Portfolio Management

Prepared By:

Noorulhadi QureshiLecturer Govt College of Management

Sciences Peshawar

FUNDAMENTAL ANALYSIS

(INDUSTRIES AND COMPANIES)

Industry & Company Analysis

• Company can be characterized as belonging

to an industry. The performance of

companies would, therefore, be influenced by

the fortune of the industry it belongs.

• An Analyst has to undertake an industry

analysis so as to study the fundamental

factors affecting the performance of different

industries.

Industry & Company Analysis

• An Industry is generally described as a

homogenous group of companies. Or group

of firms producing reasonably similar

products which serves the same needs of

common set of buyers.

• Industry analysis refers to an evaluation of

the relative strengths and weaknesses of

particular industries.

Industries are traditionally classified

on the basis of product

PHARMACEUTICAL

TEXTILE CEMENT

OIL AND GAS

STEEL

INDUSTRIES

Product life-cycle (PLC) Like human beings, products also have an arc. From birth to death, human beings pass through various stages e.g. birth, growth, maturity, decline and death. A similar life-cycle is seen in the case of products. The product life cycle goes through multiple phases, involves many professional disciplines, and requires many skills, tools and processes. Product life cycle (PLC) has to do with the life of a product in the market with respect to business/commercial costs and sales measures. To say that a product has a life cycle is to assert three things:

The four main stages of a product's life cycle and the accompanying characteristics are:

StageCharacteristics

1. Market introduction stage

2. Growth stage

3. Maturity stage

4. Saturation and decline stage

The four main stages of a product's life cycle and the accompanying characteristics are:

Stage Characteristics

1. Market introduction stage

• costs are very high

• slow sales volumes to start

• little or no competition

• demand has to be created

• customers have to be prompted to try the product

• makes no money at this stage

2. Growth stage

• costs reduced due to economies of scale

• sales volume increases significantly

• profitability begins to rise

• public awareness increases

• competition begins to increase with a few

new players in establishing market

• increased competition leads to price

decreases

3. Maturity stage

• costs are lowered as a result of production volumes increasing and experience curve effects

• sales volume peaks and market saturation is reached

• increase in competitors entering the market

• prices tend to drop due to the proliferation of competing products

• brand differentiation and feature diversification is emphasized to maintain or increase market share

• Industrial profits go down

4. Saturation and decline stage

• costs become counter-optimal

• sales volume decline

• prices, profitability diminish

• profit becomes more a challenge of

production/distribution efficiency than

increased sales

Definition of 'Industry Lifecycle'

A concept relating to the different stages an

industry will go through, from the first product

entry to its eventual decline.

• A form of fundamental analysis involving the

process of making investment decisions based

on the different stages an industry is at during a

given point in time. The type of position taken

will depend on firm specific characteristics, as

well as where the industry is at in its life cycle.

Industry Life Cycle

• According to Julius Grodinsky industry life cycle theory-the life of an industry can be segregated into the-

• Pioneering Stage

• Expansion Stage

• Stagnation Stage

• Decay Stage

Introduction stage/ Pioneering

Stage:

• This is the first stage in the industrial life cycle of a new industry where the technology as well as the product are relatively new and have not reached a state of perfection. The pioneering stage is characterized by rapid growth in demand for the output of industry. As a result, there is a great opportunity for profit & highly risk. It’s also called sunrises industries. For example, ‘a leasing industry’ Computer Software & information technology etc.

Growth stage /Expansion Stage:

• This is second stage of expansion or

growth and survived the pioneering stage.

The stage of an industry are quite

attractive for investment purposes.

Investors cab get high returns at low risk

because demand exceeds supply in the

this stage. Companies will earn increasing

amounts of profits and pay attractive

dividends.

Maturity stage/Stagnation Stage:

• This is the third stage in the industry life

cycle. In this stage, the growth of the

industry stabilizes. The ability of the

industry to grow appears to have been

lost. sales may be increasing but at a

slower rate than that experienced by

competitive industries or by the overall

economy. For example, Desktop PC

Computers.

Decline stage/ Decay Stage:

• From the stagnation sage the industry passes to

the decay stage. This occurs when the products

of the industry are no longer in demand. New

products and new technologies have come to

the market. Customers have change their habits,

style and liking. As a result, the industry

becomes obsolete and gradually ceases to exist.

Thus, changes in social habits, changes in

technology and declining demand are the

causes of decay of an industry.

• The industry life cycle approach has

important implications for the investor. It

gives an insight into the apparent of

investment in given industry a t a given

time. In fact, each development stage is

unique and exhibits different characteristic

Competitive Conditions in the

Industry

Permanance

Labour Conditions

Attitude of Government

Supply of Raw Materials

Cost Structure

Fixed Cost

The higher the fixed cost

Component. The higher is

the sales volume necessary

To achieve break-even point.

Variable Cost

The lower the proportion of

fixed cost relative to

variable cost, lower would

be the break-even point.

Industry Analysis includes the cost structure of the industry i.e

Fixed Cost and Variable Cost

Lower break even point provides higher margin of safety.

An analyst would consider lower break even point industry

For his investment.