Investment Banking
Internship Class
Industry Analysis:
Global and Country
Or understanding the critical industry
factors that affect your company
Objectives
A. Understand the critical areas of the global
analysis framework, particularly industry
analysis
B. Understand how to include industry forecasts
into your company report
C. Understand where to find sources of data for
your international and domestic industry
prospects
D. Review an example of an analysis of an
industry, and understand the required format
of your Industry Report
A. Understand the Critical Areas of the
Global Analysis Industry Framework
1. Global Industry Analysis
• Key Considerations?
• What are the key trends globally which have or will
have an effect on the industry
- What has been happening in global markets that
can or may have an effect on my market and
company?
- What are the likely key trends in technology,
production, sales, etc. that can or may affect the
industry?
- Who are the potential international competitors
who can or may enter my market?
2. Country Industry Analysis
Key considerations?
 I. Industry life cycles
• What is the sensitivity of company earnings to
business cycles?
• Key factors to analyze
• Sensitivity of sales of the firm’s product to
the business cycles
• Operating leverage
• Financial leverage
 II. Industry competitiveness models
• Porter’s 5 Forces
• SWOT Analysis
I. Industry Life Cycles
All industries are in different stages of
development!
 You must determine at which stage your industry is
in currently
 Remember that technological innovation may have
the effect of changing the life cycle of the industry
Stage
Sales Growth
Start-up
Rapid & Increasing
Consolidation
Stable
Maturity
Slowing
Relative Decline
Minimal or Negative
Industry Life Cycles
Stage 1 Stage 2
Start-up Consolidation
Beginning
Rapid
Deceleration
Development Growth
Growth
Stage 3
Maturity
Stage 4
Decline
Stabilization and
Market Maturity
of
Bryan’s View of
Industry and Management
Poor
Good
Do
Well
??
Poor
??
Poor
Industry
Good
Management Quality
B. How to include industry forecasts
in your company report
 How do you include industry data in your report?
Generally, through industry competitiveness models
 What is the purpose of these models, i.e. strategic
analysis?
• Industries, like companies, can be evaluated in a
consistent format to determine its attractiveness
• The key is to develop/use a consistent format
that will help you understand the key drivers of
profitability in the industry
• Once you have identified the key drivers of
industry profitability, then you evaluate
your company on those key drivers.
Choice of Industry
Competitiveness Models
 Does it matter which model of competitiveness
you choose?
• While the choice of model and the model
format may differ, the key is to understand
the key factors driving all areas of the
industry to determine the relative
attractiveness of the industry
Industry Competitiveness
Models – SWOT Analysis
 Strengths
• What are the positives for the industry, i.e. what
factors make this industry attractive
 Weaknesses
• What factors make this industry unattractive?
 Opportunities/Trends
• What factors make this industry likely to do well in
the future?
 Threats
• What factors are most likely to make this industry
unattractive in the future?
II. Industry Competitive Models –
Porter Model
New Entrants
Suppliers
Industry
Competitors
Substitutes
Buyers
Determinants of Industry Profitability
Industry Structure
• 1. Industry Competitors - rivalry
• 2. Potential Entrants – threats
• 3. Suppliers – bargaining power
• 4. Buyers – bargaining power
• 5. Substitutes – threats
 The strength of these forces is a function the
industry structure
Determinants of Profitability
 The collective strength of these 5 areas affects
a firms ability to earn returns in excess of their
cost of capital
• If the forces are positive, firms can earn
good rates of return
• If not, despite good management, firms may
have difficulty earning good returns
1. Industry Competitors
 Rivalry Determinants
• Industry growth
• Fixed (or storage
costs) / value added
• Intermittent
overcapacity
• Product differences
• Brand identity
• Switching costs
•Concentration and
balance
•Informational
complexity
•Diversity of competitors
•Corporate stakes
•Exit barriers
2. Potential Entrants
 Entry Barriers
• Economies of scale
• Proprietary product differences
• Brand identity
• Switching Costs
3. Suppliers
 Determinants of Supplier
Power
• Differentiation of inputs
• Switching costs of
suppliers
• Presence of substitute
inputs
• Supplier concentration
• Importance of volume to
supplier
• Cost relative to total
purchases in industry
•Threat of forward
integration to threat of
backward integration
•Capital requirements
•Access to distribution
•Absolute cost
advantages
•Government policy
•Expected retaliation
4. Substitutes
 Determinants of Substitutions Threat
• Relative price performance of substitutes
• Switching costs
• Buyer propensity for substitutes
5. Buyers
 Determinants of Buyer
Power
Bargaining leverage
• Buyer concentration versus
firm concentration
• Buyer volume
• Buyer switching costs versus
firm switching costs
• Buyer information
• Ability to backward
integrate
• Substitute products
•Price Sensitivity
•Price to total purchases
•Product differences
•Brand identity
•Impact on quality /
performance
•Buyer profits
•Decision maker’s
incentives
C. Sources of Data
for Industry Analysis
Where is the best place to start?
