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

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

Vicentiu Covrig 3 Purpose of Economic Analysis 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

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

Vicentiu Covrig 5 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  Computers, Internet, etc.

Vicentiu Covrig 6 Business Cycles Pattern of economic recession and expansion - Periods of economic expansion are followed by periods of contractions  Recession  2 or more concessive quarters of contraction  Higher unemployment  Restricted credit  Reduced output  Depression  Severe recession (no official definition)

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

Vicentiu Covrig 8 Competitive Environment 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 Competitive advantage

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