new lecture 3 spr 09

8/14/2019 New Lecture 3 Spr 09

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Spring 2009 NBA 5060

Lecture 3 Macroeconomic, Industry, and Strategy Analysis

1. Information Collection

2. Economic, Industry, and Strategy Analysis

3. Application to CBRL

For 01/29/09: Come to class prepared to discuss the accounting analysisquestions for CBRL (see todays handouts).

Lecture 2 Page 1 of 13


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Where to find information

Company Information:

SEC website: http://www.sec.gov/edgar.shtml

Guide to Common SEC Filings:

Filing DescriptionForm 10-K This is the annual report filed by most companies. It

provides a comprehensive overview of the companysbusiness. Depending on company size, it must be filedwithin 60 days of the close of the fiscal year.

Form 10-Q This is the quarterly financial report filed by mostcompanies. It includes unaudited financial statements andprovides a continuing view of the companys financial

position during the year. Depending on company size, itmust be filed within 35 days of the close of the quarter.Form 8-K This is the current report that is used to report the

occurrence of any material events of corporate changesthat are of importance to investors and have not beenpreviously reported.

Proxy Statement(form DEF 14A)

The proxy statement provides official notification todesignated classes of shareholders of matters to bebrought to a vote at a shareholders meeting.

Schedule 13D This filing is required by 5 percent (or more) equity ownerswithin 10 days of the acquisition event.

Schedule 13E These are filings required by persons engaging in goingprivate transactions in the companys stock or bycompanies engaging in tender offers for their ownsecurities.

Schedule 13G This is similar to Schedule 13D but is only available inspecial cases where control of the issuer is notcompromised.

Schedule 14D These are filings required pursuant to a tender offer.Form 3, Form 4,and Form 5

These are statements of ownership filings required bydirectors, officers, and 10 percent owners. Form 3 is theinitial ownership filing, Form 4 is for changes in ownership,and Form 5 is a special annual filing.

RegistrationStatements(formsS-1 and S-3)

These are filings that are used to register securities beforethey are offered to investors. The most commonregistration filings are Forms S-1 and S-3.

Prospectus (Rule424)

This document is made available to investors in a securityoffering. It comes in varieties 424A, 424B1, 424B2, 424B3,424B4, 424B6, and 424B7.

http://www.sec.gov/edgar.shtmlhttp://www.sec.gov/edgar.shtmlhttp://www.sec.gov/edgar.shtmlhttp://www.sec.gov/edgar.shtml


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The Form 10-K

Item DescriptionCover Page Lists company name, fiscal year end, state of

incorporation, each class of publically traded securities,

and other information.Item 1 Business Identifies principal products and services of thecompany, principal markets and methods of distribution,and other key attributes and risks of the business.

Item 2- Properties Location and character of key properties.Item 3 LegalProceedings

Brief description of material pending legal proceedings.

Item 4 Submissionof Matters to Vote

Information relating to the convening of a meeting ofshareholders, whether annual or special, and thematters voted upon.

Item 5 Market forCommon Stock

Principal market in which commons stock is traded:high and low quarterly stock prices for the last twoyears; number of stockholders; dividends paid duringthe last two years; future dividend plans.

Item 6 SelectedFinancial Data

Five-year summary of selected financial data, includingnet sales and operating revenue, income fromcontinuing operations, total assets, and long-termobligations.

Item 7 ManagementsDiscussion andAnalysis

Discussion of results of operations, liquidity, capitalresources, off-balance-sheet arrangements, andcontractual obligations. Discussion should includetrends, significant events and uncertainties, causes ofmaterial changes, effects of inflation and changing

prices, and critical accounting policies.Item 7A Disclosures aboutMarket Risk

Provides qualitative and quantitative disclosures aboutmarket risk (e.g., interest rate, exchange rate, andcommodity price risk). Requirements apply to financialinstruments and commodity instruments.

Item 8 FinancialStatements andSupplementary Data

Two-year audited balance sheets, three-year auditedstatements of income, three-year audited statements ofcash flows, along with supporting notes and schedules.

Item 9 Changes inand Disagreementswith Accountants

Description of any changes in and disagreements withindependent auditors on any matter of accountingprinciples or practices, financial statement disclosure, or

auditing scope of procedure.Item 9A Controlsand Procedures

Opinion of top management and auditors regarding theeffectiveness of the companys internal controls andprocedures over financial reporting.



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Where to find information (contd)

Other sources of company information

Company website, especially press releases

Financial press

Analyst research reports



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Macroeconomic data

Data on past economic activity:

FreeLunch.com

Economagic

FedStats

The White House Economic Statistics Briefing Room

US Census Bureau

Bureau of Economic Analysis

Bureau of Labor Statistics

Federal Reserve

Economic calendar of events

Forecasts of future GDP:

The Conference Board

Congressional Budget Office

International GDP forecasts: US Department of Agriculture

Industry data

S&P Industry Survey

Polson Enterprises Industry Portals



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Overview of Economic, Industry, and Strategy Analysis

Objectives:

Macroeconomic Analysis:

Understand the general consensus about major macroeconomic factors.

