Deck 6: Industry Analysis

Question 1

Industry life cycles predict an industry's sensitivity to the economy.

Answer 1

False
Explanation: Life cycle growth influences many variables in the valuation process. The particular phase in the life cycle of an industry or company determines the growth of earnings, dividends, capital expenditures, and market demand for products. All of these are complex and affect the economy. Therefore, life cycles are not predictors. They can only accurately be drawn after events have transpired.

Question 2

Investors who follow the bottom-up approach to stock valuation are referred to as industry-analysts.

Answer 2

False
Explanation: Investors who follow the bottom-up approach are called stock pickers.

Question 3

The method that starts the stock valuation process with an economic analysis is called the top-down approach.

Answer 3

True
Explanation: The top-down approach goes from the macroeconomic viewpoint to the individual company.

Question 4

The presence of cash dividends increases the ability of some institutional investors to invest in companies.

Question 5

The life cycle curve in Chapter 6 is graphed so that the steeper the slope of the line, the faster the growth rate of the industry.

Question 6

Firms in the development stage are typically publicly owned.

Question 7

An industry reaches the maturity stage when its sales growth matches the rate of growth of the economy.

Question 8

A frequent source of capital for profitable Stage I companies is venture capitalists.

Question 9

The last step to the top-down approach is to analyze the overall health of the economy.

Question 10

Due to intense needs for capital to fund growth, Stage I companies rarely pay cash dividends.

Question 11

The method of starting the stock valuation process with an analysis of the economy is referred to as the bottom-up approach.

Question 12

The more saturated an industry gets with competitors, the further along the life cycle it will probably be.

Question 13

Stock dividends are used to signal to investors that a company is making profit.

Question 14

The first step in the top-down approach to stock valuation is analyzing the position of the industry in its life cycle.

Question 15

The crossover point on the life cycle curve is the point where companies sell stock in an initial public offering (IPO).

Question 16

The S&P 500 Index and Gross Domestic Product (GDP) seem to have similar long-term growth paths.

Question 17

Stock prices plummet as industries move across the crossover point, because price-earnings ratios collapse as analysts lower growth expectations.

Question 18

Stock prices increase as companies reach the crossover point, since the company's earnings are now more predictable.

Question 19

Firms in the development stage finance their growth from internal cash flows.

Question 20

Industry life cycles measure the growth path of an industry through five stages.

Question 21

Competition can be intense in oligopolies due to price wars and international competition.

Question 22

Analyzing the structure of an industry can help an investor to determine the profitability of the companies in that industry.

Question 23

The lack of barriers to entry tends to help established firms by giving them power to increase prices and profits.

Question 24

If an industry is in the mature phase, this means that all companies in that industry will also be in the mature phase.

Question 25

Companies that do not have a differentiated product and compete on price are probably in purely competitive industries.

Question 26

Pure competition in manufacturing is common in the United States.

Question 27

Industries in the decline stage suffer from shrinking sales because product innovation has not increased the product base over the years.

Question 28

One way of maintaining growth when domestic markets have become saturated is to expand into markets overseas.

Question 29

Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.

Question 30

Ascertaining the competitive structure of an industry can help the analyst to determine the long-term profitability and outlook for that industry.

Question 31

The impact of intense rivalry within industries is similar to the threat of new entrants.

Question 32

It is always a safe bet to invest in companies in growing industries.

Question 33

Dividend payout ratios in declining industries can often reach 100% of earnings.

Question 34

When monopolies exist, they are almost always found in mature industries.

Question 35

The structure of competition in an industry, and how freely companies can compete with each other, is irrelevant for the analysis of companies.

Question 36

The growth rate of the companies that make up the S&P 500 is an excellent proxy for the growth of mature companies.

Question 37

Oligopolistic industries are characterized by many competitors and few barriers to entry.

Question 38

Firms in industries with low barriers to entry are limited in their ability to raise prices.

Question 39

Firms are most able to raise prices on products for which many substitute goods exist.

Question 40

The grocery industry shows a fairly constant relationship between grocery store sales versus real GDP data.

Question 41

Investors should buy consumer non-cyclical stocks in the early stages of recovery.

Question 42

Investors usually anticipate movements in the economy before they actually happen.

Question 43

Rotational investing is defined as the process by which investors rotate out of losing stocks and into new stocks.

Question 44

Competitive strategies of individual firms have an immediate impact on the structure of the industry.

Question 45

When analyzing an industry, individual companies seem to stand out for their superior performance.

Question 46

Different industries react similarly to changes in the business cycle.

Question 47

When studying an industry, it is difficult to determine the "best-" and "and" worst-performing companies in that industry.

Question 48

Analysis of various industries gives the investor insights into the comparative performance of the entire economy.

Question 49

Companies with consistently high returns on equity usually are highly leveraged to take advantage of the large profit margins.

