PRESENTED TO : SIR ALLAH BAKASH KHAN
PRESENTWD BY :
MUBASHIR ALI
IQRA SHAHZAD
JHANZAIB SALEEM
HASEEB ARIF
UZAIR BHATI
UJALA ASHIQ
S.M WAJIH
#43
#27
#25
#39
#54
#52
#29
Overview
 Difference between the returns for alternative industries during specific
period
 Performance of the firms within an industry consistently
 Difference in risk among industries
 Risk for individual industries over time
 Industries differ in terms of their return on assets
 Unique factors that must be considered in global industry analysis
 Stages of industry life cycle
 Estimation procedure for the operating profit
 Other relative valuation ratios
 P/BV
 P/CF
 P/S
 Industry/Market
 Global Industry Analysis
 Industrial Analysis using the relative valuation approach
 Microanalysis of Industries
 Five basic competitive forces
Why do Industry Analysis?
• Helps to find profitable investment opportunities.
• top-down plan for valuing individual companies and selecting stocks
for a portfolio.
What Do We Learn From Industry Analysis?
 Do firms within an Industry show consistent performance over time?
 Is there a difference in the risk for alternative industries?
 Doe the risk for individual Industries vary or does it remain relatively
constant over time?
Cross-Sectional Industry Performance
 Performance varies from year to year
 Wide dispersion in rates of return in different industries
Industry Performance Over Time
 Variables that affect industry performance change over time
 Research: there is almost no association in individual industry performance year
to year
OR
Sequential rising or falling markets
Performance Of The Companies Within an Industry
 There is wide dispersion in the performance of companies within an
industry
 This reinforces the need for company analysis in addition to industry analysis
Differences in Industry Risk
• A large range of risks presence among different industries at the same time at
the same point
• These risks might fluctuate during the rising and falling of market
• Different risks measures different industries substantial dispersion at a period
of time, where as individual company risk measures are stable during that time
The Business Cycle and Industry Sector
 Industry performance affect by economical change.
 Our main objective is to monitor how economy information impact the short-run
and long-run industry valuation.
 Forms of Economy Trends
 There are two forms of Economy Trend
 Cyclical Changes : The changes that arise from the ups and downs of the
business cycle.
 Structural Changes : The change that arise from the major change of the
business cycle.
 Downsizing of an industry is an example of structural Change.
 For industry review we have to examine structural economic changes.
 Business cycle is helpful for determining Future Market and Industry Performance.
Rotation Strategy : It is the movement of money from one industry sector to
another.
Economics Variables
Inflation : Higher the inflation cause higher market interest rates and more uncertainty
about future price and cost.
Inflation does not effect Natural Resource Industry because there output will likely
sell at higher price
Interest Rates : Financial institutions, including banks are impacted by higher
rates because it is difficult to pass higher rate to customer.
Higher interest rate clearly harm the housing and constructing business.
International Economics : Domestic and international events affect by the
value of U.S Dollar.
Consumer Sentiments : The performance of consumer cyclical industry will be
affected by changes in consumer sentiment and by consumer willingness and
ability to borrow and spend money.
The Stock Market and
the Business Cycle
Structural Economic Changes and Alternative
Industry
Business Environment is also impacted by different factors.
Demographics : The United States has had a baby boom and a baby bust and is now
enjoying a baby boom let as members of the baby boom generation (those born
between the end of World War II and the early 1960s) have children.
Life Style : Lifestyles deal with how people live, work, form households, consume,
enjoy leisure, and educate themselves. Consumer behavior is affected by trends and fads.
Technology : Technology affect Structural change . New Technology cause major
change in the industries.
Political and Regulations :
Because political change reflects social values, today’s social trend may be
tomorrow’s law, regulation, or tax.
 Some regulations and laws are based on Economic Reasoning.
 Regulatory changes have affected numerous industries.
 Regulations and laws affect international commerce. International tax laws,
tariffs, quotas, embargoes, and other trade barriers have a significant effect on
some industries and global commerce.
EVALUATING THE INDUSTRY LIFE CYCLE
A FIVE-STAGE MODEL WOULD INCLUDE IN THIS INDUSTRY LIFE CYCLE
ANALYSIS:
 PIONEERING DEVELOPMENT
 RAPID ACCELERATING GROWTH
 MATURE GROWTH
 STABILIZATION AND MARKET MATURITY
 DECELERATION OF GROWTH AND DECLINE
.
1 Pioneering development
During this start-up stage, the industry experiences modest sales growth and very
small or negative profits.
The market for the industry’s product or service during this stage is small, and
the firms incur major development costs.
