Transcript ch2097e
Chapter 20 Market And Industry Analysis ®1999 South-Western College Publishing 1 Market Analysis • 1st step in top-down analysis • Stock market most important factor in movement of individual stocks • Macro-economy most important factor related to movements in the stock market • Feedback loop between the macro-economy and the stock market – Market anticipates but also helps drive what happens in the real economy 2 ®1999 South-Western College Publishing Gross Domestic Product (GDP) • Most widely used measure of health of overall economy • Quarterly and Annually Figures • Value of All Goods and Services w/in a Country • Gross National Produce (GNP) • Components – C+I+G+(X-M) – Based on Keynesian economic theory – Structured to avoid “double-counting” of economic activities – Overstates role of consumption as proportion of total economic activity ®1999 South-Western College Publishing 3 Quarterly And Annual Data • Advanced Estimates – Quarterly • Preliminary Estimates • Revised Estimates • Benchmark Revisions – Covers past three years ®1999 South-Western College Publishing 4 Reporting GDP Jan. Feb. Mar. Quarter 1 Apr. May Advanced Estimate Preliminary Estimate ®1999 South-Western College Publishing June July Revised Estimate Benchmark Revision 5 Components Of GDP • Consumption • Investment • Government Spending • Net Exports Nominal GDP • Inflation Real GDP ®1999 South-Western College Publishing 6 Measuring Consumption 68% Components: • Durable Goods • Nondurable goods • Services Measures: • Car Sales • Retail Sales • Personal Income/Expenditures ®1999 South-Western College Publishing 7 Measuring Investment 13% Components: • Nonresidential – structures; equipment & software • Residential • Changes in private inventories Measures: • Housing Starts/Building Permits • Durable Goods Orders • New Home Sales • Construction Spending • Factory Orders/Business Inventories ®1999 South-Western College Publishing 8 • Measuring Government Spending – 18% – Incl. Federal (defense; nondefense) and State & Local government spending – Public construction • Measuring Net Exports – -4% – Includes exports vs. imports of goods & services – Merchandise trade balance • Measuring Inflation – Producer price index – Consumer price index ®1999 South-Western College Publishing 9 Measuring GDP 100% • Purchasing Managers’ Index • Employment • Industrial Production Capacity ®1999 South-Western College Publishing 10 Business Cycle • Trough – Low point • Peak – High point • Expansion – Before a peak • Contraction – After a peak • Movement around long-run trend ®1999 South-Western College Publishing 11 Composite Index • Coincident – Move directly with business cycle • Leading – Lead business cycle • Lagging – Lag business cycle ®1999 South-Western College Publishing 12 Leading Index Components Manufacturing Hours Unemployment Claims Vendor Performance Manufacturers’ New Orders Orders for Plant And Equipment Private Housing Units Money Supply ®1999 South-Western College Publishing Consumer Expectations Index of Stock Prices Sensitive Materials Prices Unfilled Orders 13 Coincident Index Components • Employees on Nonagricultural Payrolls • Personal Income less Transfer Payments • Index of Industrial Production • Manufacturing and Trade Sales ®1999 South-Western College Publishing 14 Lagging Index Components • Average Duration of Unemployment • Ratio of Manufacturing and Trade Inventories to Sales • Changes in Labor Costs per Unit of Output • Average Prime Rate • Commercial and Industrial Loans • Ratio of Installment Credit to Personal Income • Change in Consumer Price Index for Services ®1999 South-Western College Publishing 15 Federal Government and the Macro-economy • Fiscal Policy – taxation and spending policies of the government designed to achieve GDP growth, full employment, and stable prices • Civilian Unemployment Rate – Most heavily monitored statistic • Budget Deficits ®1999 South-Western College Publishing 16 Federal Reserve Bank and the Macro-economy • Created in 1913 • Monetary Policy – Money supply (M1,M2,M3) vs. interest rates – Recession vs. Inflation • Tools – Open Market Operations – Bank Discount Rate • Related to Federal Funds Rate – Bank Reserve Requirements ®1999 South-Western College Publishing 17 Economy And Financial Markets • Bond Market – Relationship between Yield to Maturity and GDP depends on relative impact of: • Inflation vs. • Risk