or trade A good analysis of the industry in which a company operates provides a framework to analyse an individual company Industry analysis is useful in a number of investment applications that make use of fundamental analysis. Its uses include the following: Understanding a company’s business and business environment. Industry analysis is often a critical early step in stock selection and valuation because it provides insights into the issuer’s growth opportunities, competitive dynamics, and business risks For a credit analyst, industry analysis provides insights into the appropriateness of a company’s use of debt financing and into its ability to meet its promised payments during economic contractions Material in this presentation is adapted and based on the CFA Institute Investment Series books. 4 Industry Analysis: Things to consider I. What are the barriers to entry Is it difficult or easy for a new competitor to challenge incumbents Relatively high (low) barriers to entry imply that the threat of new entrants is relatively low (high) II. How concentrated is the industry Do a small number of companies control a relatively large share of the market, or does the industry have many players, each with a small market share III. What are capacity levels That is, based on existing investment, how much of the goods or services can be delivered in a given time frame Does the industry suffer chronic over- or under capacity, or do supply and demand tend to come into balance reasonably quickly in the industry IV. How stable are market shares Do companies tend to rapidly gain or lose share, or is the industry stable V. Where is the industry in its life cycle Does it have meaningful growth prospects, or is it demand stagnant/declining VI. How important is price to the customer’s purchase decision Material in this presentation is adapted and based on the CFA Institute Investment Series books. 5 Strategic Analysis starting point: Porter’s “Five Forces” Framework 6 Intensity of Rivalry Bargaining Power of Customers Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers First focus for analysis Material in this presentation is adapted and based on the CFA Institute Investment Series books. Representative Industry Sectors 7 Basic Materials and Processing Consumer Discretionary Energy Financial Services Industrial/Producer Durables Technology Telecommunications Utilities Material in this presentation is adapted and based on the CFA Institute Investment Series books. Using GICS 8Material in this presentation is adapted and based on the CFA Institute Investment Series books. Industry Life Cycle Source: Based on Figure 2.4 in Hill and Source: Based on Figure 2.4 in Hill and Jones (2008). Source: Based on Figure 2.4 in Hill and Jones (2008). 9Material in this presentation is adapted and based on the CFA Institute Investment Series books. Example: Industry Analysis for Confectionary Material in this presentation is adapted and based on the CFA Institute Investment Series books. 10 Major Companies Cadbury, Hershey, Mars/Wrigley, Nestle Barriers to Entry/Success Very High: Low financial or technological hurdles, but new players would lack the established brands that drive consumer purchase decisions. Level of Concentration Very Concentrated: Top four companies have a large proportion of global market share. Recent mergers have increased the level of concentration. Impact of Industry Capacity Not applicable: Pricing is driven primarily by brand strength. Manufacturing capacity has little effect. Industry Stability Very Stable: Market shares change glacially. Life Cycle Very Mature: Growth is driven by population trends and pricing. Price Competition Low: A lack of private-label competition keeps pricing stable among established players, and brand/familiarity plays a much larger role in consumer purchase decisions than price. Demographic Influences Not applicable. Government & Regulatory Influences Low: Industry is not regulated, but childhood obesity concerns in developed markets are a low-level potential threat. Also, high-growth emerging markets may block entry of established players into their markets, possibly limiting growth. Social Influences Not applicable. Technological Influences Very Low: Innovation does not play a major role in the industry. Growth vs. Defensive vs. Cyclical Defensive: Demand for candy and gum is extremely stable.