industry specific analysis chapter 9 robinson, munter, grant
TRANSCRIPT
Industry Specific Analysis
Chapter 9
Robinson, Munter, Grant
Grant, Munter & Robinson
Chapter 9 2
Learning Objectives
• Understand the role of industry benchmarks
• Understand how industry membership can affect financial statements
• Understand the importance of industry identification
• Be aware of nonfinancial analysis measures used for specific industries
Grant, Munter & Robinson
Chapter 9 3
Analysis
• Time series– Compare subject firm to itself over time
• Cross-sectional– Compare subject firm to an appropriate
benchmark within the same period of time• Industry Averages
Grant, Munter & Robinson
Chapter 9 4
Conglomerates
• Difficult to benchmark because they operate in multiple industries
• Must disclose segment data for– Lines of business that contribute at least 10% of
revenues, assets or net income– At least 75% of total revenues
• These disclosures can be used for industry specific analysis
Grant, Munter & Robinson
Chapter 9 5
Accounting RequirementsUS GAAP (FAS 131)
• Requires each segment to disclose
• Sales revenues
• Operating profit
• Assets
• Some expense items
Grant, Munter & Robinson
Chapter 9 6
Accounting RequirementsIAS 14
Primary segment disclosures• Revenues and operating profit
• Assets and liabilities
• Capital expenditures
• Depreciation and amortization
• Other non-cash expenditures
Grant, Munter & Robinson
Chapter 9 7
Accounting RequirementsIAS 14
Secondary segment disclosures• Revenue
• Assets
• Capital expenditures
• Inter-segment pricing for both primary and secondary segments
Grant, Munter & Robinson
Chapter 9 8
Industry comparison example
PepsiCo Coca-Cola
NA Beverage
Int’l Beverage
NA Beverage
Int’l Beverage
Revenue 3,842 2,582 7,526 12,386
Net Income 927 221 1,480 4,594
Operating assets
1,325 1,747 4,738 6,611
ROS 24.1% 8.6% 20.0% 37.1%
RAO 70.0% 12.7% 31.2% 69.5%
Grant, Munter & Robinson
Chapter 9 9
Retail
• Wal-Mart Stores– Sales are largely cash-based
• Largest assets: Inventory, Property
• Largest liabilities: Accounts payable, long-term debt
• Largest expense: Cost of goods sold
Grant, Munter & Robinson
Chapter 9 10
RetailSpecific information
• Affected by: – Consumer confidence,
– CPI
– Disposable income
– Real GDP growth
– Interest rates
• Same store sales indicates the amount of the sales growth that is coming from new stores versus existing stores.
Grant, Munter & Robinson
Chapter 9 11
Health Care Management
• United Health Group provides health care management and insurance
• Service firm – no inventory• Goodwill indicates expansion through
acquisition• Medical cost payable is largest liability
– Unearned premiums is a current liability
• Revenues primarily from premiums earned• Largest expense is for medical costs
Grant, Munter & Robinson
Chapter 9 12
Health Care ManagementSpecific information
Health care facilities• CPI
• Federal budget – Medicaid/Medicare spending
• Unemployment– Uninsured
Grant, Munter & Robinson
Chapter 9 13
Health Care ManagementSpecific information
Insurance • Net investment yield
• Interest rates
• Demographics
• Premium growth and Reinsurance rates
• Lapse ratio, Net premiums written to surplus, Combined ratio
Grant, Munter & Robinson
Chapter 9 14
Publishing
• The New York Times Company
• Large accounts receivable– Advertising and subscription revenue
• Largest assets are property and equipment
• “Costs in excess of net assets acquired” is goodwill
• Liability for Un-expired subscriptions
Grant, Munter & Robinson
Chapter 9 15
PublishingSpecific information
• Demographic trends– Preference for books, newsprint, magazines vary
by age group
• Health of the education sector– Text book sales
• Volatility of paper prices• May provide sales mix information
– Advertising vs. circulation– Newspaper, broadcasting, internet sales
Grant, Munter & Robinson
Chapter 9 16
Restaurants
• McDonald’s Corporation• Property & Equipment is the largest asset• Reliant upon long-term financing• Large retained earnings• Revenues from company-owned stores and franchise
fees• Food and packaging costs are only about 1/3 of
revenues• Labor-related costs are nearly 75% of food/packaging
costs
Grant, Munter & Robinson
Chapter 9 17
RestaurantsSpecific information
• Financial statement information– Average weekly sales
– Same store sales
• Nonfinancial statement measures– Consumer confidence
– CPI
– Interest rates
– Real disposable income
– Real GDP growth
Grant, Munter & Robinson
Chapter 9 18
Waste Management
• Republic Services, Inc.
