Industry Specific Analysis Chapter 9 Robinson, Munter, Grant

Industry Specific Analysis

Chapter 9

Robinson, Munter, Grant

Grant, Munter & Robinson

Chapter 9 2

Learning Objectives

• Understand the role of industry benchmarks

• Understand how industry membership can affect financial statements

• Understand the importance of industry identification

• Be aware of nonfinancial analysis measures used for specific industries


Chapter 9 3

Analysis

• Time series– Compare subject firm to itself over time

• Cross-sectional– Compare subject firm to an appropriate

benchmark within the same period of time• Industry Averages


Chapter 9 4

Conglomerates

• Difficult to benchmark because they operate in multiple industries

• Must disclose segment data for– Lines of business that contribute at least 10% of

revenues, assets or net income– At least 75% of total revenues

• These disclosures can be used for industry specific analysis


Chapter 9 5

Accounting RequirementsUS GAAP (FAS 131)

• Requires each segment to disclose

• Sales revenues

• Operating profit

• Assets

• Some expense items


Chapter 9 6

Accounting RequirementsIAS 14

Primary segment disclosures• Revenues and operating profit

• Assets and liabilities

• Capital expenditures

• Depreciation and amortization

• Other non-cash expenditures


Chapter 9 7

Accounting RequirementsIAS 14

Secondary segment disclosures• Revenue

• Assets

• Capital expenditures

• Inter-segment pricing for both primary and secondary segments


Chapter 9 8

Industry comparison example

PepsiCo Coca-Cola

NA Beverage

Int’l Beverage

NA Beverage

Int’l Beverage

Revenue 3,842 2,582 7,526 12,386

Net Income 927 221 1,480 4,594

Operating assets

1,325 1,747 4,738 6,611

ROS 24.1% 8.6% 20.0% 37.1%

RAO 70.0% 12.7% 31.2% 69.5%


Chapter 9 9

Retail

• Wal-Mart Stores– Sales are largely cash-based

• Largest assets: Inventory, Property

• Largest liabilities: Accounts payable, long-term debt

• Largest expense: Cost of goods sold


Chapter 9 10

RetailSpecific information

• Affected by: – Consumer confidence,

– CPI

– Disposable income

– Real GDP growth

– Interest rates

• Same store sales indicates the amount of the sales growth that is coming from new stores versus existing stores.


Chapter 9 11

Health Care Management

• United Health Group provides health care management and insurance

• Service firm – no inventory• Goodwill indicates expansion through

acquisition• Medical cost payable is largest liability

– Unearned premiums is a current liability

• Revenues primarily from premiums earned• Largest expense is for medical costs


Chapter 9 12

Health Care ManagementSpecific information

Health care facilities• CPI

• Federal budget – Medicaid/Medicare spending

• Unemployment– Uninsured


Chapter 9 13

Health Care ManagementSpecific information

Insurance • Net investment yield

• Interest rates

• Demographics

• Premium growth and Reinsurance rates

• Lapse ratio, Net premiums written to surplus, Combined ratio


Chapter 9 14

Publishing

• The New York Times Company

• Large accounts receivable– Advertising and subscription revenue

• Largest assets are property and equipment

• “Costs in excess of net assets acquired” is goodwill

• Liability for Un-expired subscriptions


Chapter 9 15

PublishingSpecific information

• Demographic trends– Preference for books, newsprint, magazines vary

by age group

• Health of the education sector– Text book sales

• Volatility of paper prices• May provide sales mix information

– Advertising vs. circulation– Newspaper, broadcasting, internet sales


Chapter 9 16

Restaurants

• McDonald’s Corporation• Property & Equipment is the largest asset• Reliant upon long-term financing• Large retained earnings• Revenues from company-owned stores and franchise

fees• Food and packaging costs are only about 1/3 of

revenues• Labor-related costs are nearly 75% of food/packaging

costs


Chapter 9 17

RestaurantsSpecific information

• Financial statement information– Average weekly sales

– Same store sales

• Nonfinancial statement measures– Consumer confidence

– CPI

– Interest rates

– Real disposable income

– Real GDP growth


Chapter 9 18

Waste Management

• Republic Services, Inc.

• Property & equipment is largest asset– Large depreciation expense

• Followed closely by Intangible assets– Large amortization expense

• Significant long-term debt


Chapter 9 19

Waste ManagementSpecific information

• Daily municipal solid waste per capita

• GDP

• Landfill and incinerator capacity of company

• Landfill disposal charges

• US population growth


Chapter 9 20

Utilities• First Energy Corp.• Regulated industry

– Unique financial statement presentation– Assets may be presented in reverse order

• Heavily invested in PP&E• Goodwill from acquisitions• Liability for decommissioning nuclear

power plants


Chapter 9 21

UtilitiesSpecific information

• Regulatory Assets– Expenses deferred until the next general rate increase

• Interest rates• GDP• Cooling/heating degree days (from 65°)• Industrial production• Household formation and housing starts• Risks from commodities markets


Chapter 9 22

Insurance• The Progressive Corporation• Invested premiums dominate assets

– Reported in more detail

• Deferred expenses for commissions, underwriting and other costs of acquiring policies– Amortized over the life of the policy

• Unique liabilities– Unearned premiums– Loss reserve

• Premium revenue and related loss expense on income statement


Chapter 9 23

InsuranceSpecific information

• Legal requirements of coverage

• Net investment yield

• Interest rates

• Demographics

• Premium growth and Reinsurance rates

• Lapse ratio, Net premiums written to surplus, Combined ratio


Chapter 9 24

Computer Hardware

• Dell Computer Corporation

• Inventories are relatively small

• Receivables are relatively large

• Accounts payable is large– Days payable ≈ 53

• Small amount of long-term debt

• Separate R&D on the income statement


Chapter 9 25

Computer HardwareSpecific information

• Business capital spending

• Consumer confidence

• Currency exchange

• Global sales report (Semiconductor industry)

• Leading economic indicators

• Real GDP growth

• Exchange rate fluctuations


Chapter 9 26

Airlines

• Continental Airlines• Service industry• Flight equipment is dominant asset• Routes, gates and slots (cost of acquiring)

– Capitalized and amortized

• Air traffic liability is unearned revenue• Wages and fuel dominate operating expenses


Chapter 9 27

AirlinesSpecific information

• Revenue passenger mile (RPM)• Available seat-mile• Load factor• Consumer confidence• Disposable income and Corporate profits• Jet fuel prices• Number of aircraft in fleet


Chapter 9 28

Financial Institutions

• Citigroup, Inc.

• Service industry (diversified)

• 90% of assets are cash, deposits, investments or other receivables and loans

• Customer deposits are a liability

• Loan interest is primary revenue source


Chapter 9 29

Financial InstitutionsSpecific information

• Interest rates• Disposable income• Consumer confidence• Consumer borrowing patterns• Housing and large expenditures• Delinquencies and bankruptcies• Efficiency ratio


Chapter 9 30

Summary

• Understand industry benchmarks

• Understand how industry membership can affect financial statements

• Understand the importance of industry identification

• Be aware of nonfinancial analysis measures used for specific industries

Documents

Industry Specific Analysis Chapter 9 Robinson, Munter, Grant