This document provides an overview of industry analysis. It defines an industry as a group of companies that produce similar goods and services. The analysis examines key factors that influence industries like economic activity, growth rates, profitability, competition, and government policies. It also describes different ways to classify industries, such as by product, business cycle, or industry life cycle stage. Finally, it lists several external sources that analysts use to research specific industries.
2. 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?
3. 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
4. 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
5. 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
6. 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
7. 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
8. 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
9. 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
10. 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
11. 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
12. The life of an industry can be separated into
1. Pioneering stage
2. Expansion stage
3. Stagnation stage
4. Decay stage
Industry life cycle
13. 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
