the top-down approach to market, industry, and company analysis (Chapter 9)
market analysis
examine the attractiveness of a particular market
macroanalysis of the relationship between the aggregate securities markets and the aggregate economy
specific micro valuation of the stock market employing the valuation approaches
indicators
coincident indicators
lagging indicators
leading indicators
reach peaks or troughs before corresponding peaks or troughs in aggregate economic activity
have peaks or troughs that roughly coincide with the peaks and troughs in the business cycle
experience their peaks and troughs after those of the aggregate economy
microvaluation analysis: calculate an actual estimate of the value of the market
free cash flow to the equityholder (FCFE) model
relative valuation
estimate of next year's cash flows
discount rate
interest expense
-interest expense - operating profit
tax rate
operating margin
-operating profit = sales per share x operating margin
discount rate
growth rate of sales per share
industry analysis
structural impacts
life cycle of the industry
cyclical impacts
competitive forces within an industry (Porter analysis)
*business cycle
recession (contracts)
recovery (recovers from the prior expansion to reach the prior peak)
peaks
expansion (grows further)
*sector rotation
-monitor economic trends
-attempt to move their investments from one sector (or industry within a sector) to another sector (or industry) as economic trends change
financial firms: contraction induce lower inflation and interest rates
investors prefer materials and technology industries
cyclical industries: consumer durables, luxury items
equipment manufacturers become attractive as modernising, renovating, and buy new equipment will be more
consumer staples: food, beverages, pharmaceuticals become better as it is necessity
expect defensive industries that are less sensitive to economic conditions
capital goods (physical assets that a company uses in the production process to manufacture products and services
lifestyles
technology
demographics
politics and regulation
rapid accelerating growth
mature growth
pioneering development
stabilisation/market maturity
deceleration of growth / decline
birth
adolescence
adulthood
middle age
old age
-market for product or service is small
-modest sales growth
-negative profits (major development costs)
-market develops and becomes substantial
-sales grow at increasing rate
-limited competition (high margins)
-profits explode
-sales growth no longer accelerating
-growth may be higher than GDP
-high margins attract competitors
-profit margins begin to decline
-growth declines to GDP growth rate
-profit margins vary by industry
-controlling costs becomes more important
-competition and low margins brings returns on capital down to cost of capital
-sales growth declines due to shifts in demand or substitutes
-profit margins squeezed
-low profits or losses
-low returns on capital
bargaining power of buyers
bargaining power of suppliers
threat of new entrants
threat of substitute products or services
rivalry among existing firms
increases if:
-equal size companies
-slow growth
-high fixed costs
-exit barriers
increases if:
-large profit potential
-substitutes that are close in price or function
-more commodity-like product or service
increases if:
-fewer suppliers
-seller industry is more concentrated than buyer industry
-supplier supplies critical input
-supplier sells to several industries
-few substitutes
increases if:
-buyer accounts for large % of your sales
-buyer has knowledge of seller's profits
-product accounts for large % of buyer's cost
-many sellers
increases with low barriers to entry:
-high profit margins
-small financial resources needed to compete
-no economies of scale
-distribution channel that is easy to build
-low switching costs
-no government licensing requirements
-unlimited access to materials
global industry analysis
final questions in the fundamental analysis procedure
intrinsic value of the firm's stock
intrinsic value compare with the market value
best companies within desirable industries
firm competitive strategies
low cost strategy
differentiation
offensive
focusing a strategy
defensive
tenets of warren buffet
management tenets
financial tenets
business tenets
market tenets
does the business have a consistent operating history
does the business have favourable long-term prospects
is the business simple and understandable
is management candid with its shareholders
does management resist the institutional imperative
is management rational
calculate owner earnings
look for companies with high profit margins
focus on return on equity
for every dollar retained, make sure the company has created at least one dollar of market value
what is the intrinsic value of the business
can the business be purchased at a significant discount to its fundamental intrinsic value