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Chapter 12

Chapter 12. Macroeconomic and Industry Analysis. Outline. Valuation approach Global economy The domestic economy Demand and supply shock Federal government policy Business cycles: the Macro Cycle Industry analysis and industry life-cycle; the Micro Cycle Competitive positioning.

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Chapter 12

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  1. Chapter 12 Macroeconomic and Industry Analysis

  2. Outline • Valuation approach • Global economy • The domestic economy • Demand and supply shock • Federal government policy • Business cycles: the Macro Cycle • Industry analysis and industry life-cycle; the Micro Cycle • Competitive positioning

  3. Framework of Analysis • Fundamental Analysis • Approach to Fundamental Analysis • Domestic and global economic analysis • Industry analysis • Company analysis • Top-down approach

  4. An alternative approach • Stock price is the present value of all future cash flows it generates to its holder • Factors influencing dividends: top down • Factors influencing discount rates • Risk free rate • Inflation • Risk aversion degree

  5. Global Economic Considerations • Foreign Demand • Foreign demand critical for US recovery from 2008 financial crisis • Exchange rate risk • Cheap $ helps US exports, while appreciation of $ hurts • Sales and Earnings • Stock returns

  6. Key Domestic Economic Variables • Gross domestic product • Unemployment rates • Interest rates & inflation • Impact on fix-income assets • Impact on stocks • Budget deficit • Government spending-Revenue • Sentiment • Consumer confidence • Business

  7. Demand Shocks • Demand shock - an event that affects demand for goods and services in the economy • Who demand goods? • Tax rate cut • Increases in government spending • Money supply • Foreign exports demand

  8. Supply Shocks • Supply shock - an event that influences production capacity or production costs • Basic commodity price changes (oil price) • Whether to agriculture

  9. Federal Government Policy • Fiscal Policy – • government spending and taxing actions • Direct policy • Slowly implemented

  10. Federal Government Policy (cont.) • Monetary Policy - manipulation of the money supply to influence economic activity • Tools of monetary policy • Open market operations • Discount rate • Reserve requirements

  11. Business Cycles-Macro Cycle • Business Cycle • Business cycle is the recurring pattern or recession and recovery

  12. Cyclical Indicators: Leading Leading Indicators - tend to rise and fall in advance of the economy Examples • Stock Prices: reflect anticipation of future • Money supply, New orders for goods: impact future

  13. Cyclical Indicators: Coincident Coincident Indicators - indicators that tend to change directly with the economy Examples • Industrial production • Manufacturing and trade sales

  14. Cyclical Indicators: Lagging Lagging Indicators - indicators that tend to follow the lag economic performance Examples • Average duration of unemployment

  15. Industry Analysis-sensitivity to business cycle • Sensitivity to business cycles • Factors affecting sensitivity of earnings to business cycles • Sensitivity of sales of the firm’s product to the business cycles • Defensive: Necessities (Grocery, Drugs, Medical), small/cheap items (Movies, DVD, tobacco) • Sensitive/Cyclical : big items and luxury ( house, car, jewels, premium brands) • Operating leverage (Fixed costs are fixed) • Financial leverage (interest payments are fixed)

  16. Industry Analysis: Industry Life Cycles(micro cycle) StageSales Growth Start-up Rapid & Increasing Consolidation Stable Maturity Slowing Relative Decline Minimal or Negative

  17. Industry analysis: Competitive environment • Porter’s five forces • Threat of entry • Rivalry between existing competitors • Pressure from substitute products • Bargaining power of buyers • Bargaining power of suppliers

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