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Complete Financial Solutions

SECURITY ANALYSIS

Complete Financial Solutions

FUNDAMENTAL

ANALYSIS

FUNDAMENTAL ANALYSIS

� Fundamental analysis is the study of economic, industry, and company conditions in an effort to determine the value of a company's stock.

� Involves analyzing the company’s financial statements and health, its management and competitive advantages and its competitors and markets.

� There are several possible objectives:� to conduct a company stock valuation and predict its probable price

evolution,� to make projection on its business performance,� to evaluate its management and make internal business decisions,� to calculate its credit risk.

STEPS IN FUNDAMENTAL ANALYSIS

APPROACHES USED:

� Top-down Approach

� Bottom-up Approach

Company Analysis

Economy Analysis

Industry Analysis

Geographical Analysis

1. GEOGRAPHICAL ANALYSIS

Based on:

� Topography

� Size

� Location

� Climate

� Natural resources

� Cost effectiveness

NAR

LAC

EMEA

APAC

2. ECONOMY ANALYSIS

� The stock market does not operate in a vacuum. To get an

insight into the complexities of the stock market , one needs to

develop a sound economic understanding and be able to

interpret the impact of important economic indicators on stock

markets.

� Economic analysis is a process whereby strengths and

weaknesses of an economy are analyzed.

ECONOMIC ANALYSIS FACTORS

� Gross Domestic Product (GDP)

� Industrial Production

� Inflation

� Exchange Rate

� Interest Rates

� Unemployment Rate

� Capital Account Deficit

� Government Policy (Monetary & Fiscal)

� Consumer Sentiment

ECONOMIC INDICATORS

Change in Consumer Price Index for services

Manufacturing and Trade Scales

Money Supply

Ratio of Trade Inventories to Sales

Industrial ProductionStock Prices

Average Duration of Unemployment

Employees on Non Agricultural Payrolls

Yield curve slope

LAGGINGCOINCIDENTLEADING

Economists use three types of indicators that provide data on the movement of the economy as the business cycle enters different phases.

ECONOMIC FORECASTING

� Economic forecasting is the process of making predictions about the economy.

� It may be:

1. Short term forecast – upto 3 years

2. Intermediate forecast – 3-5 years

3. Long term forecast – more than 5 years

� Forecasting Techniques:

1. Anticipatory surveys

2. Barometric or Indicator Approach

3. Economic Model Building Approach

1. Anticipatory Surveys

� It is a survey of expert opinions of those prominent in the

government, business, trade and industry.

� Generally it incorporates expert opinion with construction

activities, plant and machinery expenditure, level of

inventory, etc.

� It may also include the opinion or future plans of consumers

regarding their spending

2. Barometric Or Indicator Approach

� In this approach, various economic indicators are studied to

find out how the economy is likely to behave in the future.

� These indicators are classified as:

1. Leading indicators

2. Coincident indicators

3. Lagging indicators

3. Economic Model Building Approach

� In this approach the forecaster makes use of various

independent and dependent variables.

� He must specify the relationship between these variables.

� Assumptions should be clearly stated.

� It yields a definite forecast figure based on precisely stated

factors.

� Gives the direction and also the magnitude.

3. INDUSTRY ANALYSIS

� OBJECTIVES:

� To understand how industry structure drives competition, which

determines the level of industry profitability

� To assess industry attractiveness

� To forecast future profitability

� To identify key success factors

� The five forces are environmental forces that impact on a

company’s ability to compete in a given market.

� They determine the attractiveness of a market i.e., the overall

industry profitability.

� The purpose of five-forces analysis is to diagnose the principal

competitive pressures in a market and assess how strong and

important each one is.

PORTER’S FIVE FORCE MODEL

The Five Forces:

1. THREAT OF NEW ENTRANTS

�� Economies of ScaleEconomies of Scale

� Product Differentiation

� Capital Requirements

� Switching Costs

� Access to Distribution Channels

� Customer loyalty to established

brands

� Government Policy

Entry BarriersEntry

Barriers

Eg. – Power Industry

2. BARGAINING POWER OF SUPPLIERS� Threatening to

� raise prices or

� reduce quality

� Suppliers are likely to be profitable if:

� Supplier industry is dominated by few firms

� Supplier products have few substitutes

� Supplier products are differentiated

� Supplier products have high switching costs

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Eg. Auto ancillary industry

3. BARGAINING POWER OF BUYERS

� Compete with supplier industry by:

� Bargaining down prices

� Forcing higher quality

� Eg. FMCG Industry

Bargaining Power of Buyers

Bargaining Power of Buyers

4. THREAT OF SUBSTITUTE PRODUCTS

�� Buyer propensity to substitute Buyer propensity to substitute �� Relative price performance of Relative price performance of

substitutes substitutes �� Buyer switching costs Buyer switching costs �� Perceived level of product Perceived level of product

differentiation differentiation �� Products with improving Products with improving

performance relative to present performance relative to present industry productsindustry products

� Eg. Electronic products

Threat of SubstitutesThreat of

Substitutes

5. RIVALRY AMONG COMPETITORS

ooOccurs when a firm is pressured or Occurs when a firm is pressured or

sees an opportunitysees an opportunity

ooPrice competition often leaves the Price competition often leaves the

entire industry worse offentire industry worse off

ooAdvertising battles may increase Advertising battles may increase

total industry demand, but may be total industry demand, but may be

costly to smaller competitorscostly to smaller competitors

Rivalry among

competitors

Rivalry among

competitors

Eg. Telecom Industry

CutthroatCutthroat competitioncompetition is more likely to occur when:is more likely to occur when:

� Numerous or equally balanced competitors

� Slow growth industry

� High fixed cost

� High storage cost

� Lack of differentiation

� Diverse competitors

� High exit barriers

BUSINESS CYCLE

The economy recurrently experiences periods of expansion and contraction, although the length and depth of those cycles can be irregular. This recurring pattern of recession and recovery is called the Business Cycle.

Stages in Business Cycle:

� Expansion

� Peak

� Contraction

� Trough

STAGES IN BUSINESS CYCLE

� Expansion

• Production up

• Employment up

� Peak

• Production highest

• Employment highest

• Inflationary pressures (demand more than supply)

� Contraction

• Production down

• Employment down

� Recession

• Trough

• Production lowest

• Employment lowest

The direction in which an economy is heading has a significant impact on companies’ performance and ability to deliver earnings.

SENSITIVITY OF INDUSTRIES TO BUSINESS CYCLE

� Cyclical Industries

• Have above average sensitivity to the state of the economy

• Outperform other industries

Eg. Durable goods industries like:

Automobile industry

Capital goods industry

� Defensive Industries

• Have little sensitivity to the business cycle.

• Outperform others when economy enters recession.

Eg. Food producers and processors

Pharmaceutical firms

INDUSTRY LIFE CYCLE

� Industry Life Cycle consists of the stages of evolution through

which an industry progresses as it moves from conception to

stabilization and stagnation.

� The stage in which a particular industry (and thus, a firm within

the industry) currently exists plays a major role in the way

investors view its future.

Stages in Industry Life Cycle:

� Introduction

� Growth

� Maturity

� Decline

The industry life cycle helps investors to assess the growth potential of different companies in an industry.

4. COMPANY ANALYSIS

� Balance sheet analysis

� Technical analysis

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