INDUSTRY ANALYSISBY

AMLIN DAVID

Webster’s dictionary defines industry as “ a department or branch of a craft, art business, or manufacture.” And more specifically

A group of productive or profit making enterprises or organizations that have a similar technological structure of production and that produce or supply technically substitutable goods, services, or sources of income

What is an Industry?

1. Provides insight into the key sectors or subdivisions of overall economic activity that influence particular industries, and

2. To know the relative strength or weakness of particular industry or other groupings under specific sets of assumptions about that economic activity. The analyst with an economic forecast that he has developed from scratch, or a set of figures that he has developed from forecasts prepared by others is now ready to apply this information in an appropriate industry.

Usefulness of Industry Analysis

Industry classification by product does not present a terribly acute problem for the astute analyst when he is classifying firms with the basically one product or a homogeneous group of products. The problem worsens considerably, however, when he deals with a firm that has diversified its product line. Unfortunately, today the latter case is the rule rather than exception.

Industry classification by product

In order to provide an organized reporting framework for the vast amount of data collected by the federal government, the SIC was developed. The SIC is the statistical classification standard underlying all establishment based federal economic status classified by industry

Standard industrial classification

Industrial division Major groups

A Agriculture, forestry and fishing

01-09

B Mining 10-14

C Construction 15-17

D Manufacturing 20-39

E Transportation, communication, electric gas and sanitary services

40-49

F Wholesale trade-Durable goods

50-51

G Retail trade 52-59

H Finance, insurance and real estate

60-67

I Services 70-89

J Public administration

91-97

K Nonclassifiable establishments

99

The major groups detailed in the table and identified by two digit codes are further subdivided into three- digit industry groups and, finally, into four digit industries

Growth of the industry Profitability Nature of the product Nature of competition Government policies Availability of labor Research and development Index

Parameters of Industry Analysis

Another way of classifying industries is in a cyclical framework, that is how they react to upswings and downswings in the economy. The general classifications in the framework are growth, cyclical, defensive and cyclical growth.

Growth industries are generally characterized by expectations of abnormally high rates of expansion in earnings, often independent of the business cycle. Frequently this type of situation is associated with a major change in the state of technology or an innovative way of doing or selling something

Cyclical industries are considered to be those most likely to benefit from a period of economic prosperity and most likely to suffer from a period of economic recession.

Industry classification according to business cycle

Defensive industries are those, such as the food processing industry, hurt least in periods f economic downswing. Defensive industries often contains firms whose securities an investor might hold for income. Defensive stocks might even be considered countercyclical , because their earnings might very well expand while earnings of cyclical stocks are declining.

The investment press and brokerage firms have coined yet another classification, that of cyclical growth industries. Obviously, these possess characteristics of both a cyclical industry and growth industry

Past sales and earnings performance Permanence of the industry Attitude of government towards the industry Labor conditions within the industry Competitive conditions as reflected in any barriers to entry that

might exist Stock prices of firms in the industry relative to their earnings

Key characteristics in an Industry Analysis

The life of an industry can be separated into

1. Pioneering stage

2. Expansion stage

3. Stagnation stage

4. Decay stage

Industry life cycle

1. Federal government

2. Investment services

3. Standard & Poor’s

4. The value line

5. Forbes

6. Trade Publications

7. Funk and Scott Index

External sources of information for industry analysis

Securities analysis and portfolio management- Jonathan and Fisher

References

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