Chapter 11 ECONOMIC AND INDUSTRY ANALYSIS

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Chapter 11 ECONOMIC AND INDUSTRY ANALYSIS

• Why are economic and industry analyses important?
• How are investment decisions related to the
  business cycle?
• How are economic forecasts made?
• How industries classified?
• What are the important components of industry
  analysis?
• What is the framework and some of the techniques
  used in industry analysis?

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The importance of economic and industry analysis

• The macro factors are important, but are not a
  substitute for a careful analysis of the specific
  company
• Stock prices are positively related to economic
  activity
• Variation in performance among different
  industries
• Companies do not operate in a vacuumeconomic and
  industry conditions affect the company and the
  performance of its stock

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Figure 11.1 Recent Performance of the
SP500 and Three Industries
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Business cycles and investment decisions

• What is a business cycle
• Definition
• No two business cycles have been alike

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Business cycles and stock prices

• Stock prices lead economic activity
• Stocks prices are not a prefect predictor of
  economic activity
• Stock prices and inflation
• Over market and the performance of industry groups

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Figure 11.2 Stock Returns vs. Inflation
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Business cycles and interest rates

• Real rates are inversely related to economic
  activity
• Business cycles and yield spreads
• Investment timing implications
• Stocks
• Bonds

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Economic forecasting

• Qualitative forecasts
• Leading indicators
• Anticipation surveys
• Econometric model building (quantitative
  forecasts)

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Implications for investors

• Why is economic forecasting difficult
• Using economic forecasts

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Industry analysis

• Defining and classifying industries
• Difficulty in classifying industries
• Common industry classifications
• SIC codes

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Components of an industry analysis

• Competitive structure of the industry
• Permanence
• Vulnerability to external shocks
• Regulatory and tax considerations
• Labor conditions
• Historical record of revenue, earnings, and
  dividends
• Financial and financing issues

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Industry life cycles

• Birth phase
• Growth phase
• Mature growth phase
• Stabilization or decline phase
• Some caveats about industry life cycles

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Figure 11.4 Industry Life Cycle
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Analyzing industry data

• End-use analysis
• Ratio analysis
• Regression and correlation analysis

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Figure 11.5 Ratio of Auto Production to
Overall Industrial Production
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Figure 11.6 Ratio of Semiconductor Sales
and Auto Sales to GDP
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Figure 11.7 Relationship Between Personal
Income and Auto Sales
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Figure 11.8 Relationship Between Operating
Revenue and Operating Income Electric
Utilities
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Figure 11.9 Relationship Between
Operating Revenue and Operating Income
Airlines