Case 5

F.
Roth
Finance
Classifying Companies into Industries
Table 1 defines 11 representative sectors/industries, according to GICS/ICB. Assume the classification

system is based on the criterion of a company’s principal business activity as judged primarily by
source of revenue.
Based on the information given, determine an appropriate sector membership for each of the
following hypothetical companies:
1. An operator of shopping malls

2. A natural gas transporter and marketer
3. A manufacturer of heavy construction equipment
4. A provider of regional telephone services
5. A semiconductor company
6. A manufacturer of medical devices
7. A video conference provider
8. A manufacturer of chemicals and plastics
9. A manufacturer of automobiles
10. A cloud computing service provider
11. A food delivery company
12. A regulated supplier of electricity
13. A provider of wireless broadband services
14. A manufacturer of soaps and detergents
15. A software development company
16. An insurer
17. A regulated provider of water/wastewater services
18. A robotic-assisted surgery company
19. A manufacturer of pharmaceuticals
20. A provider of rail transportation services
21. A data center real estate investment trust
22. A developer of residential housing
Solution
Sector Company Number

Materials 8
Consumer Discretionary 9,11
Consumer Staples 14
Energy 2
Financials 16
Health Care 6,18,19
Industrials 3,20
Real Estate 1,21,22
Information Technology 5,10,15
Consumer Services/Telecommunications 4,7,13
Utilities 12,17
Then answer the following questions:
1. The GICS classification system classifies companies on the basis of a company’s primary
business activity as measured primarily by:
a. Assets
b. Income
c. Revenue
C is correct.
2. Which of the following is least likely to be accurately described as a cyclical company?

a. An automobile manufacturer
b. A producer of breakfast cereals
c. An apparel company producing new, trendy clothes for teenage girls
B is correct. A producer of staple foods, such as cereals, is a classic example of a non-cyclical

company. Demand for automobiles is cyclical – that is, relatively high during economic expansions
and relatively low during economic contractions. Also, demand for teenage fashions is likely to be
more sensitive to the business cycle than demand for standard food items, such as breakfast cereals.
When budgets have been reduced, families may try to avoid expensive clothing or may try to extend
the life of existing clothing.
3. Which of the following is the most accurate statement? A statistical approach to grouping
companies into industries:
a. Is based on historical correlations of the securities’ returns
b. Frequently produces industry groups whose composition is similar worldwide
c. Emphasizes the descriptive statistics of industries consisting of companies producing
similar products and/or services
A is correct.
Table 1: Sector/Industry Descriptions
Materials Companies engaged in the production of building materials, chemical,

paper and forest products, and containers and packaging, as well as
metal, mineral, and mining companies.
Consumer discretionary Companies that derive a majority of revenue from the sale of consumer-
related products or services for which demand tends to exhibit a
relatively high degree of economic sensitivity. Examples of business
activities that frequently fall into this category are automotive, apparel,
hotel, and restaurant businesses.
Consumer Staples Consumer-related companies whose business tends to exhibit less
economic sensitivity than other companies–for example, manufacturers
of food, beverages, tobacco, and personal care products.
Energy Companies whose primary line of business involves exploring for,
production of, or refining of natural resources used to produce energy;
companies that derive a majority of revenue from the sale of equipment
or through the provision of services to energy companies also fall into this
category.
Financials Companies whose primary line of business involves banking, finance,
insurance, asset management, and/or brokerage services.
Health Care Manufacturers of pharmaceutical and biotech products, medical devices,
health care equipment, and medical supplies and providers of health care
services.
Industrials Manufacturers of capital goods and providers of commercial services; for
example, business activities would include heavy machinery and
equipment manufacture, aerospace and defense, transportation services,
and commercial services and supplies.
Real Estate Companies engaged in the development and operation of real estate. This
includes companies offering real estate–related services and equity real
estate investment trusts (REITs)
Information Technology Manufacture or sale of computers, software, semiconductors, and
communication equipment; other business activities that frequently fall
into this category are electronic entertainment, internet services, and
technology consulting and services.
Communication This sector includes traditional telecommunication companies that
Services/Telecommunications provide fixed line and wireless communication services, with media,
entertainment, and interactive media and services, such as video gaming
companies.
Utilities Electric, gas, and water utilities; telecommunication companies are
sometimes included in this category.

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F.

Classifying Companies into Industries

Table 1 defines 11 representative sectors/industries, according to GICS/ICB. Assume the classification

1. An operator of shopping malls

Sector Company Number

Then answer the following questions:

2. Which of the following is least likely to be accurately described as a cyclical company?

B is correct. A producer of staple foods, such as cereals, is a classic example of a non-cyclical

Table 1: Sector/Industry Descriptions

Materials Companies engaged in the production of building materials, chemical,

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