®1999 south-western college publishing 1 chapter 20 market and industry analysis
TRANSCRIPT
2® 1999 South-Western College Publishing
Market Analysis
• 11stst step in top-down analysis step in top-down analysis
• Stock market most important factor in movement of individual Stock market most important factor in movement of individual
stocksstocks
• Macro-economy most important factor related to movements in Macro-economy most important factor related to movements in
the stock marketthe stock market
• Feedback loop between the macro-economy and the stock Feedback loop between the macro-economy and the stock
marketmarket
– Market anticipates but also helps drive what happens in the Market anticipates but also helps drive what happens in the
real economyreal economy
3® 1999 South-Western College Publishing
Gross Domestic Product (GDP)
• Most widely used measure of health of overall economyMost widely used measure of health of overall economy
• Quarterly and Annually FiguresQuarterly and Annually Figures
• Value of All Goods and Services w/in a CountryValue of All Goods and Services w/in a Country
• Gross National Produce (Gross National Produce (GNPGNP))
• ComponentsComponents– C+I+G+(X-M)C+I+G+(X-M)
– Based on Keynesian economic theoryBased on Keynesian economic theory
– Structured to avoid “double-counting” of economic activitiesStructured to avoid “double-counting” of economic activities
– Overstates role of consumption as proportion of total economic Overstates role of consumption as proportion of total economic activityactivity
4® 1999 South-Western College Publishing
Quarterly And Annual Data
• Advanced EstimatesAdvanced Estimates
– QuarterlyQuarterly
• Preliminary EstimatesPreliminary Estimates
• Revised EstimatesRevised Estimates
• Benchmark RevisionsBenchmark Revisions
– Covers past three yearsCovers past three years
5® 1999 South-Western College Publishing
Reporting GDP
Jan. Feb. Mar. Apr. May June July
Quarter 1AdvancedEstimate
PreliminaryEstimate
RevisedEstimate
BenchmarkRevision
6® 1999 South-Western College Publishing
Components Of GDP
• ConsumptionConsumption
• InvestmentInvestment
• Government SpendingGovernment Spending
• Net ExportsNet Exports Nominal GDPNominal GDP
• InflationInflation Real GDPReal GDP
7® 1999 South-Western College Publishing
Measuring Consumption68%
Components:Components:
• Durable GoodsDurable Goods
• Nondurable goodsNondurable goods
• Services Services
Measures:Measures:
• Car SalesCar Sales
• Retail SalesRetail Sales
• Personal Income/ExpendituresPersonal Income/Expenditures
8® 1999 South-Western College Publishing
Measuring Investment13%
Components:Components:• Nonresidential – structures; equipment & software Nonresidential – structures; equipment & software
• ResidentialResidential
• Changes in private inventoriesChanges in private inventories
Measures:Measures:• Housing Starts/Building PermitsHousing Starts/Building Permits
• Durable Goods OrdersDurable Goods Orders
• New Home SalesNew Home Sales
• Construction SpendingConstruction Spending
• Factory Orders/Business InventoriesFactory Orders/Business Inventories
9® 1999 South-Western College Publishing
• Measuring Government SpendingMeasuring Government Spending– 18%18%– Incl. Federal (defense; nondefense) and State & Incl. Federal (defense; nondefense) and State &
Local government spendingLocal government spending– Public constructionPublic construction
• Measuring Net ExportsMeasuring Net Exports– -4%-4%– Includes exports vs. imports of goods & servicesIncludes exports vs. imports of goods & services– Merchandise trade balanceMerchandise trade balance
• Measuring InflationMeasuring Inflation– Producer price indexProducer price index– Consumer price indexConsumer price index
10® 1999 South-Western College Publishing
Measuring GDP100%
• Purchasing Managers’ IndexPurchasing Managers’ Index
• EmploymentEmployment
• Industrial Production CapacityIndustrial Production Capacity
11® 1999 South-Western College Publishing
Business Cycle
• TroughTrough
– Low pointLow point
• PeakPeak
– High pointHigh point
• ExpansionExpansion
– Before a peakBefore a peak
• ContractionContraction
– After a peakAfter a peak
• Movement around long-run trendMovement around long-run trend
12® 1999 South-Western College Publishing
Composite Index
• CoincidentCoincident
– Move directly with business cycleMove directly with business cycle
• LeadingLeading
– Lead business cycleLead business cycle
• LaggingLagging
– Lag business cycleLag business cycle
13® 1999 South-Western College Publishing
Leading Index ComponentsManufacturing Hours
Vendor Performance
Unemployment Claims
Consumer Expectations
Manufacturers’ New Orders