2. Rapid accelerating growth
During this rapid growth stage, a market develops for the product or service and
demand becomes substantial.
The limited number of firms in the industry face little competition, and firms can
experience substantial backlogs and very high profit margins.
3
. Mature growth
success in Stage 2 has satisfied most of the demand for the industry goods or service.
future sales growth may be above normal, but it no longer accelerates.
the rapid growth of sales and the high profit margins attract competitors to the industry,
causing an increase in supply and lower prices, which means that the profit margins
begin to decline to normal levels.
4. Stabilization and market maturity
This is probably the longest phase, the industry growth rate declines to the growth rate of
the aggregate economy or its industry segment.
During this stage, investors can estimate growth easily because sales correlate highly with
an economic series
Sales grow in line with the economy, profit growth varies by industry because the
competitive structure varies by industry, and by individual firms within the industry
because the ability to control costs differs among companies.
. 5. Deceleration of growth and decline
At this stage of maturity, the industry’s sales growth declines because of shifts in
demand or growth of substitutes.
Profit margins continue to be squeezed, and some firms experience low profits or
even losses.
Finally, investors begin thinking about alternative uses for the capital tied up in
this industry.
ANALYSIS OF INDUSTRY COMPETITION
Competition and Expected Industry Returns
Porter’s concept of competitive strategy is described as the search by a firm
for a favorable competitive position in an industry.
a firm must first examine the basic competitive structure of its industry
because the potential profitability of a firm is heavily influenced by the
profitability of its industry.
After determining the competitive structure of the industry, you examine the
factors that determine the relative competitive position of a firm within its
industry. In this section, we consider the competitive forces that determine
the competitive structure of the industry.
Basic Competitive Forces
Porter believes that the competitive environment of an industry (the intensity of
competition among the firms in that industry) determines the ability of the firms to
sustain above-average rates of return on invested capital.
1.Rivalry among the existing competitors
 Rivalry increases when many firms of relatively equal size compete in an industry.
When estimating the number and size of firms, be sure to include foreign competitors.
 slow growth causes competitors to fight for market share and increases competition.
 High fixed costs stimulate the desire to sell at the full capacity, which can lead to price
cutting and greater competition
 Finally, look for exit barriers, such as specialized facilities or labor agreements. These
can keep firms in the industry despite below-average or negative rates of return.
2. Threat of new entrants
 you must determine the likelihood of firms entering the industry and increasing
competition.
 High barriers to entry, such as low current prices relative to costs, keep the threat of
new entrants low.
 high costs of switching products or brands, such as those required to change a
computer or telephone system, keep competition low.
3. Threat of substitute products
 Substitute products limit the profit potential of an industry because they limit the prices
firms in an industry can charge.
 you must determine how close the substitute is in price and function to the product in
your industry
4. Bargaining power of buyers
 Buyers can influence the profitability of an industry because they can bid down prices
or demand higher quality or more services by showing a propensity to switch among
competitors.
 Buyers become powerful when they purchase a large volume relative to the sales of a
supplier.
5.Bargaining power of suppliers
 Suppliers can alter future industry returns if they increase prices or reduce the quality
of the product or the services they provide.
 The suppliers are more powerful if there are few of them and if they are more
concentrated than the industry to which they sell.
Estimating Industry Rates of Return
•
Present value using required rate of return for the
equity in the industry
•
Valuation using the reduced form DDM
D1
Pi 
kg
Pi = the price of industry i at time t
D1 = the expected dividend for industry i in
period 1 equal to D0(1+g)
k = the required rate of return on the equity for
industry i
g = the expected long-run growth rate of
earnings and dividend for industry i
Estimating the Required Rate of Return
 Influenced by the risk-free rate
 Expected inflation rate
 Risk premium for the industry versus the market





business risk (BR)
financial risk (FR)
liquidity risk (LR)
exchange rate risk (ERR)
country political risk (CR)
 Or compare systematic risk (beta) for the industry to the market beta of 1.0
By using (CAPM)
𝒌𝒊 = 𝑹𝒇 + 𝒃(𝑹𝒎 − 𝑹𝒇)
Estimating the Expected Growth Rate
 g= 𝑓(retention rate + return on equity)
 Earnings retention rate of industry compared to
the overall market
 Return on equity is a function of
 the net profit margin
 total asset turnover
 a measure of financial leverage
ROE = net profit margin * total assets turnover * financial
leverage.
