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443_3 - Applied Equity Analysis and Por3olio ...

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Unformatted text preview: Applied Equity Analysis and Por3olio Management Lecture 3 The EIC Framework Economy Industry Company Economic Analysis •  The goal of economic analysis is to determine the financial impact of changes in economic condiCons 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 hFp://www.conference- board.org/ –  Leading indicators –  Coincident indicators –  Lagging indicators RBS Beta UNH Beta Leading Indicators •  Weekly manufacturing hours •  IniCal 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 www.conference- board.org Source: The Conference Board Coincident Indicators •  •  •  •  Source: The Conference Board Payrolls Personal income Industrial producCon Manufacturing and trade sales Lagging Indicators •  Unemployment duraCon •  Inventory to sales raCo •  Labor cost producCvity •  Prime rate •  Commercial loans •  Consumer credit to personal income •  CPI for services Source: The Conference Board Current Economic Data 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 AFracCveness Industry ROIC WACC Time Industry Analysis Threat of New Entrants Supplier Power Rivalry SubsCtutes Source: McKinsey & Co Source: Michael Porter Buyer Power Industry Structure Analysis (5 Forces) Current •  Buyers •  Suppliers •  SubsCtutes •  Entry / Exit •  Rivalry •  Overall 5 Years •  Buyers •  Suppliers •  SubsCtutes •  Entry / Exit •  Rivalry •  Overall Scale: 5 = Most Favorable 3 = Neutral 1 = Most Unfavorable CalculaCng a Quick ROIC •  Source data from finance.google.com or finance.yahoo.com •  NOPAT = EBIT (aka OperaCng Income) x .65 •  Invested Capital = Total Interest Bearing Debt + Total Equity Grocery Stores Industry Analysis CompeCCve Advantage •  CompeCCve advantage determines the firm’s ROIC deviance from the industry average ROIC •  Since spreads move to zero over the long run, compeCCve advantage explains a firm’s ability to maintain its spread over Cme Company ROIC CompeCCve Advantage Industry ROIC % WACC Time CompeCCve Advantage – 2 Views Cost Leadership DifferenCaCon Cost Focus DifferenCaCon Focus OperaConal Excellence A Model of Value CreaCon Projected ROIC ...
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