8 – 1
CHAPTER 8
ECONOMIC AND INDUSTRY ANALYSIS
I. An Overview of the Valuation Process
A. The top-down, three-step approach (Exhibit 8.1)
II. Why a Three-Step Valuation Process?
A. General Economic Influences
Monetary and fiscal policy measures have an impact on the economy of the country
C. Company Analysis
Quantitative and Qualitative analysis
Estimation of the intrinsic value of the stock and comparison with the market price
D. Does the Three-Step Process Work?
Results from several academic studies support the use of the three-step investment
process
III. Economic Analysis
A strong relationship exists between the economy and the stock market, and that stock prices
Cyclical Indicator Approach to Monitoring and Forecasting the Economy
This approach contends that the aggregate economy expands and contracts in discernable
periods
Cyclical Indicator Categories
B. Knowing Monetary Variables
In US
Declines in the rate of growth of the money supply have preceded business
contraction
Increases in the rate of growth of the money supply have consistently
preceded economic expansions
D. Forecasting Performance of the Stock Market
The earnings multiplier approach
E. Analysis of World Security Markets
IV. Industry Analysis
A. What is An Industry?
There is a wide variation in industry performance. Therefore, industry analysis is
B. The Business Cycle and Industry Sectors (Exhibit 8.10)
1. Cyclical or Structural Changes
2. Rotation strategy is when one switches from one industry group to another over the
course of a business cycle
3. Economic Variables
Inflation
C. Structural Economic Changes and Alternative Industries
Climate Change
D. Evaluating the Industry Life Cycle (Exhibit 8.11)
Five Stage Industry Life Cycle Model
Pioneering Development
Four Phase Energy Evolution Cycle (Exhibit 8.12)
Growth and dependency of an existing energy source
E. Analysis of Industry Competition
Competition and Expected Industry Returns
Porter’s concept of competitive strategy is described as the search by a firm for a
Porter’s Five Competitive Forces (Exhibit 8.13)
Rivalry among the existing competitors
Threat of new entrants