Vicentiu Covrig Macroeconomic and Industry Analysis chapter 12

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Vicentiu Covrig Macroeconomic and Industry Analysis (chapter 12 online) 1

Vicentiu Covrig Macroeconomic and Industry Analysis (chapter 12 online) 1

Vicentiu Covrig Dimensions of the Economy n n n As the economy goes, so

Vicentiu Covrig Dimensions of the Economy n n n As the economy goes, so goes the businesses and their stock… Macroeconomic Analysis - aggregate economic activity u. Gross Domestic Product u. Interest rates u. Consumer spending, consumer income uemployment Microeconomic Environment - industry, firm, plant, or product level u. Industry specific regulation u. Material prices (aluminum, wheat, oil, etc. ) 2

Vicentiu Covrig Purpose of Economic Analysis n n Understand the impact of recent economic

Vicentiu Covrig Purpose of Economic Analysis n n Understand the impact of recent economic trends on company you need to value Develop a perspective on how future economic trends will affect profitability and risk of subject company: - current stage of the business cycle - economic growth expectations - supply and demand conditions - inflation expectations - investment and credit conditions - political and regulatory events 3

Vicentiu Covrig Forces Driving the Economy 1) Demographics - Baby boom generation u. Born

Vicentiu Covrig Forces Driving the Economy 1) Demographics - Baby boom generation u. Born 1946 through 1964 Significant impact on society: • spending • saving • working/retirement • housing 4

Vicentiu Covrig 2) Productivity - The ability to produce more products and services with

Vicentiu Covrig 2) Productivity - The ability to produce more products and services with the same number of people. - When productivity growth is robust, the standard of living increases. - Gains are often made from advances in technology u Computers, Internet, etc. 5

Vicentiu Covrig Business Cycles n Pattern of economic recession and expansion - Periods of

Vicentiu Covrig Business Cycles n Pattern of economic recession and expansion - Periods of economic expansion are followed by periods of contractions u. Recession Ø 2 or more concessive quarters of contraction ØHigher unemployment ØRestricted credit ØReduced output u. Depression ØSevere recession (no official definition) 6

Vicentiu Covrig Economic Indicators n Data series that successfully describe the pattern of projected,

Vicentiu Covrig Economic Indicators n Data series that successfully describe the pattern of projected, current, or past economic activity. - Leading indicators u Money Supply, building permits, manufacturer’s new orders, initial claims for unemployment - Lagging Indicators u Consumer price index, inventories, labor cost - Coincident Indicators u Industrial production, personal income, payrolls 7

Vicentiu Covrig Competitive Environment n Industry’s market structure - Current stage of the industry

Vicentiu Covrig Competitive Environment n Industry’s market structure - Current stage of the industry life cycle - How cyclical it is - Number and size of competitors - Monopoly/Oligopoly - Industry sales and profitability - R&D and technology n Competitive advantage 8

Vicentiu Covrig Michael Porter characterizes the competitive environment -- five forces n n n

Vicentiu Covrig Michael Porter characterizes the competitive environment -- five forces n n n Rivalry among existing competitors Threat of new entrants Pressure from substitute products Bargaining power of customers Bargaining power of suppliers 9