Columbia University
Graduate School of Business
B9301-74
Advanced Seminar in Investing
Professor Paul Johnson
303 Uris Hall
Thurs: 4:00-6:50 PM
Office Phone: 407-0415
General Overview
In the previous investment classes, most of the analysis was focused on individual companies. In this class we will focus on analyzing specific industries. After this class students should have an understanding of two types of analysis--bottoms-up (individual companies) and top-down (industries or macro analysis). In this exercise, the group is trying to determine whether or not the industry offers an attractive investment opportunity. The goal is to determine whether or not the industry should be rated a "BUY" or a "SELL." In addition, the group should determine the most attractive long investment in the industry and the most attractive short investment. One of the issues that needs to be addressed is the industry’s international exposure. For instance, the auto industry is clearly global in nature and investigating these issues is critical to successful analysis. Despite this lesson having a primary focus on analyzing the industry, students must remember that this is a class on investing, so please focus your analysis on the individual companies within the industry and their stocks when doing this assignment.
Groups will present their analysis during the last third of the course. Each group will be given up to 10 minutes to present their findings followed by 5 minutes of questions by the other students. Seven or eight groups will present per day -- time will be tight and we will move fast -- so please be prepared.
Specific Topics to be Covered
Each group needs to address the following in their industry overview:
1. Historical valuation
The primary question that must be asked is the industry currently "in favor" with investors or "out of favor." To answer this question, the group should look at the historical record as well as the current level of several traditional valuation measures such as the following:
Price/book
Market capitalization (including debt)/revenues
Price/Earnings (P/E)
P/E relative to the S&P 400 or 500
Price/FCF (as defined in class)
EV/IC versus ROIC
2. Historical investment returns
Groups should try to determine the historical investment returns from investing in these industry and how these returns compare with investing in the overall stock market. Keep in mind that returns have to be adjusted for risk, if possible.
3. Demand characteristics
The primary question to be answered is from where does unit demand for this product or service derive and is that demand increasing, decreasing or remaining flat. Each group will need to look at historical unit growth as well as forecast future unit growth. The group should be able to answer the following:
sources of demand
historical unit growth
forecast unit growth for 1 year, 3 years, 5 years, 10 years.
is unit demand cyclical or stable
is unit demand tied to the economic cycle or independent of the economy
4. Industry structure
After determining overall industry unit demand and forecast for growth, the group should layout the industry structure. The goal is to determine market share concentration of the key companies, particularly how this has changed over time. The group should also determine if the products or services within the industry are highly differentiated or commodity in nature. Finally, the group should determine how each of the industry’s market segments are served. Please determine the current and historical record of the following:
major players
market shares
market share concentration
market segments
5. Competitive structure
Once the industry structure is determined, then the group must focus on the competitive forces within the industry. The goal is to determine what forces control overall pricing within the industry. Do the companies within the industry set price because of their product differentiation or market concentration or is everyone a price taker because of the low differentiation between products? Porter analysis can be very effective here, although we will look at other types of analysis as well.
Porter:
barriers to entry
product substitution
buyer’s power
supplier power
rivalry
6. Individual company strategies
Once the industry’s characteristics have been determined, the group should look at the different competitive strategies of the key industry participants. This analysis will not be as in-depth as in prior investment classes, but we are looking for investment opportunities within the overall industry framework. By differentiating the various strategies, the groups should be looking for those companies that would be the most attractive investment vehicles, in terms of both buying and selling the stocks.
7. Cost structures throughout the industry
Students should look to differentiate the different costs structures of the various key market participants, including manufacturing costs, costs of distribution, cost of service and support, and any major differences in cost of financing operations.
8. Individual company financial returns
In this section, look at the financial returns of the key market participants. The primary measure will be return on invested capital (ROIC) as we have defined it in class. The groups should try to calculate the annual ROIC for the past five years and project whether they would expect that trend to continue into the next few years. In addition, please prepare a full ROIC and CAP analysis on at least one of the companies within the industry. The ROIC analysis should include five years of annual performance and an analysis of the past four quarters. The CAP analysis should determine the MiCAP and determine a sensitivity analysis around your growth, profitability and returns assumptions.