Introduction
Industries are classified according to how they react to upswings and downswings in the economy and what types of products they deal in. This is usually based on general growth pattern, cyclical, defensive and cyclical growth. Growth industries are generally characterized by expectations of abnormal high rates of expansion in earnings, often independent of the business cycle. The growth industries were associated with photography, color television, computers, pharmaceuticals, office equipment, and sophisticated communications equipment. In recent years the growth industries have dealt with such items as cellular phones, genetic engineering, and the environmental/waste management.
Cyclical industries are considered to be those most likely to benefit from a period of economic prosperity and most likely to suffer from a period of economic recession. We shall see later in this chapter that consumer and manufacturer durables, such as refrigerators and drill presses, are these types of products. This is because their purchase can be postponed until personal, financial or general business conditions improved. These industries, then, are considered cyclical.
Defensive industries are those, such as the food-processing industry, hurt least in periods of economic downswing. We will see later that consumer nondurables and services, which in large part are those items necessary for existence- such as food and shelter-, are products in defensive industries. Defensive industries often might even be considered countercyclical, because their earnings might very well expand while the earnings of cyclical stocks are declining.
The Big movers report, NYSE Largest % gain in prices
The big movers are:
The NYSE Largest % gain in prices companies are from financial, Electric Utilities, services, Basic materials, Healthcare, technology and consumer goods sectors. Out of the ten companies financial sector had one company, Electric Utilities sector had three companies, educational sector one company, basic materials one company, consumer goods one company, healthcare sector two companies and technology sector one company (Market watch 1-4)
Riskmetrics Group Inc which is from financial sector the only company has 23.59% operating margin. However ITT Educational Services Inc and NRG Energy Inc had outperformed the all other companies in terms of profitability.
The Big movers report, NASDAQ Largest % gain in prices
The big movers are:
Case Study: Intuitive Surgical Inc Performance
Current and Fixed Assets: For Intuitive Surgical Inc fixed assets, the same upward trend could be observed for the last one year period. Overall, total assets have increased each year for the last three years. Looking at this trend and the positive outlook for the global economy, this trend will continue as Intuitive Surgical Inc will continue with its modest growth plans complementing its savings plan (White, Sondhi, and Fried, 146).
Current and Long Term Liabilities: The company’s current liabilities – debts that are due within a one-year period — have shown an upward. The increases though are very small that in a graphical presentation, the figures would look almost flat. This is probably the effect of the weak dollar exchange that raised the value of accounts payable even if there is a significant drop in the income taxes in 2009. For the long-term liabilities, the company has increased its borrowings for 2009.
Owner’s Equity: Despite the decrease for 2009 in owner’s equity, the company still declared a higher dividend payout. With the company’s strong business model that is founded on social and corporate responsibility, owner’s equity will show the same trend for the years to come. It may even go up a little once the company is able to implement its cost saving measures (O’Sullivan, Sheffrin, and Perez, 19).
Sales Revenues: Sales revenues for the year period showed an upward trend due to the strong international sales in the consumer and medical divisions. The U.S. segment has made a bigger contribution in the pharmaceutical division. Intuitive Surgical Inc continued to become profitable despite the economic slowdown. Since the company is able to weather the recession and come out profitable in the last year, there is every indication that it will do the same within the next three years. Revenues could go higher as the U.S. market becomes stronger and consumer spending will increase, potentially increasing this region’s overall contribution.
EBIT, including unusual items: Most of expenses are used in research and development. The upward growth in 2009 is the result large legal settlements that Intuitive Surgical Inc had with some companies. For the next three years, Intuitive Surgical Inc ‘s EBIT will exhibit the same movement and could up or down depending on the outcomes of outstanding and future legal cases.
Net Income: With the company’s saving measures and the rationalization of some segments, it is expected that net income will show an increasing trend within the next three-year period as a result of efficiencies created by these measures.
Stock Performance: Intuitive Surgical Inc common stock is a good investment today. Looking at the Historical performance of the company’s common stock, its prices have changed well. In October 2009 but it is again expected to increase within the next fiscal period. Comparing these results with that of the S&P 500 Index, it is evident that owning a Intuitive Surgical Inc common stock is a good investment because it is fairly stable in the period when global economy was experiencing a downturn. During this period up until October 2009, the S&P 500 Index has been steadily going down, experiencing its lowest point. Although S&P performed better that Intuitive Surgical Inc during bullish years, the company’s performance in bearish times is very telling of how stable is the company’s operations.
