FIN401- Chapter 12

FIN401- Chapter 12 - Chapter 12: Macroeconomic and Industry...

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Unformatted text preview: Chapter 12: Macroeconomic and Industry Analysis and Framework for Analysis Framework Analysis of the economy Analysis of the industry Analysis Analysis of the company Global Economic Considerations Global Performance in countries and regions is highly Performance variable variable Political risk Exchange rate risk » Affect U.S. firms and their competitors Affect - Sales Sales - Profits Profits - Stock returns Stock Key Economic Variables Key Gross domestic product Unemployment rates Interest rates and inflation Budget deficits Key Economic Variables Key Consumer sentiment Source: Federal Reserve Bank of St. Louis, National Economic Trends, May 2009 12-5 Federal Government Policy Federal Fiscal policy » government spending and taxing spending − direct policy direct − slowly implemented slowly Federal Government Policy Federal Monetary policy » manipulation of the money supply to influence economic activity economic − quickly implemented quickly Tools » Open market operations Open » Discount rate Discount » Reserve requirements Reserve Business Cycle Business Economic business cycle » Recurring pattern of aggregate economic expansion and contraction expansion » Cycles have a common framework Cycles trough peak trough » Can only be neatly categorized by length and Can turning points after the fact Business Cycle Business National Bureau Economic Research National Monitors economic indicators Composite indexes of general economic Composite activity activity Series Series of leading, coincident, and lagging indicators of economic activity to assess the status of the business cycle status Industry Analysis Industry Industry Analysis Industry Second step in the fundamental analysis Second of common stocks of Performance can vary widely across Performance industries industries Sectors refer to broader categories, such as several industries grouped together as (e.g. medical sector, retail sector) (e.g. Industry Stock Price Performance, 2008 2008 What is an Industry? What Are industry classifications clear-cut? » Diversified lines of business cause Diversified classification problems classification » Industries are often less identifiable with one product or service product Classifying Industries Classifying NAICS attempts to define industry groups NAICS attempts -Four or five-digit code Other Classifications: S&P, Value Line Other S&P, Example of NAICS Industry Codes Example Business Cycle Analysis Business Industries can perform differently depending Industries upon the stage of the business cycle stage Analysis of industries by their operating ability in Analysis relation to the economy relation » Growth industries » Defensive industries industries » Cyclical industries industries » Counter-cyclical Sensitivity to Business Cycle Sensitivity Factors affecting sensitivity of earnings to Factors sensitivity business cycles business » Sensitivity of sales of the firm’s product to the business cycle business » Operating leverage Operating » Financial leverage Financial Depiction of the Business Cycle Depiction Industry Relationship to Business Cycles Industry Sector rotation » Selecting industries based on the Selecting based stage of the business cycle − Peak – natural resource firms natural − Contraction – defensive firms defensive − Trough – equipment, construction firms equipment, − Expanding – cyclical industries cyclical Sector Rotation Illustrated Sector Analyzing Industries Analyzing By stage in their life cycle By life » Describes the stages most industries go through Describes stages » Helps determine the health and future prospects of the industry of Industry Life Cycles Industry Stage Start-up Consolidation Maturity Relative decline Sales Growth Rapid and increasing Stable Slowing Minimal or negative The Industry Life Cycle The Life Cycle Analysis Life Start-up stage offers the highest potential returns, greatest risk returns, Investors interested in capital gains should Investors capital avoid the maturity stage avoid Consolidation stage of most interest to investors investors » Growth is rapid, but orderly Industry Structure and Performance (Porter Model) (Porter Determinants of industry competition and Determinants profitability profitability » Threat of entry » Rivalry between existing competitors » Pressure from substitute products » Bargaining power of buyers » Bargaining power of suppliers ...
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This note was uploaded on 12/10/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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