Copyright 2004 Global Insight, Inc.

Introduction to Global Insight’s

WIS Stock Sector BenchmarksA New Tool for Financial Analysis

Presented by

Mark Killion, CFAManaging Director

Global Insight’s World Industry Services

2Copyright 2004 Global Insight, Inc.

• Introduction to Global Insight’s latest measures for sector investment research and corporate strategy

• New Global Sector benchmarks organized into standard stock sector classification that follow GICS and Dow-Jones

• Easy point and click access to a unique multidimensional global data set, which includes all sectors in all countries

• Sector indicators line up well with items in company income statements: sales, profits, and costs

• “Cleanest,” best measure of underlying, normalized profits and sales• Does not suffer from well-known “survivorship bias,” but is subject to “top-

down” macro constraint for consistency and quality control

• Unique and consistent financial benchmarks that are flexibly defined across country/regions and sectors

WIS Stock Sector Benchmarks:A New Tool for Financial Analysis

Agenda:

3Copyright 2004 Global Insight, Inc.

What Stock Market Sectors are Included?

• Energy• Basic Materials (10)• Industrials (9)• Consumer Discretionary (9)• Consumer Staples (5)

• Health Care (2)• Financials (3)• Information Technology (3)• Telecommunications• Utilities

All of the Top-Ten Economic Sectors are Included!In addition to over 40 additional industries and sub-sectors

(number of sub-sectors shown in parentheses)

4Copyright 2004 Global Insight, Inc.

What Indicators are Included for Sectors?

WIS Includes Indictors that Line up Directly with Key Items in Company Income Statements

• Global Insight’s framework:• Top-down consistency

augmented by bottom-up B2B and trade patterns

• Sales translated into profits via operating and financial leverage

• Our sector sales and profits are:• The “cleanest” measure of

current operating performance • More reliable than unconstrained

“bottom up” measures• Free from “survivorship bias”

• “Normalized” earnings growth• Which will see fastest growth?• Which sector stock prices are

relatively rich/cheap given the outlook for growth and volatility?

• Sector-level measures include:• sales, profits, and margins• measured in US$ and Euros• (forthcoming: CapEx, FCF)

• Sector sales and profits are key to:

• understanding asset valuation, credit quality, and cash flows

• anticipating the CapEx cycle and employment growth

• Sector indicators are big “Peer Group” benchmarks for use in Credit Risk and Asset Valuation

• Data derived from IRS/Tax filings• Sector data are components of

National Income Accounts (NIA)

5Copyright 2004 Global Insight, Inc.

--Business cycle impact greatest in the short and medium term--Over longer time frames, technology and commercial patterns “Feed Back” from the bottom up to shape the macro trend Macro

Policies Slate of Demand Scenarios Prices and Exchange Rates

Industry Output and Purchase

Requirements Consumer versus B2B

Sales Technology,

Commercial Linkages among Sectors

Trade and Competition

Company

Trends in Sales Growth, Cost Structure

Market Penetration Prospects for Cash Flow Earnings Growth for

Asset Valuation

Sector Data Benchmarks Serve as a

“Gear Box” that Connects Macro with

Companies!

How Do Stock Sectors Relate to Macro Economic Views?

“Top Down” Macro Outlook Drives Sector Conditions!

6Copyright 2004 Global Insight, Inc.

Who Provides the Sector Benchmarks?

• WIS expertise is a focus on sector markets: measuring sector size, composition, and growth

• Track changing sources of growth in sales, costs, and profits

• Aggregations and comparisons, consistency across 70 countries with global totals• Common coverage: All sectors in all countries• Detailed sector categories add up to total GDP• Key indicators for each sector (sales, costs, profits…)

• Measure inter-sector relationships in B2B markets, trade patterns, IT spending, and risk management

Stock Sector Benchmarks is Created by Global Insight’s World Industry Service (WIS)

7Copyright 2004 Global Insight, Inc.

Global Recovery Will Lift Most Sectors(% Growth in Inflation-Adjusted Sector Sales in 70 Largest Economies)

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All SectorsManufacturing SectorServices Sectors

An Example of the Outlook for Growth in Key Global Sectors

• This is an example of global sector sales growth, shown over time, with a forecast

• Sector indicators provided for detailed as well as the high level global view of all sectors, such as this

• “Drill down” from the high-level global view into finer definitions of sectors and sub-sectors

• “Drill down” as well as into finer views of geographic regions and countries

8Copyright 2004 Global Insight, Inc.

Services Held Up Better Than Manufacturing(% Growth in Inflation-Adjusted Sector Sales for World and Key Regions)

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Banking & Insurance

Communications

Wholesale & Retail

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Autos & Transport Equip.

Chemicals & Refineries

Computers & Electronics

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Key Services SectorsKey Manufacturing Sectors

Start with High-Level View, Then Drill Down Into Sub-Sectors and Industry Components

9Copyright 2004 Global Insight, Inc.

• This graph shows how Global Insight’s WIS lines up with aggregated company financial data for the telecommunications sector

• Geographic coverage is the total world• WIS data (black line with diamond) is total sales• Aggregated company data (green line with

triangle) is sum of total sales reported by all companies included in the GICS sector index

• Top-10 companies (red dash with circle) show the sum of total sales reported by the world’s 10 largest companies (largest in terms of sales)

• WIS is the widest measure of sector activity• includes all commercial activity in the sector• including privately held companies and

government owned enterprises• Is not distorted by balance sheet impacts

• The ratio of Largest 10 Companies to Total WIS sector sales is a Sector “Concentration Ratio”

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WISCompanies in GICS Index Top 10 Companies (2002)

Telecommunication Sector Sales – US$ Bill.

