Financial Management: Week 46

Industry Analysis by Equity Analyst

Learn
Apart from having a general understanding of what a company does, an equity analyst would analyze the characteristics of its industry.

Unlearn
The strength of a company is not just based on the management, business model or brand name. It is utmost important to understand the industry a company is in and how the external environment could impact the company.

Relearn
A top-down industry analysis requires consideration of the following factors:

Industry classification
The analyst would classify the industry by the industrial life cycle and business cycle reaction.

External factor review
The analyst would analyze the impact of external factors such as technology, government, foreign influences, demography and social changes on the industries.

Demand analysis
The analyst would then assess future demand for the industry’s output. This could be done for example by looking at historical relationship between gross domestic product (GDP) growth and the growth in company revenue.

Supply analysis
The analyst would obtain data on the aggregate size of the potential supply of output from a given industry and compare this with projected demand for the industry’s output. This information could be obtained from capacity utilization data of the particular industry.

Industry pricing practices
Given the supply and demand data, the analyst could estimate pricing trends within an industry. In addition to supply and demand, other factors that contribute to company profitability and pricing decisions include product segmentation, industry concentration, ease of industry entry and supply input price.