Industries With Different Demand Factors Discussion
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Part 1. Select three industries with different demand factors.
A. For each industry, indicate what economic series you would use to predict the growth for the industry. Discuss why the economic series selected is relevant for this industry.
B. For one of the industries prepare a scatterplot of industry sales per share and observations from the economic series you suggested for this industry for the most recent 10 years. Based on the results of the scatterplot, discuss whether the economic series was closely related to this industry’s sales and discuss the stage of your industry in its life cycle.
C. Evaluate your industry in terms of the five factors that determine an industry’s intensity of competition. Based on this analysis, what are your expectations about the industry’s profitability in the short run (1 or 2 years) and the long run (5 to 10 years)?
D. Prepare a table listing the variables that influence the earnings multiplier for your chosen industry and the market index series for the most recent 10 years.
i. Do the average dividend- payout ratios for your industry and the market index differ? How should the dividend payout influence the difference between the multipliers?
ii. Based on the fundamental factors, would you expect the risk for this industry to differ from that for the market? In what direction, and why? Calculate the industry beta using monthly data for five years. Based on the fundamental factors and the computed systematic risk, how does this industry’s risk compare to the market? What effect will this difference in risk have on the industry multiplier relative to the market multiplier?
iii. Analyze and discuss the different components of growth (retention rate, total asset turnover, total assets/ equity, and profit margin) for your chosen industry and a market index during the most recent 10 years. Based on this analysis, how would you expect the growth rate for your industry to compare with the growth rate for the market index? How would this difference in expected growth affect the multiplier?
Part 2. Do the following for companies outside the retail drugstore industry.
A. Give an example of a growth company, and discuss why you identify it as such. Based on its P/E, do you think it is a growth stock? Explain.
B. Give an example of a cyclical stock, and discuss why you have designated it as such. Is it issued by a cyclical company?
C. Discuss a company that is known to be a low-cost producer in its industry and consider why it is a cost leader. Do the same for a firm known for differentiating.
Select a company outside the retail drugstore industry and:
D. Indicate what economic series you would use for a sales projection. Discuss why this is a relevant series.
E. Based on reading its annual report and other public information, discuss what you perceive to be its competitive strategy (i.e., low-cost producer or differentiation).
F. Examine its operating profit margin relative to the operating margin for its industry during the most recent 10- year period. Discuss the annual results in terms of levels and percentage changes.
G. Select two stocks in an industry of your choice in Part 1,
i. Perform a common-size income statement analysis over a two-year period.
ii. Discuss which firm is more cost effective.
iii. Discuss the relative year-to-year changes in gross profit margin, operating profit margin, and net profit margin for each company.
iv. Compute their forward P/E ratios using last year’s average price [(high plus low)/2] and estimated earnings.
v. Compute their growth rate of earnings over the last five years. vi. Look up the most recent beta reported in Value Line.
vii. Discuss the relationships among P/ E, growth, and risk.
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