• Property & equipment is largest asset– Large depreciation expense
• Followed closely by Intangible assets– Large amortization expense
• Significant long-term debt
Grant, Munter & Robinson
Chapter 9 19
Waste ManagementSpecific information
• Daily municipal solid waste per capita
• GDP
• Landfill and incinerator capacity of company
• Landfill disposal charges
• US population growth
Grant, Munter & Robinson
Chapter 9 20
Utilities• First Energy Corp.• Regulated industry
– Unique financial statement presentation– Assets may be presented in reverse order
• Heavily invested in PP&E• Goodwill from acquisitions• Liability for decommissioning nuclear
power plants
Grant, Munter & Robinson
Chapter 9 21
UtilitiesSpecific information
• Regulatory Assets– Expenses deferred until the next general rate increase
• Interest rates• GDP• Cooling/heating degree days (from 65°)• Industrial production• Household formation and housing starts• Risks from commodities markets
Grant, Munter & Robinson
Chapter 9 22
Insurance• The Progressive Corporation• Invested premiums dominate assets
– Reported in more detail
• Deferred expenses for commissions, underwriting and other costs of acquiring policies– Amortized over the life of the policy
• Unique liabilities– Unearned premiums– Loss reserve
• Premium revenue and related loss expense on income statement
Grant, Munter & Robinson
Chapter 9 23
InsuranceSpecific information
• Legal requirements of coverage
• Net investment yield
• Interest rates
• Demographics
• Premium growth and Reinsurance rates
• Lapse ratio, Net premiums written to surplus, Combined ratio
Grant, Munter & Robinson
Chapter 9 24
Computer Hardware
• Dell Computer Corporation
• Inventories are relatively small
• Receivables are relatively large
• Accounts payable is large– Days payable ≈ 53
• Small amount of long-term debt
• Separate R&D on the income statement
Grant, Munter & Robinson
Chapter 9 25
Computer HardwareSpecific information
• Business capital spending
• Consumer confidence
• Currency exchange
• Global sales report (Semiconductor industry)
• Leading economic indicators
• Real GDP growth
• Exchange rate fluctuations
Grant, Munter & Robinson
Chapter 9 26
Airlines
• Continental Airlines• Service industry• Flight equipment is dominant asset• Routes, gates and slots (cost of acquiring)
– Capitalized and amortized
• Air traffic liability is unearned revenue• Wages and fuel dominate operating expenses
Grant, Munter & Robinson
Chapter 9 27
AirlinesSpecific information
• Revenue passenger mile (RPM)• Available seat-mile• Load factor• Consumer confidence• Disposable income and Corporate profits• Jet fuel prices• Number of aircraft in fleet
Grant, Munter & Robinson
Chapter 9 28
Financial Institutions
• Citigroup, Inc.
• Service industry (diversified)
• 90% of assets are cash, deposits, investments or other receivables and loans
• Customer deposits are a liability
• Loan interest is primary revenue source
Grant, Munter & Robinson
Chapter 9 29
Financial InstitutionsSpecific information
• Interest rates• Disposable income• Consumer confidence• Consumer borrowing patterns• Housing and large expenditures• Delinquencies and bankruptcies• Efficiency ratio
Grant, Munter & Robinson
Chapter 9 30
Summary
• Understand industry benchmarks
• Understand how industry membership can affect financial statements
• Understand the importance of industry identification
• Be aware of nonfinancial analysis measures used for specific industries