Money Supply
Orders for Plant And Equipment
Index of Stock Prices
Private Housing Units
Sensitive Materials Prices
Unfilled Orders
14® 1999 South-Western College Publishing
Coincident Index Components
• Employees on Nonagricultural PayrollsEmployees on Nonagricultural Payrolls
• Personal Income less Transfer PaymentsPersonal Income less Transfer Payments
• Index of Industrial ProductionIndex of Industrial Production
• Manufacturing and Trade SalesManufacturing and Trade Sales
15® 1999 South-Western College Publishing
Lagging Index Components
• Average Duration of UnemploymentAverage Duration of Unemployment• Ratio of Manufacturing and Trade Inventories to Ratio of Manufacturing and Trade Inventories to
SalesSales• Changes in Labor Costs per Unit of OutputChanges in Labor Costs per Unit of Output• Average Prime RateAverage Prime Rate• Commercial and Industrial Loans Commercial and Industrial Loans • Ratio of Installment Credit to Personal IncomeRatio of Installment Credit to Personal Income• Change in Consumer Price Index for ServicesChange in Consumer Price Index for Services
16® 1999 South-Western College Publishing
Federal Government and the Macro-economy
• Fiscal Policy Fiscal Policy
– taxation and spending policies of the taxation and spending policies of the government designed to achieve GDP growth, government designed to achieve GDP growth, full employment, and stable pricesfull employment, and stable prices
• Civilian Unemployment RateCivilian Unemployment Rate
– Most heavily monitored statisticMost heavily monitored statistic
• Budget DeficitsBudget Deficits
17® 1999 South-Western College Publishing
Federal Reserve Bankand the Macro-economy
• Created in 1913Created in 1913• Monetary PolicyMonetary Policy
– Money supply (M1,M2,M3) vs. interest ratesMoney supply (M1,M2,M3) vs. interest rates– Recession vs. InflationRecession vs. Inflation
• ToolsTools– Open Market OperationsOpen Market Operations– Bank Discount RateBank Discount Rate
• Related to Federal Funds RateRelated to Federal Funds Rate– Bank Reserve RequirementsBank Reserve Requirements
18® 1999 South-Western College Publishing
Economy And Financial Markets
• Bond MarketBond Market– Relationship between Yield to Maturity and GDP Relationship between Yield to Maturity and GDP
depends on relative impact of:depends on relative impact of:• Inflation vs. Inflation vs. • Risk of defaultRisk of default
• Stock MarketStock Market– Leading indicator of trends in real Leading indicator of trends in real GDPGDP
• Forward-lookingForward-looking• Also, impacted by monetary policy before rest of Also, impacted by monetary policy before rest of
economyeconomy• Also affects rest of economy directly Also affects rest of economy directly
19® 1999 South-Western College Publishing
Valuing The Overall Stock Market
• Traditional measures for comparing valuesTraditional measures for comparing values• Book ValueBook Value
– Ratio of stock’s price to book value (M/BV)Ratio of stock’s price to book value (M/BV)
• DividendsDividends– Dividend yield = annual div. / current priceDividend yield = annual div. / current price
• EarningsEarnings– P/E ratioP/E ratio– E/P ratio = “earnings yield”E/P ratio = “earnings yield”
20® 1999 South-Western College Publishing
Valuing The Overall Stock Market
• Compare measures to:Compare measures to:• Other values / yields throughout economyOther values / yields throughout economy
– Bond yields vs. stock yieldsBond yields vs. stock yields
• Historical valuesHistorical values• But “context-dependent”But “context-dependent”
– AttitudesAttitudes– Fiscal and economic environmentFiscal and economic environment– Composition of market / indexComposition of market / index– All change over time All change over time – Cause relative values to changeCause relative values to change
21® 1999 South-Western College Publishing
Industry Analysis• The second step in the three-step fundamental The second step in the three-step fundamental
analysis procedureanalysis procedure• The first step is the macroanalysis of the stock The first step is the macroanalysis of the stock
marketmarket• The last step is to analyze individual companies The last step is to analyze individual companies
and stocks in light of the market and industry and stocks in light of the market and industry forecastsforecasts
22® 1999 South-Western College Publishing
Links Between the Economyand Industry Sectors
• Identify and monitor key assumptions and Identify and monitor key assumptions and variablesvariables
• Economic trends are eitherEconomic trends are either– Cyclical - up and down with business cycleCyclical - up and down with business cycle– Structural - major changeStructural - major change