• BYU Libraries:
• Go to BYU.edu, Libraries, HBLee Library,Find
Businesses by Subject, Business Management, then click
on Industries Tab, then go to NetAdvantage (Standard and
Poors). Put in your industry name in the survey dropdown
box, and review the material. This gives wonderful
information on the industry, and particularly, how do you
analyze companies in this industry (See IR-2 Finding
Industry Information)
• Value-line:
• At the beginning of each industry section, there
is a short description of the industry, the key
drivers, and what is happening domestically.
Sources of Data (continued)
Company 10K and 10Q reports
• Companies are required by law to disclose
information relating to what is happening in
the industry and (to a small degree) how they
are doing relative to these events.
• Generally, the larger and better run
companies will have a good description
on the factors affecting the industry
• Look in the reports of other similar
companies as well
Sources of Data (continued)
 Other sources:
• US Government, including the Commerce
department
• Sell-side research, i.e. Merrill, Morgan Stanley,
Schwab, etc.
D. Understand Required Areas
of your Industry Report
10 Required Key Areas:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
General Industry Information
Industry Type
Key Indices
Recommendation
Description and Summary
Competitive Structure
Competitiveness Analysis Model
Key Valuation Ratios to Watch
Key Items to Watch
Relative Performance versus the market and
economy
General Industry Information
This section includes three areas:
 Narrow industry classification (Level 4)
This is the specific industry you are concerned
with—the industry in which your company
operates, i.e. Computer Hardware
 Broad industry classification (Level 3)
This is the broader industry classification for your
industry, i.e., Computers
 Country
This is the country of domicile of your company,
i.e., the United States for Apple
2.
Industry Type
 I use the 6 industry types proposed by Peter
Lynch.
 Each of these general types of industries/firms possess
different characteristics, so analysts need to focus on
different attributes to determine if the industry/firm is
attractive or not.
Slow Growers
Stalwarts
Fast Growers
Cyclicals
Turnarounds
Asset Plays
Slow Growers
 Slow growers: Utilities
 At or near the top of the industry or product life
cycle
 Typically pay a regular dividend due to few
attractive internal investments
 Focus on:
 Potentially profitable new products or acquisitions
that will allow rising earnings and dividends
 Repositioning of products along the life cycle
which may allow rising earnings and dividends
Stalwarts
 Stalwarts: Pharmaceuticals
 Expected to have faster earnings growth, but their
consistent growth, priced into the stock price,
makes large price changes unlikely
 Tend to do relatively better in times of uncertainty
due to a flight to quality and liquidity
 Focus on:
 The firm’s current PE versus its history with the
market and industry
 Anything that might increase the firm’s earnings
growth rate above historical levels
Fast Growers
 Fast Growers: technology
 Comprised of smaller aggressive firms with high
earnings growth potential (>20% year)
 Risky as stock prices tumble at first sign of
negative earnings surprises
 Focus on:
 How will the firm sustain its high growth rate?
 How will this growth be financed?
 Is the firm maintaining its cash flow growth?
Cyclicals
 Cyclicals: automotive, building construction
 Firms whose sales and profits rise and fall with the
business cycle
 Focus on:
 Economic forecasts and where we are currently in
the economic cycle
 The firm’s internal conditions and management
 The firms financial ability to weather economic
downturns
Note: Watch for when earnings begin to rise after an
economic downturn. Although its PE will be high,
this is the best time to buy (assuming your
economic forecasts are correct)
Turnarounds
 Turnarounds: Industries in transition
• Firms with current internal weaknesses but external
opportunities which investors believe they can
recover from
• Due to typically high leverage and investor
pessimism, these generally are risky investments
but can be profitable investments if you get them
right
 Focus on:
• The firm’s specific plans to correct the problem/or
hire new management with turnaround experience
• Discussions with firm’s suppliers/customers
may provide information on the success and
timing of a turnaround
Asset Plays
 Asset plays:
• Firm’s with valuable assets that are hidden in the
balance sheet, i.e. land holdings, film libraries,
trademarks, patents, or subscribers
 Focus on:
• The value (intrinsic) of each major division (or
specific assets) on a stand-along basis. Compare
this to the current market price of the firm
• Other assets that may not be correctly priced by the
market, i.e., real estate, patents, etc.
3. Key Indices
 Here you pick the two best indices which best
represent the industry you are analyzing.
