443_3 - Applied Equity Analysis and Por3olio Management Lecture 3 The EIC Framework Economy Industry Company 2 Economic Analysis

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Unformatted text preview: Applied Equity Analysis and Por3olio Management Lecture 3 The EIC Framework Economy Industry Company 2 Economic Analysis •  The goal of economic analysis is to determine the financial impact of changes in economic condiDons to the performance of industries and firms •  Beta is a key indicator of economic analysis •  Economic forecast data can be found on sites such as hGp://www.conference ­board.org / –  Leading indicators –  Coincident indicators –  Lagging indicators 3 Beta 4 Leading Indicators •  Weekly manufacturing hours •  IniDal unemployment claims •  New manufacturing orders •  Vendor performance •  New capital goods orders •  Building permits •  Stock prices •  Money supply •  Interest rate spreads 10yr vs fed funds •  Consumer confidence Source: The Conference Board 5 Coincident Indicators •  •  •  •  Payrolls Personal income Industrial producDon Manufacturing and trade sales Source: The Conference Board 6 Lagging Indicators •  Unemployment duraDon •  Inventory to sales raDo •  Labor cost producDvity •  Prime rate •  Commercial loans •  Consumer credit to personal income •  CPI for services Source: The Conference Board 7 Current Economic Data Source: The Conference Board 8 Industry Analysis •  The purpose of industry analysis is to determine the rules of the game that impact the profitability of an industry •  Industry analysis determines an industry’s ability to generate a spread (ROIC vs WACC) •  Approximately 50% of a firm’s performance can be explained by industry factors Company ROIC % Industry AGracDveness Industry ROIC WACC Time 9 Industry Analysis Threat of New Entrants Supplier Power Rivalry Buyer Power SubsDtutes Source: McKinsey & Co Source: Michael Porter 10 11 12 13 14 15 Industry Structure Analysis (5 Forces) Current •  •  •  •  •  •  Buyers Suppliers SubsDtutes Entry / Exit Rivalry Overall 5 Years •  •  •  •  •  •  Buyers Suppliers SubsDtutes Entry / Exit Rivalry Overall Scale: 5 = Most Favorable 3 = Neutral 1 = Most Unfavorable 16 CalculaDng a Quick ROIC •  Source data from finance.google.com or finance.yahoo.com •  NOPAT = EBIT (aka OperaDng Income) x .65 •  Invested Capital = Total Interest Bearing Debt + Total Equity 17 Grocery Stores 18 Industry Analysis 19 CompeDDve Advantage •  CompeDDve advantage determines the firm’s ROIC deviance from the industry average ROIC •  Since spreads move to zero over the long run, compeDDve advantage explains a firm’s ability to maintain its spread over Dme Company ROIC CompeDDve Advantage % Industry ROIC WACC Time 20 21 CompeDDve Advantage – 2 Views Cost Leadership DifferenDaDon OperaDonal Excellence Cost Focus DifferenDaDon Focus 22 23 A Model of Value CreaDon Projected ROIC 24 InnovaDon Drives Margins at Apple 25 3Q 2010 (June 30) Results for Apple •  •  •  •  •  •  •  •  •  61.3% YoY Growth and 16.3% QoQ Growth 39.1% Gross Margin and 27% OperaDng Margin 8.4 mm iPhones shipped (ASP $595) 3.27mm iPads (ASP $640) 3.47mm Macs –  ASP Desktop $1,296 –  ASP Notebooks $1,255 iTunes Revenue $1B 225,000 Apps in App Store and 5B Downloads $4B cashflow generated in quarter and $45.8B cash balance InternaDonal Sales 52% of Revenue Source: Apple, SIG, JP Morgan 26 Apple Stores Provide CompeDDve Advantage •  16% of Company Sales •  293 Retail Stores (5 ­20 Year Leases, Avg 10 Yrs) •  Average Revenue Per Store in Q3 $9mm in 2010 vs $5.9mm in Q3 2009 •  60.5mm visitors in quarter to stores •  Each stores averaged 2,300 visitors per day Source: Apple 27 Importance of Focusing Resources and Making Choices Source: All Things D 28 R&D as a Percentage of Sales Source: Bloomberg 29 Redefining the Rules of the Game Source: All Things D 30 Secrets to Apple Success •  Culture of small close knit teams •  •  •  •  –  Apple Remote app wriGen by 1 programmer –  Apple hires fewer programmers that work on mulDple projects Few Management Layers Constantly Challenge Employees to Stretch Deadlines are Crucial Apple Focuses on Own Products Rather than Feature Game with CompeDtors •  Hire People that are Passionate about Your Products •  Emphasize Work Life Balance •  Maintain a Startup Culture Source: 8 Management Lessons I learned at Apple, Business Insider 31 Apple is the World’s Largest Startup Source: All Things D 32 Apple Faces a Key InflecDon Point “Once a company devises a great product it has a monopoly in that realm, and concentrates less on innovaDon than protecDng its turf. The Mac user interface was a 10 ­year monopoly. Who ended up running the company? Sales guys. At the criDcal juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”  ­ Steve Jobs Source: Steve Jobs interview by Steve Levy reposted on Daring Fireball 33 BDK CompeDDve Advantage 34 ...
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This note was uploaded on 02/22/2011 for the course BMGT 443 taught by Professor Perfetti during the Spring '11 term at Maryland.

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