Owning Intuitive Surgical Inc stock does not fully depend on the stock price. It also requires looking at the company’s dividend payouts. Based on a year period, dividends have been increasing since 2008 to 2009. This means that investors should hold on to their common stock because a lower price in the market does not mean that the company is not profitable. It only means that the company has experienced a temporary setback in the short-run that made the market nervous. Moreover, a Intuitive Surgical Inc stock should be evaluated based on the company’s short and long-term goals. This requires looking at the company’s latest quarterly return. This only shows that the company remains profitable despite the lower stock price.
Based on big movers’ analysis, the company is expected to post a 7% increase in sales for the next period as a result of its sound business model and experience. This may be a good period to buy additional Intuitive Surgical Inc common stock while the price is relatively lower. The year 2010 is believed to strengthen the company’s position due to the launching of new drugs and the improvement of the global economy. There is every indication in many parts of the world that the recession is already receding. Even in the U.S., the economy is already recovering, albeit in a slower pace. A recovery of the global economy means that its consumer and medical devices’ divisions will pick up. With positive market outlook, there is every possibility that stock prices are going to stay in the $60s level.
Financial Growth: Domestic vs. International: Comparing the growth of the company’s domestic operations with its international operations, it will come out that international growth rates are higher compared to domestic figures. A segment by segment analysis of sales growth will show the same trend. Of the three segments, pharmaceutical posted the highest growths for the year. Overall, Intuitive Surgical Inc‘s overall growth and profitability are highly dependent on the success of its international and U.S. operations. It cannot be profitable if one region will post substantial losses.
Global Analysis: The global operation of Intuitive Surgical Inc is structured in such a manner that the company is not dependent on any one region to become profitable. In other words, the company’s subsidiaries are fairly distributed and contributing to the overall operation so that there is balance in the revenue stream. Intuitive Surgical Inc has subsidiaries in almost all countries worldwide, making it less affected by an economic slowdown in the United States. In the same manner that a slowdown in one economy will not be badly felt because it can be offset by its other subsidiaries’ results in other geographic locations.
Its capacity to weather an economic recession in the United States is evidenced by 2009 figures. Unlike many companies, Intuitive Surgical Inc managed to post positive growth and higher dividends in 2009 despite the fact that the world was worried about the financial and mortgage industries’ crisis in the Unite States. The reason why the company is better able to manage the slowdown in the U.S. is because of its strong international sales and the nature of its businesses. Intuitive Surgical Inc ‘s international operations are already well-established in their local markets, resulting to overall high sales revenues. In fact, the only segment where the U.S. sales were higher in 2009 was in the pharmaceutical division. In consumer and medical devices, international sales were higher. Because of its stable performance outside of the U.S., Intuitive Surgical Inc ‘s lower pharmaceutical sales for 2009 was not enough to lower the overall profitability of the company. Its strong international presence was able to shelter the company from the recession in the U.S.
Moreover, Intuitive Surgical Inc ‘s business has not been significantly affected by global economic problems because it is manufacturing and selling products that can be considered as necessities. Its consumer products include items that have become part of people’s daily consumption. Most of its prescription drugs do not have a lot of competitors since they serve niche markets. Its medical devices continue to sell because they are also necessary in laboratories and clinics. In essence, Intuitive Surgical Inc weathered the shock because of its strong international presence and the kind of products it is selling.
Further, Intuitive Surgical Inc was able to realize savings in its operations because it does not engage in the traditional distribution channels. Instead of having middlemen in their international operations, Intuitive Surgical Inc has its own distribution and marketing arms so that their products reach customers directly. This can give the company a higher flexibility in pricing, which is very useful when customers are holding on their money.
Intuitive Surgical Inc is a company that holds a true leadership position in the global marketplace because of its sound and flexible business models and its capacity to withstand global economic problems. The company will continue to become one of the most profitable ones within the coming years if it will continue to operate as a socially responsible company that produces quality products to serve the markets’ needs.
The Economy and the Industry Analysis
In the preceding chapter we saw how various techniques of economic forecasting could be brought to bear upon the investment decision. Specifically, we observed how various approaches could be used to forecast components of gross national product (GNP), and we noted that for the investment decision it was often as significant to predict the direction of any change in these sectors as it was to predict their actual level. An example or two will highlight this concept.
