Portfolio Management LECTURE THREE FUNDAMENTAL ANALYSIS (INDUSTRIES AND COMPANIES) Prepared By: Noorulhadi Qureshi Lecturer Govt College of Management Sciences Peshawar
Industry & Company Analysis• Company can be characterized as belonging to an industry. The performance of companies would, therefore, be influenced by the fortune of the industry it belongs.• An Analyst has to undertake an industry analysis so as to study the fundamental factors affecting the performance of different industries.
Industry & Company Analysis• An Industry is generally described as a homogenous group of companies. Or group of firms producing reasonably similar products which serves the same needs of common set of buyers.• Industry analysis refers to an evaluation of the relative strengths and weaknesses of particular industries.
Industries are traditionally classified on the basis of product STEEL PHARMACEUTICAL OIL AND GAS INDUSTRIES TEXTILE CEMENT
Product life-cycle (PLC) Like human beings, products also have an arc. From birth to death, human beings pass through various stages e.g. birth, growth, maturity, decline and death. A similar life-cycle is seen in the case of products. The product life cycle goes through multiple phases, involves many professional disciplines, and requires many skills, tools and processes. Product life cycle (PLC) has to do with the life of a product in the market with respect to business/commercial costs and sales measures. To say that a product has a life cycle is to assert three things:The four main stages of a products life cycle and the accompanying characteristics are:StageCharacteristics1. Market introduction stage2. Growth stage3. Maturity stage4. Saturation and decline stage
The four main stages of a products life cycle and the accompanying characteristics are:Stage Characteristics1. Market introduction stage• costs are very high• slow sales volumes to start• little or no competition• demand has to be created• customers have to be prompted to try the product• makes no money at this stage
2. Growth stage• costs reduced due to economies of scale• sales volume increases significantly• profitability begins to rise• public awareness increases• competition begins to increase with a few new players in establishing market• increased competition leads to price decreases
3. Maturity stage• costs are lowered as a result of production volumes increasing and experience curve effects• sales volume peaks and market saturation is reached• increase in competitors entering the market• prices tend to drop due to the proliferation of competing products• brand differentiation and feature diversification is emphasized to maintain or increase market share• Industrial profits go down
4. Saturation and decline stage• costs become counter-optimal• sales volume decline• prices, profitability diminish• profit becomes more a challenge of production/distribution efficiency than increased sales
Definition of Industry LifecycleA concept relating to the different stages an industry will go through, from the first product entry to its eventual decline.• A form of fundamental analysis involving the process of making investment decisions based on the different stages an industry is at during a given point in time. The type of position taken will depend on firm specific characteristics, as well as where the industry is at in its life cycle.
Industry Life Cycle• According to Julius Grodinsky industry life cycle theory-the life of an industry can be segregated into the-• Pioneering Stage• Expansion Stage• Stagnation Stage• Decay Stage
Introduction stage/ Pioneering Stage:• This is the first stage in the industrial life cycle of a new industry where the technology as well as the product are relatively new and have not reached a state of perfection. The pioneering stage is characterized by rapid growth in demand for the output of industry. As a result, there is a great opportunity for profit & highly risk. It’s also called sunrises industries. For example, ‘a leasing industry’ Computer Software & information technology etc.
Growth stage /Expansion Stage:• This is second stage of expansion or growth and survived the pioneering stage. The stage of an industry are quite attractive for investment purposes. Investors cab get high returns at low risk because demand exceeds supply in the this stage. Companies will earn increasing amounts of profits and pay attractive dividends.
Maturity stage/Stagnation Stage:• This is the third stage in the industry life cycle. In this stage, the growth of the industry stabilizes. The ability of the industry to grow appears to have been lost. sales may be increasing but at a slower rate than that experienced by competitive industries or by the overall economy. For example, Desktop PC Computers.
Decline stage/ Decay Stage:• From the stagnation sage the industry passes to the decay stage. This occurs when the products of the industry are no longer in demand. New products and new technologies have come to the market. Customers have change their habits, style and liking. As a result, the industry becomes obsolete and gradually ceases to exist. Thus, changes in social habits, changes in technology and declining demand are the causes of decay of an industry.
• The industry life cycle approach has important implications for the investor. It gives an insight into the apparent of investment in given industry a t a given time. In fact, each development stage is unique and exhibits different characteristic
Cost Structure Industry Analysis includes the cost structure of the industry i.e Fixed Cost and Variable Cost Variable Cost Fixed Cost The lower the proportion of The higher the fixed cost fixed cost relative to Component. The higher is variable cost, lower wouldthe sales volume necessary be the break-even point.To achieve break-even point. Lower break even point provides higher margin of safety. An analyst would consider lower break even point industry For his investment.