Industry Analysis:

1. Understand the sensitivity of the industry to key macroeconomicfactors

2. Understand how the industry operates and the key performancemetrics for evaluating these operations

3. Understand the competitive structure of the industry

Strategy Analysis:

Understand the companys plan for creating and sustaining a competitiveadvantage.

Competitive advantage is what allows a company to earn

abnormally high profitability.

Outcomes:

Accounting Analysis:

Financial Analysis:

Prospective Analysis:



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Macroeconomic Analysis

Some examples of potentially useful economic Indicators

Growth in GDP (long run sustainable growth rates) Consumer confidence

Interest rates / yield curve

Inflation / CPI / PPI

Key Commodity prices (e.g. oil prices)

Foreign Exchange rates

Sensitivity of Industry Profitability to Key Macroeconomic Factors:Macroeconomic Factor

Sector GDP Interest Rate Oil PriceBasic materials + + Energy + + +Conglomerates + Consumer goods + + Financial + Health care + Industrial goods + + Services + Technology + + Utilities +

Key: + + = strong positive relation; + = positive relation; = negative relation; = strong negative relation.

Understanding current profitability:

Forecasting future profitability:

Note: This is a qualitative assessment. If you are analyzing a firm in theconsumer goods industry and overall GDP growth is high this tells you toexpect high profitability for your firm and the other firms in the industry, but itdoes not tell you how high.



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Industry Analysis

Porters Five Forces (from Palepu and Healy 2007)

1. Rivalry among existing firms is there price pressure from existing firms?

Over-capacity?2. Threat of New Entrants Cost of entry barriers; abnormal profitability?3. Threat of substitutes based on existence and relative price/performance

of competing products.4. Buyer Power (relative to the firm) price sensitivity; relative cost of not

doing business with the other party5. Supplier Power (relative to the firm) mirror image of buyer power.

Includes relative cost of not doing business with the other party.



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Cost o f InputsSuppliers of labor andmaterials

InvestmentProduction technology (assets)required to support operations

Price of OutputsProduct or service suppliedto customers

Supplier PowerSwitching costsDifferentiationImportance of

product for costsand quality

Number of suppliers

Volume per supplier

Threat of SubstitutesRelative price and

performanceBuyer willingness to

switch

Threat of EntrantsScale economiesFirst mover advantageDistribution accessRelationships

Legal barriers

RivalryScale economiesExcess capacityExit barriers

Industry growthConcentration

Differentiation

Buyer PowerSwitching costsDifferentiationImportance of

product for costsand quality

Number of buyers

Volume per buyer

Basic idea is to use the five forces analysis to guide your deeper strategicanalysis and further research on the company. E.g. if the threat of entry is themost important factor, you should gather additional info on factors such as thecosts of entering the market, firms most likely to enter, overall market growth,effect of competition on margins, etc.



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This type of analysis also forces you to learn and understand the industry better.So even without a definite conclusion, the analysis is useful because it providesyou with a structured approach.



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Company Strategy Analysis:

Evaluating a firms operating strategy to evaluate how it intends to positionitself within the industry and obtain future economic rents (i.e. profits).

Basically to determine if the business model makes sense and willultimately lead to profitability. Highlights strengths and weakness and potentialred flags of which you should be aware.

Applying strategy analysis:

Is the strategy based on low-cost leadership or product differentiation? Asimple but powerful characterization of firm strategies that can be examined inthe financial ratios such as expected turnover and profit margins of the firm.

Degree of geographical diversification. Is the firm targeting only thedomestic market or international markets as well?

Degree of line of business diversification (i.e. horizontal diversification).This can have an impact on value through risk, management focus, cash drain,etc. Also, there is an empirical regularity known as the diversification discount.

Sustainability ofcompetitive advantage. For example, differentiation inretail-apparel is often very difficult to sustain over extended time period.

Note: These are very broad-scope analyses. An analyst or manager should beintimately familiar with the operating environment of the firm, including productlines, key value drivers, growth/expansion opportunities, key risk factors, and

potential indicators that the company is executing its strategy competently.One good source of strategy information is from managements discussion andanalysis of results. Tangible plans are useful, while vacuous platitudes are not(e.g. we plan to expand into the Northeast with 50 new stores by 2007 versus,our goal is to be the leading supplier of HVAC circulators and pumps)



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Application of Economic, Industry and Strategy analysis toCBRL

Would you describe the overall performance of the economy over the fiscalyears 2006, 2007, and 2008 as strong or weak? What does this imply about

profitability for the restaurant industry over this time?

How will the economy likely evolve over the next 5 to 10 years, and whatdoes this mean for firms in the industry?

What are the key ratios and statistics that capture financial health of firmsin the industry?



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What are the main characteristics shaping competition (and profitability) inthe industry?

Porters Five ForcesRivalry among firms:

Threat of newentrants:

Treat of Substitutes:

Supplier Power:

Buyer Power:

What are the main elements of the companys strategy?

Does CBRL follow a product differentiation strategy or are they a costleader? What does this imply about profit margin and asset turnovers forCBRL, relative to its competitors?


new lecture 3 spr 09

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