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SECURITY ANALYSIS
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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
Geographical Analysis
Economy Analysis
Industry Analysis
Company Analysis
APPROACHES USED:
Top-down Approach
Bottom-up Approach
1. GEOGRAPHICAL ANALYSIS
Based on:
Topography
Size EMEA
NAR
Location APAC
Climate LAC
Natural resources
Cost effectiveness
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
Economists use three types of indicators that provide data on the
movement of the economy as the business cycle enters different
phases.
LEADING COINCIDENT LAGGING
Yield curve slope Employees on Non Average Duration of
Agricultural Payrolls Unemployment
Stock Prices Industrial Production Ratio of Trade
Inventories to Sales
Money Supply Manufacturing and Change in Consumer
Trade Scales Price Index for services
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
PORTER’S FIVE FORCE MODEL
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.
The Five Forces:
1. THREAT OF NEW ENTRANTS
Economies of Scale
Product Differentiation
Entry Capital Requirements
Barriers
Switching Costs
Access to Distribution Channels
Customer loyalty to established
Eg. – Power Industry brands
Government Policy
2. BARGAINING POWER OF SUPPLIERS
Threatening to
raise prices or
reduce quality
Bargaining Suppliers are likely to be profitable if:
Power of Supplier industry is dominated by
Suppliers few firms
Supplier products have few
substitutes
Supplier products are differentiated
Eg. Auto ancillary Supplier products have high
industry switching costs
3. BARGAINING POWER OF BUYERS
Compete with supplier industry by:
Bargaining Bargaining down prices
Power of
Forcing higher quality
Buyers
Eg. FMCG Industry
4. THREAT OF SUBSTITUTE PRODUCTS
Buyer propensity to substitute
Relative price performance of
substitutes
Threat of Buyer switching costs
Substitutes Perceived level of product
differentiation
Products with improving
performance relative to present
industry products
Eg. Electronic products
5. RIVALRY AMONG COMPETITORS
o Occurs when a firm is pressured or
sees an opportunity
Rivalry
among
o Price competition often leaves the
competitors entire industry worse off
o Advertising battles may increase
total industry demand, but may be
Eg. Telecom Industry
costly to smaller competitors
Cutthroat competition 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 Contraction
• Production up • Production down
• Employment up • Employment down
Peak Recession
• Production highest • Trough
• Employment highest • Production lowest
• Inflationary pressures • Employment lowest
(demand more than supply)
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 Defensive Industries
• Have above average • Have little sensitivity to the
sensitivity to the state of the business cycle.
economy • Outperform others when
• Outperform other industries economy enters recession.
Eg. Durable goods industries Eg. Food producers and
like: processors
Automobile industry Pharmaceutical firms
Capital goods industry
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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