 For an company that is part of the S&P500, go to
IR-7A S&P 500 Benchmarks. Go to company data,
and it will tell you the Level 3 (industry) and Level
4 (sub-industry name). If you do not have an
S&P500 company, find a comparable company in
the same industry that is part of the S&P and look
up that company. Your industry information will
be the same.
 If you are doing a Level 3 industry, you will have
level 2 (industry group name) and level 3 (industry
name) information
Key Indices
 Check your indices to determine what information is
available, i.e., price, PE, dividend, etc.
 Most of the S&P Indices have price, PE, and
dividend information.
 Generally, you want indices in which the major
companies in your industry are included
 In the case of the Computer Industry, I chose the 4520-20-10 level 4 index, which is S5CMHW.
 In the case of the Beverage industry, I choose the 3020-10 Level 3 index, which is S5BEVG.
4. Recommendation
 This is where you put your reputation on the
line and state your recommendation
 This is where you determine, strategically, whether
this industry is a buy, hold, or sell.
Remember that you can have an attractive
company in an unattractive industry, and an
unattractive company in an attractive industry.
This is just your assessment of the industry.
 I consider the Computer Hardware Industry a hold,
as it is fast becoming a commodity/appliance type
product.
Unless a manufacturer can differentiate their
product, it will be difficult to maintain the higher
margins necessary for profitability
5. Description and Summary
 This is a short description and summary of the
industry
 Include a short but broad description to help the
reader understand the industry
 In addition, include one or two key points of your
analysis to support your recommendation from #4
above.
 In the Computer Hardward Industry, I discuss a
short description of the industry and the key areas
included. Then I review the key issues supporting
my “hold” recommendation, mainly the evolution
of the industry and the challenges it faces.
6. Competitive Structure
 Your competitive structure would include:
 Number of players in the industry
 Size of the various players
 Key items critical to the industry, i.e. drivers of
profitability
 Amount of international versus domestic
competition
 The computer industry is characterized by a few
manufactures that produce internationally, particulalry
in emerging markets as labor costs are critical. In
addition, I discuss the key areas of maintaining
profitability in the industry, i.e. Service and support.
7. Competitive Analysis Model
 You get to choose your competitive analysis
model
 Two most familiar are the SWOT analysis and
Porters 5 forces. Other models are available and
can be used. The choice is yours
The most important key is that you cover all the
important areas of industry analysis.
 In the Computer Hardware Industry example, I used
the SWOT framework which looked at both the shortterm and long-term analysis. Key was the ability to
specify the key drivers of profitability and key drivers
of risk.
8. Key Valuation Ratios to Watch
 Here you tell what you consider are the most
important valuations ratios to watch.
 Think through what are the key drivers of
profitability for the industry
Pick the ratios that best show differences in
those key drivers
Remember that these ratios will differ by
industry (and often country as well). Look in
specific sell-side reearch for key ratios that are
emphasized (see TT01)
 Key in the Computer industry is profitability. As
such, PE and PB are important. In addition, some
companies have high levels of cash, so you must
ensure earnings are from operations and not interest.
9. Key Items to Watch
 Here is what you should watched for this industry
 As you understand the key drivers of the industry,
try to understand key items to watch that allow you
to understand what is happening in the industry.
 In the Computer Industry, a key item is the Book to Bill ratio.
This measures industry new orders (new orders booked), to billing
(orders where they have requested payment).
• When this ratio is greater (less) than 1.0, it is
assumed that the industry is expanding
(contracting).
• Note that there are book to bill ratios in many of the
major countries, i.e., Japan, Taiwan, etc.).
10. Relative Performance versus the
Market and Economy
 This section shows how the industry has performed
versus a major market index (of your choice) and versus
economic growth
While this is more important for more mature
industries, it can be helpful for all industries
as it gives a historical snapshot of
performance versus specific benchmarks.
Example of Relative Performance versus the S&P 500 (in %):
02
03
04
05
06
07 YTD
SPX
33.1
28.3
20.9
-9.0
-11.9
-3.9
XCI
29.5
81.7
75.2
-35.0
-14.9
-12.4
Relative
-3.6
53.4
54.3
-26.0
-3.0
-8.5
GDP
4.3
4.6
4.2
4.1
1.1
1.0
Questions
 Any questions on the format of the analysis I
require for your Industry Report?
Review of Objectives
A. Do you understand the critical areas of the
global analysis framework, particularly
industry analysis?
B. Do you understand how to include industry
forecasts into your company report?
C. Do you understand where to find sources of
data for your international and domestic
industry prospects?
D. Did you understand the example of an
analysis of an industry, and the required
areas of your industry report?