Chap 017

CHAPTER 17
Macroeconomic and Industry

Analysis
INVESTMENTS | BODIE, KANE, MARCUS

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
17-2
Fundamental Analysis
• A firm’s value comes from its
earnings prospects, which are
determined by:
– The global economic environment
(stability, exchange rate, inflation,
growth…)
– Economic factors affecting the
firm’s industry
– The position of the firm within its
industry
17-3
Table 17.1 Economic Performance

17-4
The Domestic Macroeconomy

• Stock prices rise with earnings.
• P/E ratios are normally in the range of 12-
25.
• The first step in forecasting the
performance of the broad market is to
assess the status of the economy as a
whole.

17-5
Figure 17.2 S&P 500 Index versus Earnings

Per Share

17-6
The Domestic Macroeconomy:

Key Variables
• Gross domestic product
• Unemployment rates
• Inflation
• Interest rates
• Budget deficit
• Consumer sentiment

17-7
Demand and Supply Shocks
• Demand shock - an • Supply shock - an

event that affects event that influences
demand for goods production capacity or
and services in the production costs
economy

17-8
Demand-side Policy
• Fiscal policy – the government’s spending
and taxing actions
• Monetary policy – manipulation of the

money supply
• Inflation

17-9
Supply-Side Policies
• Goal: To create an environment in
which workers and owners of capital
have the maximum incentive and
ability to produce and develop goods.
• Supply-siders focus on how tax policy

can be used to improve incentives to
work and invest.

17-10
Business Cycles
• The transition points across cycles are
called peaks and troughs.
– A peak is the transition from the end of
an expansion to the start of a
contraction.
– A trough occurs at the bottom of a
recession just as the economy enters a
recovery.

17-11
Figure 17.10 A Stylized Depiction of the

Business Cycle

17-12
The Business Cycle

Cyclical Industries Defensive Industries
• Above-average sensitivity • Little sensitivity to the
to the state of the business cycle
economy. • Examples include food
• Examples include producers and
producers of consumer processors,
durables (e.g. autos) and pharmaceutical firms, and
capital goods (i.e. goods public utilities
used by other firms to • Low betas
produce their own
products.)
• High betas
17-13
Economic Indicators
• Leading indicators tend to rise and fall
in advance of the economy.
• Coincident indicators move with the
market.
• Lagging indicators change subsequent
to market movements.

17-14
Figure 17.4 Indexes of Leading,

Coincident, and Lagging Indicators

17-15
Economic Calendar
• Many sources, such as The Wall Street
Journal and Yahoo! Finance, publish the
public announcement dates of various
economic statistics.

17-16
Figure 17.5 Economic Calendar at

Yahoo!

17-17
Industry Analysis
• It is unusual for a firm in a troubled
industry to perform well.
• Economic performance can vary

widely across industries.
• Sensitivity to business cycle

17-18
Figure 17.6 Return on Equity, 2009

17-19
Figure 17.7 Industry Stock Price Performance,

2009

17-20
Defining an Industry
• North American Industry

Classification System, or NAICS
codes
• Firms with the same four-digit NAICS

codes are commonly taken to be in
the same industry.

17-21
Sensitivity to the Business Cycle
1. Sensitivity of sales:
• Three factors
• Necessities vs.
determine discretionary goods
how sensitive • Items that are not
a firm’s sensitive to income
earnings are levels (such as tobacco
to the and movies) vs. items
business that are, (such as
cycle. machine tools, steel,
autos)
17-22
Figure 17.9 Industry Cyclicality

17-23
2. Operating • Firms with low operating

leverage : leverage (less fixed assets)
the split are less sensitive to
between business conditions.
fixed and • Firms with high operating
variable leverage (more fixed
costs assets) are more sensitive
to the business cycle.

17-24
Table 17.6 Operating Leverage of Firms A and B

Throughout the Business Cycle

17-25
3. Financial • Interest is a fixed cost

leverage: that increases the
the use of sensitivity of profits to
borrowing the business cycle.

17-26
Industry Life Cycles

Stage Sales Growth
• Start-up • Rapid and
• Consolidation increasing
• Maturity • Stable
• Relative Decline • Slowing
• Minimal or
negative

17-27
Figure 17.12 The Industry Life

Cycle

17-28
Industry Structure and Performance:

Five Determinants of Competition
1. Threat of entry
2. Rivalry between existing competitors
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of suppliers

Chap 017

Uploaded by

Copyright:

Available Formats

Chap 017

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 017

Uploaded by

Copyright:

Available Formats

CHAPTER 17

Macroeconomic and Industry

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.1 Economic Performance

INVESTMENTS | BODIE, KANE, MARCUS

The Domestic Macroeconomy

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.2 S&P 500 Index versus Earnings

INVESTMENTS | BODIE, KANE, MARCUS

The Domestic Macroeconomy:

INVESTMENTS | BODIE, KANE, MARCUS

Demand and Supply Shocks

• Demand shock - an • Supply shock - an

INVESTMENTS | BODIE, KANE, MARCUS

• Monetary policy – manipulation of the

INVESTMENTS | BODIE, KANE, MARCUS

• Supply-siders focus on how tax policy

INVESTMENTS | BODIE, KANE, MARCUS

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.10 A Stylized Depiction of the

INVESTMENTS | BODIE, KANE, MARCUS

The Business Cycle

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.4 Indexes of Leading,

INVESTMENTS | BODIE, KANE, MARCUS

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.5 Economic Calendar at

INVESTMENTS | BODIE, KANE, MARCUS

• Economic performance can vary

• Sensitivity to business cycle

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.6 Return on Equity, 2009

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.7 Industry Stock Price Performance,

INVESTMENTS | BODIE, KANE, MARCUS

• North American Industry

• Firms with the same four-digit NAICS

INVESTMENTS | BODIE, KANE, MARCUS

Sensitivity to the Business Cycle

Figure 17.9 Industry Cyclicality

INVESTMENTS | BODIE, KANE, MARCUS

Sensitivity to the Business Cycle

2. Operating • Firms with low operating

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.6 Operating Leverage of Firms A and B

INVESTMENTS | BODIE, KANE, MARCUS

Sensitivity to the Business Cycle

3. Financial • Interest is a fixed cost

INVESTMENTS | BODIE, KANE, MARCUS

Industry Life Cycles

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.12 The Industry Life

INVESTMENTS | BODIE, KANE, MARCUS

Industry Structure and Performance:

INVESTMENTS | BODIE, KANE, MARCUS

You might also like