When the GNP is growing, unemployment is relatively low and the general economic climate is an economic forecast based upon any of the approaches already discussed would probably show high and increasing levels of expenditures on consumer durables, inventory, and plant equipment. Because business is buoyant and it is generally expected that this will continue, businessmen accumulate inventory in anticipation of still higher sales levels, and they also increase their capacity through plant and equipment expenditures. At the same time, on the consumer’s side of the market, individual households are experiencing high levels, and they also increase their capacity through plant and equipment expenditures. At the same time, on the consumer’s side of the market, individual households are experiencing high levels of personal discretionary income, and they are free to spend some of this money on such things as residential housing, automobiles, and other consumer durables.
Indeed, if prior economic periods had been far less booming than those just described, expenditures on various durable, having been postponed, could now become exaggerated.
It would be desirable at such a time to buy securities or firms in industries most likely to benefit from these purchasing patterns. As you will recall in the opportunistic-model-building approach, the forecaster would arrive at specific estimates of the broad categories we have just mentioned. It is easy to see how such an economic forecast can be helpful, not only in selecting industries that will benefit in a period of general economic prosperity but also in selecting those that will benefit in periods when only certain sectors of the economy are expanding. Much academic research has substantiated the importance of sound industry analysis to successful investment analysis. Examples of the latter type would be defense industries in a period when the federal government is boosting the economy through large national-defense expenditures, and also those industries that will be hurt least during a periods of economic downswing-such as those producing food, something that is always necessary.
Another way of gauging the economy’s performance with special regard to specific industry classifications is to examine regularly the statistics contained in the monthly Federal Reserve Bulletin. By examining the behavior of the various series over time, the analyst can gain insights into important economic developments in many industries and important industry subsectors. An increase in manufacturing could necessitate additional capital spending to add overall manufacturing capacity. If additional capacity comes on-line, price competition would become more prevalent if an occurrence, such as an economic downturn, results in decreased demand for manufactured products. These are but two of the possible implications of the noted increase in capacity utilization. Many more undoubtedly exist. Although such tentative conclusions can be derived from even such a superficial analysis, such observations should be incorporated into the analyst’s overall data base of information.
Characteristics In An Industry Analysis
In an industry analysis, any number of key characteristics should be considered at some point by the analyst. In this section we will enumerate and discuss several of these: past sales and earnings performance, the performance of he industry, the attitude of government toward the industry, labor conditions within the industry, the competitive conditions as reflected in any barriers to entry that might exist, and stock prices of firms in the industry relative to their earnings.
Past Sales and Earnings Performance:- One of the most important effective steps in forecasting is assessing the historical performance of the industry in questions. Certainly, two factors with a central role in the ultimate success of any security investment are sales and earnings; therefore in order to gain perspective from which to forecast, looking at the historical performance of sales and earnings is helpful.
One important factor the analyst might uncover is that the history of the industry is very brief. This finding alone might make him more cautious about a commitment in this industry, because if the industry has not proved its ability to weather a variety of economic growth prospects, the opportunity of getting in on the ground floor might be a paramount consideration.
The historical record of the industry is crucial for yet another reason namely, the calculation of both average levels and stability of performance in both sales and earnings, including growth-rate calculations. Even though past average levels or past variability may not be repeated in the future, the analyst needs to know how the industry has reacted in the past. With knowledge and understanding of the reasons behind past behavior, he is better able to assess the relative magnitudes of performance in the future.
A related factor that the analyst must also consider is the cost structure of the industry- that is, the relation of fixed to variable costs. The higher, the fixed-cost component, the higher the sales volume necessary to achieve the firm’s break-even point. Conversely, the lower the relative fixed costs, the easier it is for a firm to achieve and surpass its breakeven point.
Permanence:- Another important factor in an industry analysis is the relative permanence of the industry. Permanence is a phenomenon related to the products and technology of the industry, whereas the historical record just discussed deals with the behavior of the numbers without regard to the factors that underlie them. If the analyst feels that the need for this particular industry will vanish in an extremely short period of time, it would seem foolish to invest funds in the industry. Sometimes an industry fades from the scene because of a replacement industry that eliminates or diminishes the need for the original industry. Certainly the rise of the automobile caused a decline in the importance of the carriage and the buggy whip, the growth of popularity of margarine hurt the demand for butter, and so on. In this age of rapid technological advance, the degree of permanence of an industry has become an ever more important consideration in industry analysis.