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
= 𝑠𝑎𝑙𝑒𝑠
𝐸𝑞𝑢𝑖𝑡𝑦
𝑠𝑎𝑙𝑒𝑠
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑒𝑞𝑢𝑖𝑡𝑦
∗ 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠*
Earnings Multiplier for the S&P Industrial index
and Retail industry and Influential
variables:(1993-2009)
ROE Estimate based on total period averages
(1993-2009)
Time series plot of return on equity for
the S&P Industrial index and Retail
industry
Industry Valuation Using the Free Cash
Flow to Equity (FCFE) Model
FCFE is defined as follows:
Net income
+ Depreciation
- Capital expenditures
- D in working capital
- Principal debt repayments
+ New debt issues
Industry Valuation Using the Free Cash
Flow to Equity (FCFE) Model
 The Constant Growth FCFE Model
FCFE1
V
kg
 The Two-Stage Growth FCFE Model
Industry analysis using the
relative valuation
Relative valuation
Relative valuation model is the business valuation method that’s compares a
company’s value to that of its competitors or industry peers to assess the
financial worth.
The earnings multiple technique
The earnings multiplier, also called the price-to-earnings ratio (P/E), is a valuation
method used to compare a company’s current share price to its per-share earnings.
Earnings Multiplier = Market value per share / Earnings Per Share (EPS)
Estimating earning per share
 Earnings per share is a measure of how much profit a company has generated.
EPS is calculated as follows:
 EPS = net income –dividend to preferred stock/ no of shares outstanding common
shares
 Forecasting sales per share
 Time series analysis
 Input output analysis
 Industry economy relationship
Industry profit margin forecast
 The profit margin is a ratio of a company's profit divided by its revenue.
It's always expressed as a percentage. It tells you how well a company uses
its income.
 A high ratio means the company generates a lot of profit for every dollar of
revenue.
 A low percentage means the firm's high costs reduce the profit for each
dollar of income.
The industry operating profit margin
 Operating margin measures how much profit a company makes on a dollar
of sales, after paying for variable costs of production such as wages and
raw materials, but before paying interest or tax.

It is calculated by dividing a company's operating profit by its net sales.

Regression analysis
Regression analysis is a powerful statistical method that allows you to examine
the relationship between two or more variables of interest. While there are
many types of regression analysis.
 Time series analysis
Time series analysis comprises methods for analyzing time series data in order to
extract meaningful statistics and other characteristics of the data. Time series
forecasting is the use of a model to predict future values based on previously
observed values
Industry profit margin forecast
Interest expense is a function of financial leverage and interest rates
1. Calculate the annual total asset turnover (TATO)
2. Use your current sales estimate and an estimate of TATO to estimate
total assets next year
3. Calculate the annual long-term (interest bearing) debt as a percent of
total assets,
4. Estimate long-term debt for the next year
Profit margin and component expenses for the
S&P industrial and retail industry
Time series plot of the operating profit margin for the
S&P industrial and retail industry(1993-2009)
Industry Tax Rates:
Tax rate differ B/w industries.
Example:
oil industry, in which heavy depletion allowances
cause lower taxes.
Assume :
Tax law changes are consistent across industries.
Examine the relationship :
 tax rates over time for your industry and the
 aggregate market to determine if you can use regression analysis
in your estimation process.
Time series plot of effective tax rate for the industrial
and retail industry 1993-2009
Estimated tax rate:
Multiply the EBT per share value by (1 −tax rate ) to get EPS.
Estimating EPS
 Examine the industry’s net profit margin as a
check on your EPS estimate.
Time series plot of net profit margin for the industrial and
retail industry 1993-2009
An Industry Earnings Estimate Example





An initial estimate that would be modified based on his or her
industry knowledge, current events, and expectations of unique
factors.
Relationship was between RET industry & PCE.
OPM & RET industry recover.
Decline duration.
Tax rate for RET industry consistently.
Estimating an industry earnings multipliers
Using two alternative techniques
Macro analysis :
Examine relationship B/w multiplier for industry and market.
Microanalysis:
Estimate the multiplier by examining specific variable that
influence
Macro analysis of an industry multiplied:
why a relationship
Relationship :between the earnings multiplier (P/E ratio) for an industry
to the P/E for the aggregate market.
Expect a relationship based on the variables that influence the
multiplier—
The required rate of return,
 the required rate of return (k) is a function of the
 nominal risk-free rate (which is the same for all investments) plus a
risk premium, which 1isthe major reason for differences, in k
 Risk premium differ B/w market and industry.
Rate of growth (g)
A.
B.
May differ from market.
In level of the Price Earning ratio.
changes in the P/E ratio for the aggregate market and for alternative
industries are caused by changes in the k − g spread.. coz two
variables move together.
Expected growth rate of earnings and dividends for industry. (g)
Greater the earnings growth, the better. When the dividend payout ratio
is the same, the dividend growth rate is equal to the earnings growth
rate.
