EVALUACIÓN DE PROPUESTAS

sectors, providing greater flexibility relative to SIC codes. More industries are identified.

14-3. Industry analysis is valuable because industries have turned in widely- varying

performances in the past, and undoubtedly will continue to do so in the future. Investors’ results have been greatly affected by the industries in which they

invested. Some industries’ price performance have been virtually flat over long periods, while others show very large gains.

14-4. Obviously, differences of opinion will exist about industries expected to perform well in

the future. In the next five years (i.e., roughly 2007-2012), such industries as alternative energy sources and medical technology (artificial organs, genetic engineering, etc.) may do well. Over the next 10 to 15 years, instructors and students are free to make their own choices.

14-5. The stages of the industry life cycle are the pioneering stage, the expansion stage, the

stabilization stage, and the declining stage.

14-6. New internet-related activities are in the pioneering stage. The medical service industry

is in the expansion stage as is cellular phones. The supermarket industry is in the stabilization stage, as is the chemical industry. Declining industries could include, as possibilities, textiles and furniture.

14-7. The pioneering stage offers the greatest risk.

14-8. Cyclical industries, such as autos, appliances, and houses, are the most sensitive to the

business cycle. Defensive industries, such as the food industry, are the least affected by recessions and economic adversity.

14-9. Investors should analyze the stage of the business cycle and the likely movements in

interest rates. As the economy approaches a recession, cyclical industries are likely to be more affected than other industries while defensive industries will be least affected. An expected rise in interest rates will have adverse consequences for such industries as homebuilding and savings and loans.

14-10. Porter identifies the threat of new entrants; the bargaining power of buyers; rivalry

between existing competitors; threat of substitute products or services; and the bargaining power of suppliers.

14-11. The reverse statement is correct; profitability is a function of structure.

14-12. The fundamental valuation of industries is based on the same concept of valuation used

throughout the text. Specifically, it is necessary to estimate the expected returns

(earnings or dividends) and a multiplier (or, alternatively, a discount rate) for industries, as was done in the preceding chapter with the market, or as will be done in the next chapter with individual companies.

14-13. Several sources of information would be useful to an investor doing a detailed industry

analysis.

• Standard & Poor’s Industry Survey provides basic data.

• Dun & Bradstreet Key Business Ratios provides ratio information. • The Quarterly Financial Report for Manufacturing, Mining, and Trade

Corporations, a government publication, provides timely information on

individual industries.

• Forbes magazine rates industry performance annually in its January issue. This gives investors’ calculated information for a five year period.

• The Value Line Investment Survey estimates industry statistics for both the current year and the coming year, and ranks all industries covered in terms of timeliness (probable performance over the next 12 months).

14-14. The industry life cycle is useful in helping investors to assess both the return

potential and the risk of investing in various companies, depending upon the stage of the industry life cycle. If investors buy companies in the pioneering stage, they may realize large payoffs, but they may also lose a substantial part, or even all, of their investment in some companies because the risk of failure is high. Conversely, investors may choose to invest in very large, well known companies in the stabilization phase of the industry life cycle, accepting moderate returns with moderate risks. For example, Coca-cola has been a good stock to own for most of the last 20 or so years. Finally, investors may choose to find companies in the expansion stage because the potential returns will be larger than for those companies in the stabilization stage, while the risks, although larger, are still acceptable.

CFA

14-15. Note: Candidates could select any three of the following five competitive forces and

then relate those selected to both Ford and Merck. 1. Rivalry among existing firms.

a) Ford faces intense competition from other domestic and foreign auto manufacturers.

b) Merck has a dominant market share in many of its product lines because a limited number of companies can supply specific drugs. For many of its most profitable drugs, Merck faces no competition for an extended period of time because of patent protection. Hence, Merck's dominant market share and limited competition allow it to develop strategies of product differentiation and focusing on market segments.

2. Threat of new entrants.

a) Despite substantial capital requirements and technological barriers to entry, domestic auto manufacturers have seen foreign manufacturers establish strong market positions.

b) The drug industry has natural barriers to entry as years of research are required to develop competing products and receive FDA approval to market. Once patent protection has been achieved, Merck can take advantage of product differentiation and focus on market segments. 3. Threat of substitute products.

a) A Lexus can be substituted for a Lincoln and a Chevy for a Ford. In addition, some buyers can substitute other products such as motorcycles for cars.

b) Some drugs provide unique therapy while others have limited prescription substitutability. Again, Merck can focus on market segments and

differentiate its products. 4. Power of buyers.

a) A car buyer has several alternatives among different brands and modes of transportation. In addition, the potential buyer can defer purchase by repairing an older car. Accordingly, manufacturers are often forced to provide rebates to stimulate sales, cutting profit margins.

b) Drugs, on the other hand, are aimed at specific ailments, and potential purchasers are unlikely to defer purchase once the drug has been prescribed by a doctor. Frequently, insurance companies or the government picks up the cost of the prescription. Accordingly, drug companies have a great ability to increase prices with little consumer resistance. Again, Merck can focus on market segments.

5. Power of suppliers.

a) In theory, Ford should have an advantage here because auto

manufacturers exercise great control over their suppliers. Some of these suppliers have Ford as their major customer. This could be important in cost containment. However, there are no hints in the financial statements that Ford has been able to exploit its power over suppliers in recent years. b) Merck has no special advantages in dealing with its suppliers.

CFA

14-16. A. The concept of an industrial life cycle refers to the tendency of most industries to go

through various stages of growth somewhat resembling those of a person. Generally four stages are talked about with no uniformity in the length of each stage. The rate of growth, the competitive environment, profit margins and pricing strategies tend to shift as an industry moves from one stage to the next although it is usually difficult to pinpoint exactly when one stage has ended and the next has begun.

The initial stage is characterized by perceptions of a large market and by a high optimism for potential profits. Little or no profits are usually achieved, however, in this stage and there is usually a high rate of failures. In the second sta ge, often called rapid expansion or follow-through, growth is high and accelerating, the markets are broadening, unit costs are declining and quality is improving. The third stage, usually called mature growth, is characterized by decelerating growth caused by such things as maturing markets and/or competitive inroads by other products. Finally, an industry reaches a stage of full maturity in which growth slows or even declines. Product pricing, profitability and industry competitive structure often (though not necessarily) vary by phase. Thus, for example, the first phase usually encompasses high product prices, high costs (R&D, marketing, etc.) and a (temporary)

monopolistic industry structure. In phase two (rapid expansion), new entrants appear and costs fall rapidly due to the experience curve. Prices generally don't fall as rapidly allowing profit margins to increase. In phase three (mature growth), growth begins to slow as the product or service begins to saturate the market, and significant price reductions become less common. There’s a choking out of competitors as quality and other non-price factors become more important as competitive tools. In the final stage, industry cumulative production is so high that production costs have stopped declining, profit margins are thin (assuming competition exists), and the fate of the industry depends on the extent of replacement demand and the existence of substitute products/services.