• Combined changes have implications for the Combined changes have implications for the industry being analyzedindustry being analyzed
• Switching from one industry group to another over Switching from one industry group to another over the course of a business cycle is known as a the course of a business cycle is known as a rotation strategyrotation strategy
25® 1999 South-Western College Publishing
The Stock Market and the Business Cycle
Financial Stocks Excel
trough
peakConsumer Durables
Excel
Capital Goods Excel
Basic Industries
Excel
Consumer Staples Excel
26® 1999 South-Western College Publishing
Cyclical Economic Factors
• InflationInflation
• Interest ratesInterest rates
• International economicsInternational economics
• Consumer sentimentConsumer sentiment
27® 1999 South-Western College Publishing
Structural Economic Changes and Alternative Industries
• Social InfluencesSocial Influences– DemographicsDemographics– LifestylesLifestyles
• TechnologyTechnology• Politics and regulationsPolitics and regulations
– Economic reasoningEconomic reasoning– FairnessFairness– Regulatory changes affect numerous industriesRegulatory changes affect numerous industries– Regulations affect international commerceRegulations affect international commerce
28® 1999 South-Western College Publishing
Theme Investing
• Based on identifying emerging trends, such as:Based on identifying emerging trends, such as:
– TechnologyTechnology
– Aging populationAging population
– Freer trade and developing-country Freer trade and developing-country growthgrowth
• Identification of themes provides insight into Identification of themes provides insight into industry analysisindustry analysis
29® 1999 South-Western College Publishing
Valuing The Overall Industry
• Similar to valuing overall stock marketSimilar to valuing overall stock market• Look at:Look at:• Book ValueBook Value
– Value relative to industry’s total book valueValue relative to industry’s total book value
• DividendsDividends– Compute dividend yield for the industryCompute dividend yield for the industry
• EarningsEarnings– P/E ratioP/E ratio– E/P ratioE/P ratio– Compare to industry’s total earningsCompare to industry’s total earnings
30® 1999 South-Western College Publishing
The Earnings Multiple Technique• Estimating earnings per shareEstimating earnings per share
– start with forecasting sales per sharestart with forecasting sales per share• Industrial life cycleIndustrial life cycle• Input-output analysisInput-output analysis• Industry-aggregate economy relationshipIndustry-aggregate economy relationship
– earnings forecasting and analysis of industry earnings forecasting and analysis of industry competitioncompetition• competitive strategycompetitive strategy• competitive environmentcompetitive environment• industry operating profit marginindustry operating profit margin• industry earnings estimateindustry earnings estimate• industry earnings multiplierindustry earnings multiplier
31® 1999 South-Western College Publishing
Industry Life Cycle
• Pioneering developmentPioneering development• Rapidly accelerating industry Rapidly accelerating industry
growthgrowth• Mature industry growthMature industry growth• Stabilization and market maturityStabilization and market maturity• Deceleration of growth and declineDeceleration of growth and decline
32® 1999 South-Western College Publishing
Input-Output Analysis
• Identify suppliers and customersIdentify suppliers and customers
• Future demand from customersFuture demand from customers
• Ability of suppliers to provide goods Ability of suppliers to provide goods and services requiredand services required
• Extended to global industries, include Extended to global industries, include worldwide suppliers and customersworldwide suppliers and customers
33® 1999 South-Western College Publishing
The Industry-Economy Relationship
• Compare industry sales to aggregate Compare industry sales to aggregate economic series related to the goods economic series related to the goods and services provided by the industryand services provided by the industry
34® 1999 South-Western College Publishing
Competitive Structure of an Industry
• Determines what average EPS levels will beDetermines what average EPS levels will be• Porter’s Competitive ForcesPorter’s Competitive Forces
– Rivalry among existing competitorsRivalry among existing competitors– Threat of new entrantsThreat of new entrants– Threat of substitute productsThreat of substitute products– Bargaining power of buyersBargaining power of buyers– Bargaining power of suppliersBargaining power of suppliers