Microanalysis of an industry multiplier
Market multiply by estimating a range of value for three variable
1.
2.
3.
Divided payout ratio
Required rate of return for industry (k)
Expected growth rate of earnings and dividends for industry. (g)
Time series plot of Annual average future earnings multiplier
for the industrial and retail industry 1993-2009
Determine the multiplier ND derived a range of
p/E ratios that used with our EPS
 Estimate variables influence the industry earnings multiplier and
compare them compared able value for market P/E.
 Comparing dividend payout Ratios.
 Comparing the Required rate of return.
Other Relative Valuation Ratios
In this section we will consider the other three relative valuation ratios and compare their
performance over time.
Calculations employ the avg. Annual price and future book value, cash flow and sales.
Examine
1- long run industry-market relationship+ ∆ in relationship
2- ∆ in relationship that can explained based upon factors that should determine the
relative valuation ratio.
Input for relative valuation ratios (1993-2009)
Relative valuation ratios 1993-2008
The Price/The Book Value Ratio
The price to book value ratio explain that raise in price ultimately shows the
relationship between the increase in price upwards the book value increases.
The graph shows the decline in price to book value from year 1999 towards 2003.
Notably the relationship between the industry and the market has typically shown the
market p/bv ratio larger than or equal to the RET industry ratio. The ratios were equal
in 2008 at the lowest values since 1993.
During the last five year, the ROE for the industry has been larger than for the market,
but the cost of equity for the industry is also higher (beta=1.10) this continuesly
between ROE and risk implies that the p/bv ratio for the industry should be similar to
the market.
Time series plot of price/book value ratio
The Price/Cash Flow Ratio
The price to cash flow ratio is similar to the price to equity ratio because it is
driven by the growth rate and the stability of the cash flow series.
The figure 13.22 also shows that the growth rate on industry CF has consistently
been higher than the market in CF (over 14% towards about 5%). Also, the
growth of the industry CF series was more consistent than the market’s growth.
Therefore the P/CF ratio is in right direction (the industry ratio is larger).
Time series plot of price/cash flow ratio
The Price/Sales Ratio
The figure shows that the P/S ratio for the aggregate market has always been substantially
higher in terms of the mean values(0.72 v/s 1.30)
The P/S ratio should be impacted by three factors.
1- sales growth rate
2- the uncertainty (risk) of sales growth
3- the profitability of sales
The results shows.
1- the industry experienced a higher rate of growth for sales during the recent years.
2-both the industry and the market experienced relatively low volatility in sales growth
3- the profit margin has always been higher for the market, but the difference is
appropriate.
Time series plot of price/sales ratio
Summary of Industry/Market Ratios
Exhibit 13.27 shows the results Indicates the investor’s assessment of
the industryof the industry relative to the market declined slightly over
time because all the industry-market relative ratios have declined.
Only the price/CF ratio for the industry is above the market.
Industry has higher growth rates for all these variables and generally
lower risk characteristics, this indicates that possible the industry is
undervalued relative to the aggregate stock market.
Global Industry Analysis
Because of many active firms in foreign market and because of promotion of
foreign sales is growing for many firms it is necessary to consider the effect of
foreign firms on industry return.
The following major factors need to be analyzed in this context.
>The macro-envoirment in the major producing and consuming countries for an
industry.this will impact demand from these countries.
> the overall Analysis of global significant companies in the industry, the
products they produce and how successful they are in terms of the Dupont
three-component analysis.
Dupont anysis consists of
Profit margin
Total assets turnover
Financial leverage
>Regarding company's different accounting methodology it is not possible to
directly compare many ratios across countries but only to examine them over
time within a country.
This problem can be reduced as the international accounting standard grows.
Summary
>Several studies examined industry performance band risk. They found wide
dispersion in the performance of alternative industries during specified time
periods implying that industry analysis can help identify superior investment.
>They also show the inconsistent performance over time implying that
looking at only past performance of an industry has little value in projections
future performance.
>The analysis of industry risk indicated wide dispersion in the measure of
risk for different industries but strong consistently in the risk measure over
time for individual industries.
Time series plot of retail/industrial ratios
The good news is that past risk measure are useful when estimating
future risk.
> We discussed and demonstrate both approach to the valuation of the
RET industry. The present value of cash flow models indicated a fairly
wide range of values.
> The four relative valuation ratio techniques that provides a range of
results including the two step multiple technique.
>Industry Analysis needs to be check on global scale and must evaluate
the effect of world supply, demand and cost components of an industry
also consider the exchange rate on the total industry and the forms
within it.