The attitude of Government toward the industry:- It is important or prospective investor to consider the probable role the government will play in the industry. Will it provide support- financial or otherwise? Or will it restrain the industry’s development through restrictive legislation and legal enforcement? For example, if the government feels that foreign competition is too severe for a particular domestic industry, it can impose restrictive import quotas and /or tariffs that would tend to assist the domestic industry. Conversely, if the government feels the domestic industry is becoming too independent, it can remove any existing barriers and thus aid foreign competition. Furthermore, government can assist selected industries through favorable tax legislation.
As government becomes more influential in attempting to regulate business and to advocate consumer protection, the permanence of the industry might well be affected- not in that government interference will necessarily drive it out of business, but in that profits of the industry can be substantially lessened. Some times an industry declines in importance because of legal restrictions that are placed upon it.
Labor conditions: – As unions grow in power in our economy, the state of labor condition in the industry under analysis becomes ever more important. That is, if we are dealing with a very labor-intensive production process or a very mechanized capital-intensive process where labor performs crucial operations, the possibility of a strike looms as an important factor to be reckoned with. This is particularly true in industries with large fixed costs, for fixed costs such as rent and insurance continue even when production is curtailed. If a strike occurs in such an industry,; for example, steel manufacturing, the large fixed costs would cut deeply into profits earned before and after strike.
In a labor-intensive industry, the variable costs would undoubtedly dominate the fixed costs; however, even here, the loss of customer goodwill during a long strike would probably more than offset the possible advantages of low fixed costs might be difficult for the firm to cover.
Competitive conditions:- Another significant factor in industry analysis is the competitive conditions in the industry under study. One way to determine the competitive conditions is to observe whether any barriers to entry exist. Three general types of barriers are:
- a product differentiation edge that forestalls the entry of competition
- absolute cost advantages
- advantages arising from economies of scale.
Product –differentiation advantages generally arise when buyers have a preference for the products of established firms or industries, such as in patent medicines and breakfast cereals. Because existing firms or industries have such an advantage, a new entrant is not likely to be able to charge as high price as they do. Furthermore, a new entrant would probably have to expend large sums of money on sales and promotion expenses in order to procure an acceptable sales level.
By absolute cost-advantages, we refer to the fact that established firms or in industries are able to produce and distribute their products at any level of production or distribution at a lower cost than any ne entrant can. These advantages arise from such things as patents, ownership of resources or other key raw materials, and easier access to necessary equipment, or management skills. With this combination of circumstances, the established firms clearly are more likely to have considerably wider profit margins than their newer competition.
Economies of scale are found in industries in which it is necessary to attain a fairly high level of production in order to obtain economically feasible levels of cost- such as in producing automobiles. A firm attempting to break into such an industry would, under normal circumstances, have to obtain a significant share of the market if it expects to have a competitive cost structure relative to existing firms.
The investment implication when examining an industry that has significant barriers to entry should be clear. An analyst or prospective investor would like to see that the industry in which he is considering investment seems to be well protected fro-m the inroads of new firms; if the industry were protected by product differentiation, not only would it be difficult for new firms to enter it but it would also be exceedingly difficult for new firms to enter it but it would also be exceedingly difficult for new industries’ to develop in competition with the market currently owned by the existing industry.
Recommendation
The utility and healthcare industries is driven by tight margins, and oil companies are constantly looking for ways to boost their share holders’ value. The big movers is amongst the world’s largest integrated energy companies engaged in every aspect of utility industry. They have invested in exploration and production, geothermal, manufacturing, marketing and transportation, power generation and chemicals manufacturing, in addition to renewable and advanced technologies.
History tells us that the crude oil and natural gas industry has always been very competitive, although most lucrative due to the demand for what they produce and sell. Oil and gas consumption is essential to sustain economic growth in the industrialized world, the key to progress. The profitability catch being, oil and gas touch our lives in countless ways, every day; while oil and gas demand increases, existing production decline.
Analyzing per share data for the past one year coupled with its corporate strategies; upstream and downstream, provides a strong recommendation for its stock. This is compelling financial evidence for companies stock’s recommendation.
Works Cited
Market watch. “Stocks with the largest % gain in price.” The Wall Street Journal. 2010. Web.
O’Sullivan, Arthur, Sheffrin Steven, and Perez, Stephen. Economics: Principles, Applications and Tools. Pearson Prentice Hall, New Jersey, 2009
White, Gerald, Sondhi Ashwinpaul, and Fried, Dov. Analysis and Use of Financial Statements. New York: John Wiley, 1997