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 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 •  •  •  •  Source: The Conference Board Payrolls Personal income Industrial producDon Manufacturing and trade sales 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 •  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 DierenDaDon Cost Focus DifferenDaDon Focus OperaDonal Excellence 22 23 A Model of Value CreaDon Projected ROIC 24 ...
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This note was uploaded on 03/06/2012 for the course BMGT 443 taught by Professor Perfetti during the Spring '11 term at Maryland.

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