of default • Stock Market – Leading indicator of trends in real GDP • Forward-looking • Also, impacted by monetary policy before rest of economy • Also affects rest of economy directly ®1999 South-Western College Publishing 18 Valuing The Overall Stock Market • Traditional measures for comparing values • Book Value – Ratio of stock’s price to book value (M/BV) • Dividends – Dividend yield = annual div. / current price • Earnings – P/E ratio – E/P ratio = “earnings yield” ®1999 South-Western College Publishing 19 Valuing The Overall Stock Market • Compare measures to: • Other values / yields throughout economy – Bond yields vs. stock yields • Historical values • But “context-dependent” – – – – – Attitudes Fiscal and economic environment Composition of market / index All change over time Cause relative values to change ®1999 South-Western College Publishing 20 Industry Analysis • The second step in the three-step fundamental analysis procedure • The first step is the macroanalysis of the stock market • The last step is to analyze individual companies and stocks in light of the market and industry forecasts ®1999 South-Western College Publishing 21 Links Between the Economy and Industry Sectors • Identify and monitor key assumptions and variables • Economic trends are either – Cyclical - up and down with business cycle – Structural - major change • Combined changes have implications for the industry being analyzed • Switching from one industry group to another over the course of a business cycle is known as a rotation strategy ®1999 South-Western College Publishing 22 The Stock Market and the Business Cycle ®1999 South-Western College Publishing 23 The Stock Market and the Business Cycle peak trough ®1999 South-Western College Publishing 24 The Stock Market and the Business Cycle Basic Industries Excel Consumer Durables Excel Financial Stocks Excel ®1999 South-Western College Publishing trough peak Consumer Staples Excel Capital Goods Excel 25 Cyclical Economic Factors • • • • Inflation Interest rates International economics Consumer sentiment ®1999 South-Western College Publishing 26 Structural Economic Changes and Alternative Industries • Social Influences – Demographics – Lifestyles • Technology • Politics and regulations – Economic reasoning – Fairness – Regulatory changes affect numerous industries – Regulations affect international commerce ®1999 South-Western College Publishing 27 Theme Investing • Based on identifying emerging trends, such as: – Technology – Aging population – Freer trade and developing-country growth • Identification of themes provides insight into industry analysis ®1999 South-Western College Publishing 28 Valuing The Overall Industry • Similar to valuing overall stock market • Look at: • Book Value – Value relative to industry’s total book value • Dividends – Compute dividend yield for the industry • Earnings – P/E ratio – E/P ratio – Compare to industry’s total earnings ®1999 South-Western College Publishing 29 The Earnings Multiple Technique • Estimating earnings per share – start with forecasting sales per share • Industrial life cycle • Input-output analysis • Industry-aggregate economy relationship – earnings forecasting and analysis of industry competition • competitive strategy • competitive environment • industry operating profit margin • industry earnings estimate • industry earnings multiplier ®1999 South-Western College Publishing 30 Industry Life Cycle • Pioneering development • Rapidly accelerating industry growth • Mature industry growth • Stabilization and market maturity • Deceleration of growth and decline ®1999 South-Western College Publishing 31 Input-Output Analysis • Identify suppliers and customers • Future demand from customers • Ability of suppliers to provide goods and services required • Extended to global industries, include worldwide suppliers and customers ®1999 South-Western College Publishing 32 The Industry-Economy Relationship • Compare industry sales to aggregate economic series related to the goods and services provided by the industry ®1999 South-Western College Publishing 33 Competitive Structure of an Industry • Determines what average EPS levels will be • Porter’s Competitive Forces – Rivalry among existing competitors – Threat of new entrants – Threat of substitute products – Bargaining power of buyers – Bargaining power of suppliers ®1999 South-Western College Publishing 34