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the top-down approach to market, industry, and company analysis (Chapter…

- - - - 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
    - - reach peaks or troughs before corresponding peaks or troughs in aggregate economic activity
- - - - 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
- - - - adolescence
        
        -market develops and becomes substantial
        -sales grow at increasing rate
        -limited competition (high margins)
        -profits explode
    - - adulthood
        
        -sales growth no longer accelerating
        -growth may be higher than GDP
        -high margins attract competitors
        -profit margins begin to decline
    - - birth
        
        -market for product or service is small
        -modest sales growth
        -negative profits (major development costs)
    - - middle age
        
        -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
    - - old age
        
        -sales growth declines due to shifts in demand or substitutes
        -profit margins squeezed
        -low profits or losses
        -low returns on capital
  - - - 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 if:
        -fewer suppliers
        -seller industry is more concentrated than buyer industry
        -supplier supplies critical input
        -supplier sells to several industries
        -few substitutes
    - - 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
    - - increases if:
        -large profit potential
        -substitutes that are close in price or function
        -more commodity-like product or service
    - - increases if:
        -equal size companies
        -slow growth
        -high fixed costs
        -exit barriers
  - - - financial firms: contraction induce lower inflation and interest rates
      - consumer staples: food, beverages, pharmaceuticals become better as it is necessity
      - expect defensive industries that are less sensitive to economic conditions
    - - 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
    - - capital goods (physical assets that a company uses in the production process to manufacture products and services