Question 50

Competitive strategies of individual firms do not have an impact on the outlook for the industry as a whole.

Question 51

Rotational investors study the business cycle, and invest in companies that are likely to benefit from the predicted movements of the economy.

Question 52

Most industries are similarly affected by the cyclical swings in the economy.

Question 53

In the final stages of the business cycle, rotational investors will purchase basic materials and energy stocks.

Question 54

A Stage II industry is one that is growing, and thus provides opportunities without much risk.

Question 55

The relative importance of each of the five basic competitive forces is the same for almost every industry.

Question 56

Mature industries are not likely to be sensitive to short-term swings in the business cycle.

Question 57

Companies that have a strong ability to control suppliers enjoy a competitive advantage.

Question 58

Firms such as WalMart and McDonald's have a low level of bargaining power over their suppliers.

Question 59

Intense rivalry between competitors has a different impact on the competitors than a new entrant in the market.

Question 60

Porter's five competitive forces vary from industry to industry, and directly affect the return on assets and return on equity.

Question 61

The pharmaceutical industry is dominated by international companies.

Question 62

Which of the following is the proper order of the industry life cycle?

A)Development, growth, expansion, maturity, decline
B)Expansion, growth, development, maturity, decline
C)Development, expansion, growth, maturity, decline
D)Expansion, development, growth, maturity, decline
E)Growth, development, expansion, maturity, decline

Question 63

When analyzing the structure of an industry, which of the following factors is particular to the company only?

A)Government regulations
B)Barriers to entry
C)Product quality
D)All of the above affect industry structure

Question 64

Which of the following stages does not belong in the industry life cycle?

A)Growth
B)Stagnation
C)Decline
D)Maturity
E)Expansion

Question 65

When using the top-down approach to company valuation, which is the proper order for an analyst to use?

A)Macro-economic environment, company analysis, industry analysis
B)Company analysis, industry analysis, macro-economic environment
C)Macro-economic environment, industry analysis, company analysis
D)Industry analysis, company analysis, macro-economic environment
E)Company analysis, macro-economic environment, industry analysis

Question 66

Which of the following is the most significant positive factor in the future profitability of the pharmaceutical industry?

A)Research and development of new drugs
B)Government regulation
C)Generic drugs
D)Patents

Question 67

The pharmaceutical industry has submitted almost 2,000 drugs per year to the U.S. Food and Drug Administration between 1995 and 2005, and the approval rate is close to:

A)3.3%.
B)8.2%.
C)10%.
D)22.2%.

Question 68

Which investing approach do stock pickers favor?

A)Top-down approach
B)Bottom-up approach
C)Industry analysis
D)Rotational investing

Question 69

Growth firms generally pay higher cash dividends than mature firms.

Question 70

A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)?

A)Basic materials; consumer cyclical; consumer non-cyclical; household durable goods
B)Consumer cyclical; basic materials; consumer non-cyclical; household durable goods
C)Basic materials; household durable goods; consumer cyclical; consumer non-cyclical
D)Household durable goods; consumer cyclical; consumer non-cyclical; basic materials
E)Household durable goods; basic materials; consumer non-cyclical; consumer cyclical

Question 71

It is almost always unwise to invest in an industry which is entering Stage III of the industry life cycle.

Question 72

A technically innovative firm in a mature industry may provide better growth opportunities than a high-growth industry.

Question 73

Which of the four following industries was not mentioned as an example of a consumer non-cyclical industry?

A)Utility companies
B)Food stocks
C)Pharmaceuticals
D)Tobacco stocks

Question 74

The pharmaceutical industry has to be concerned about the competition from generic versions of their drugs during the first 5 years after the release of a new drug.

Question 75

Which of the following competitive forces is not one of the five mentioned in this chapter?

A)Threat of market entry by new competitors
B)Threat of substitute goods
C)Bargaining power of customers
D)Intensity of rivalry among competitors

Question 76

Which of the following industry sectors would an investor want to purchase at the trough of the business cycle?

A)Basic materials
B)Consumer non-cyclical goods
C)Consumer cyclical goods
D)Household durable goods

Question 77

Which of the following economic structures of industries was not specifically mentioned in this chapter?

A)Monopoly
B)Pure competition
C)Semi-strong competition
D)Oligopolies

Question 78

Why would an investor want to use the rotational investing method?

A)It allows the investor to rotate out of losing stocks
B)The investor is attempting to profit from movements in the economic cycle
C)It is an easy method of employing dollar-cost averaging
D)It assures the investor of owning the proper mix of stocks and bonds
E)It is easy to time the market for higher returns

Question 79

Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry?

A)Government regulation
B)Demographic trends
C)Generic drugs
D)Use of too much debt in their capital structure

Question 80

Which of the following four industry sectors would benefit the most from rising inflation?

A)Consumer cyclical goods
B)Basic materials
C)Household durable goods
D)Consumer non-cyclical goods