How to conduct industry analysis?
(Baboon, 102
Points)
on 8/7/12 at 10:11am
My fellow monkeys,
This is kind of an elementary question but one that I couldn't think of a perfect answer for. If you were assigned on a new deal/project, how would you go about learning everything there is to learn about the industry of the company in question? What exactly would you want to know?
I'm an IBD generalist at a bank and have been working for about a year but i've never actually had to learn an industry well enough during a pitch or a deal. I would assume equity research guys and maybe industry coverage bankers elsewhere are good at this so i would love to get everyone's opinion.
Cheers
Interested as well
Interested as well
This may sound elementary as
This may sound elementary as well, but try using a PEST analysis, or Porters five forces model to conduct an industry analysis.
The key thing to remember is
The key thing to remember is why you are conducting industry analysis to begin with. From a company perspective you want to understand how competition within an industry will affect the company you are analysing going forward. I would start with the Porter's 5 forces framework as i think its a great way to gain a quick overview of the key drivers facing an industry.
1) How competitive is competition between the existing players? Is the industry highly fragmented or concentrated and what do the key players compete on? Is it price or product differentiation?
2) How difficult would it be for new players to enter this industry? Are there massive economies of scale/scope that make this difficult? Do the incumbents have patents or supply chain relationships or distribution networks that shut out new entrants?
3) What is the relationship like between these companies and their suppliers? Are there many suppliers or just a few? Who captures most of the value in the supply chain? Can companies pass on prices to suppliers or use their scale to keep gross margins intact? Is there a threat of forward integration up/down the supply chain?
4) What is the relationship with customers like? Are customers fragmented or a small group? Is the product/service a big ticket item with higher price elasticity or are consumers willing to pay for brand/quality?
5) What new products/services could come along and make this industry obsolete? Are there any substitute technologies or products that might change the relationship between a company and its consumers?
I think if you go through these 5 points you can get a very high level overview of an industry. I currently cover European Telco's and I see a lot of this stuff day to day. Highly concentrated telco markets get turned on their head when regulators deregulate and new entrants come into the market starting price wars trying to gain market share. If you stick to the above framework you should have a rough idea of whats going on.
Ovechkin08: The key thing to
The key thing to remember is why you are conducting industry analysis to begin with. From a company perspective you want to understand how competition within an industry will affect the company you are analysing going forward. I would start with the Porter's 5 forces framework as i think its a great way to gain a quick overview of the key drivers facing an industry.
1) How competitive is competition between the existing players? Is the industry highly fragmented or concentrated and what do the key players compete on? Is it price or product differentiation?
2) How difficult would it be for new players to enter this industry? Are there massive economies of scale/scope that make this difficult? Do the incumbents have patents or supply chain relationships or distribution networks that shut out new entrants?
3) What is the relationship like between these companies and their suppliers? Are there many suppliers or just a few? Who captures most of the value in the supply chain? Can companies pass on prices to suppliers or use their scale to keep gross margins intact? Is there a threat of forward integration up/down the supply chain?
4) What is the relationship with customers like? Are customers fragmented or a small group? Is the product/service a big ticket item with higher price elasticity or are consumers willing to pay for brand/quality?
5) What new products/services could come along and make this industry obsolete? Are there any substitute technologies or products that might change the relationship between a company and its consumers?
I think if you go through these 5 points you can get a very high level overview of an industry. I currently cover European Telco's and I see a lot of this stuff day to day. Highly concentrated telco markets get turned on their head when regulators deregulate and new entrants come into the market starting price wars trying to gain market share. If you stick to the above framework you should have a rough idea of whats going on.
Thanks, this was quite helpful after you put it this way (i would've guessed porters five forces too but you definitely laid it clearer than i imagined). Could you (or anyone else) shed a bit of light as to how much you would be expected to know about an industry if you've worked on a deal in said industry and now are talking about it in the context of an interview? The reason why i'm curious is i'm preparing for buy side interviews and i figured HFs that conduct fundamental analysis would be doing this on a day to day basis and to prepare for this type of interview, I'm guessing I would need to walk the interviewer through the industries i've looked at step by step.
Thanks again for the speedy reply
Sell side ER guys will know
Sell side ER guys will know an industry inside out like the back of their hand given that they specialize in one particular industry. From my short time in the industry I would say that on the buy-side the industry knowledge is not very deep, which is not surprising as very few houses can afford to employ industry specific analysts. Most guys on the buy-side are generalists and use sell side research to dig deeper into any issues they may have.
I've never worked in IBD so I have no clue how much industry knowledge you would have but I'm assuming in any deals you did you had to come up with assumptions for the inputs into your models, especially DCF? In all likelihood those assumptions would have been based on industry dynamics, so I would look back to that for guidance. Again I'm assuming that any deals you did involved M&A and synergies? You should be able to discuss why you felt the M&A was necessary given the current industry dynamics. As an example:
Company XYZ is operating in a mature slow growth industry where top line growth is in the mid to low single digits. Margins are mediocre and the industry is fragmented. XYZ decides to acquire ABC to boost its market share and increase top line growth. Management at XYZ are also confident that the new larger company will have greater scale giving it stronger bargaining power with suppliers. Also, the increased market share may allow the company to boost margins by raising prices and cutting costs through synergies. The result of this, if it happens as planned, is that higher margins should boost ROE which increases value for shareholders.
Try and think about the deals you did in that sense and you should be able to talk about how value was created within the Porter frame work.
Best of luck
I agree porter's five forces,
I agree porter's five forces, concentration, stage in lifecycle, sensitivity to the business cycle, etc are good places to start. In more practical terms, IBISWorld and S&P publish reports on all industries, you can do a search by NCIS number if you have access. Reading those reports is the first thing I do when trying to familiarize myself with an industry.