Industry Survey: An Overview | CFA Level I Equity Valuation

As we delve into industry and competitive analysis, understanding the landscape becomes crucial. This session focuses on conducting an industry survey—a foundational step in grasping the size, growth, profitability, and market share trends of an industry.

Understanding Industry Classification

Before embarking on an industry survey, identifying the correct industry classification is key. This involves using standardized systems like the Global Industry Classification Standard (GICS) to ensure consistency and relevance in our analysis.

Industry Size and Growth

To assess an industry’s size, we look at the annual sales revenue generated by all companies within the industry. However, challenges arise when dealing with private or smaller companies due to the lack of available sales data. In such cases, estimations based on economic indicators or third-party surveys are essential.

Industry growth can be measured by year-over-year rates or compounded annual growth rates (CAGR). Distinguishing between volume-based growth and price-influenced growth provides clearer insights into market demand.

Growth vs. Mature Industries

Industries are broadly categorized as growth or mature based on their market saturation levels and growth potential. While growth industries exhibit rapid expansion often due to emerging technologies, mature industries have reached a plateau with more stable growth rates.

Sensitivity to Business Cycles

Understanding an industry’s sensitivity to economic cycles is crucial. Industries are classified as cyclicals, which fluctuate with the economy, or defensives, which remain stable regardless of economic conditions.

Industry Profitability

Exploring profitability involves looking at return on invested capital (ROIC) trends. This is challenging with private company data, so analysts might use public company margins as proxies or rely on external research data.

Market Share and Industry Concentration

Market share trends offer insights into a company’s competitive advantage and customer preference. Industry concentration, measured by the Herfindahl-Hirschman Index (HHI), indicates the level of competition and potential profitability within the industry.

Key Takeaways

• Industry classification plays a crucial role in setting the stage for accurate analysis.
• Analyzing industry size and growth provides insights into market potential and demand trends.
• Differentiating between growth and mature industries helps in forecasting future trends.
• Understanding an industry’s cycle sensitivity is essential for risk assessment.
• Exploring industry profitability and concentration can reveal competitive dynamics and investment opportunities.

Industry survey is a pivotal step in industry and competitive analysis, laying the groundwork for deeper dives into industry structure using frameworks like Porter’s Five Forces. Stay tuned as we continue to unravel the complexities of industry analysis in our next session.