World: Total Sales in the Telecommunication Sector (GICS = 50)WIS – Worldwide Sales by Telecommunications Operations

Company Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere

Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Telecommunication Sector Example

(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

10Copyright 2004 Global Insight, Inc.

Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Total World Basic Materials Sector

World: Total Sales in the Basic Materials Sector (GICS = 15)WIS – Worldwide Sales by Operations Located Anywhere

Company Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere

(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

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Basic Materials Sector Sales – US$ Bill.

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Companies in GICS Index

Top 10 Companies(2002)

Basic Materials Sector Sales - % Growth

11Copyright 2004 Global Insight, Inc.

Sales Concentration Ratios for GICS 10 Economic Sectors, Total World

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Industrials

Basic Materials

Consumer Staples

Health Care

Consumer Discr.

Financials

Technology

Utilities

Telecomm Svs.

Energy

(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

Sector-Operating Characteristics:Industry Concentration Ratios

12Copyright 2004 Global Insight, Inc.

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Average Growth RateStandard Deviation of GrowthCoefficient of Variation (COV)

How Volatile is the World Sales Pattern?Sector Growth, Standard Deviation of Growth, and the Ratio of Growth to Standard Deviation (COV):

(Inflation Adjusted Sales,1990-2002)

Sector-Operating Characteristics:Coefficient of Variation (COV)

13Copyright 2004 Global Insight, Inc.

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Volatility of Sector Sales in Various Regions The Ratio of Growth to Standard Deviation (COV)

(Inflation Adjusted Sales, 1990-2002)

Sector-Operating Characteristics:Coefficient of Variation (COV)

14Copyright 2004 Global Insight, Inc.

How Do WIS Sector Profits Compare to Stock Index Peer Groups?

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% Growth - Profits in Basic Materials Sector

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WISUtilities

% Growth - Profits in Utility Sector

Compare WIS Sectors with Peer Group Benchmarks from Company Financial Statements – Total World Basic Materials Sector

(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)

15Copyright 2004 Global Insight, Inc.

Sales and Profits Indicators in WIS Stock Sector Benchmark Facilitates Margin Analysis as part of ROE Framework

Operating Profit Margins (Excludes Depreciation and Write Offs) (Comparison between United States, United Kingdom, and Continental Europe)

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Operating Profit Margin for All Companies in the Technology Sector

in the GICS Classification Scheme • Improvement in profit margins shown as the most likely source of near-term earnings growth in the technology sector

• Framework analyzes the interaction among operating leverage, capacity utilization, and profit margins

• Many sectors will need growth in CapEx to generate high margins

• Financial Re-structuring has been in vogue in many sectors

• CapEx funded with retained earnings• Return on investment and free cash flow

receives greater scrutiny• Yet any sizeable increase in M&A and

CapEx will limit room for improvement in asset efficiency

16Copyright 2004 Global Insight, Inc.

0 1 2 3 4 5 6 7 8 9

Consumer Staples

Utilities

Materials

Cons. Discretionary

Energy

Telecomm's

Total

Industrials

Technology

Financial

Health Care

Percent Growth of US$ Sector Profits

Rank of Profits Growth Rate Forecasts Among the Top-10 Economic Sectors in the United States

Long-Term “Normalized” Sector Profits Growth(Average Percent Growth of Operating Profits in the US, Forecast for 2004-08, Top-10 GICS Economic Sectors)

Forecast Published in Q3 2003

Source: GII World Industry ServiceSource: GII World Industry Service

• WIS sector profits show the underlying, normalized rate of earnings growth

• Sector forecasts consistent with the “top down” analysis from Global Insight’s World Economic Service

• Show normalized sector growth after the cyclical “bounce” of 2003

• Rank growth across sectors for a relative and comparative perspective

• Compare sector performance across the World, European, American and Emerging Markets

17Copyright 2004 Global Insight, Inc.

Use WIS Sector Sales and Profits to Show Relative Valuation of Securities

Sector PEG Ratio: Combine sector measures for prices, profits growth, and sector risks

into a single valuation metric:

Uses two historical measures and one forecast measure Prices: Price-to-Earnings Ratio (Historical P/E) Growth: WIS Profits Growth Rates (Forecast) Risk: Risk-of-earnings growth (Historical Volatility)

Sector PEG metric shows the relative over- and under-valuation of sectors within a portfolio

Divide sector P/E ratio by the Coefficient of Variation (COV)

COV is defined as the profits growth rate divided by standard deviation of growth

18Copyright 2004 Global Insight, Inc.

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P/E Ratio PEG - P/E Adjusted by COV

Sector PEG Ratio = Sector Stock Price Valuation Metric (P/E)Adjusted for Sector Growth and Risk (COV)

(Historical Data for P/E is as of September 30, 2003; COV = Ratio of Forecast Normalized Earnings Growth to Historical Volatility of Growth. Historical Volatility covers 1990-2001, Forecast (made in August 2003) covers 2004-08)

How Much to Pay for Relative Sector Growth and Risk?

Source: S&P, GII World Industry ServiceSource: S&P, GII World Industry Service

19Copyright 2004 Global Insight, Inc.

Please Contact Us for a Personal Demonstration!

More Information?

• Mark Killion, CFAManaging Director, World Industry Service1-610-490-2547mark.killion@globalinsight.com

• Prem PremakumarApplications Manager, World Industry Service1-610-490-2525prem.premakumar@globalinsight.com