Chapter 14
INDUSTRY ANALYSIS
Multiple Choice Questions
Overview
1. In fundamental analysis, industry analysis is the:
a. first step.
b. second step.
c. third step.
d. fourth step.
(b, easy)
What Is An Industry?
2. Standard & Poor's new Global Industry Classification system divides
everything into _________economic sectors.
a. 10
b. 20
c. 30
d. 40
(a, easy)
3. Standard and Poor's new Global Industry Classification System
already includes _______ companies.
a. 10,000
b. 25,000
c. 50,000
d. 75,000
(b. moderate)
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4. A well-known and widely used system that classified industries for
more than 60 years was the:
a. Commercial Industrial Classification system.
b. National Industrial Classification system.
c. Standard Industrial Classification system.
d. American Industrial Classification system.
(c, easy)
5. Which of the following covers approximately 1,700 companies,
divided into 96 industries?
a. SIC
b. NAICS
c. GICS
d. Value Line Investment Survey
(d, moderate)
The Importance of Sector/Industry Analysis
6. Industry analysis is important because:
a. companies can only do as well as their industry.
b. industries often have an inverse relationship to the market.
c. industries perform very differently over time.
d. companies in declining industries lose money.
(c, moderate)
7. If an industry is ranked number one, based on price performance such
as the
S&P Industry Stock Indexes, an investor
a. cannot necessarily expect that same industry to be ranked number one
again next year.
b. can usually depend on an industry to maintain its top ranking for five
years or more.
c. can expect that industry to do well over the next 10 to 20 years.
d. can expect that industry to drop out of the top ten within five years.
(a, moderate)
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Analyzing Sectors/Industries
8. Which life cycle stage generally sees industries improving their
products, lowering prices, and start to attract considerable investment
funds?
a. pioneering stage
b. expansion stage
c. stabilization stage
d. maturity stage
(b, moderate)
9. Weaker firms typically fail the most in the:
a. pioneering stage.
b. expansion stage.
c. stabilization stage.
d. maturity stage.
(a, moderate)
10. Which of the following is not one of the stages of the industry life
cycle?
a. introductory
b. declining
c. stabilization
d. pioneering
(a, easy)
11. The basic competitive factors facing industries include all of the
following except:
a. bargaining power of suppliers
b. threat of government regulation
c. rivalry between existing competitors
d. threat of substitute products
(b, difficult)
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12. Which of the following is limitation of the life cycle approach to
security
analysis?
a. It focuses on sales rather than stock prices.
b. It focuses on the past more than the present.
c. It does not consider the risk in the different cycles.
d. It does not consider quantitative factors.
(a, moderate)
13. At what stage in the industrial life cycle do financial policies become
firmly established?
a. Pioneering stage
b. Expansion stage
c. Stabilization stage
d. Declining stage
(b, moderate)
14. The U.S. is moving from an ---------- society to an ----------- society.
a. agricultural; industrial
b. agricultural; information
c. industrial; information
d. industrial; international
(c, moderate)
15. When conducting industry analysis, investors should consider the
historical record of all the following except:
a. sales growth.
b. earnings growth.
c. interest rates.
d. price performance.
(c, moderate)
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16. Which of the following statements about the industry life cycle is
incorrect?
a. All industries can be classified very accurately into a specific phase.
b. Companies may stay in one phase for a significant period of time.
c. The general framework may not apply to some industries.
d. This approach does not explicitly lead to a stock price determination.
(a, difficult)
17. The most important point of Michael Porter's analysis is that industry
profitability is a function of
a. economy.
b. interest-rate level.
c. industry structure.
d. industry beta.
(c, moderate)
18. Which of the following is NOT among the qualitative factors that
should be analyzed to assess an industry's future?
a. Historical performance
b. Competition
c. Growth rate of sales
d. Structural changes
(c, moderate)
19. Regarding the qualitative aspects of industry analysis, the breakup of
AT&T in 1984 would be considered a:
a. structural change.
b. government effect.
c. competitive effect.
d. cyclical effect.
(b, easy)
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Using Sector/Industry Analysis As An Investor
20. Gold mining is a good example of a:
a. growth industry.
b. defensive industry.
c. cyclical industry.
d. countercyclical industry.
(d, moderate)
21. Which of the following types of industries is likely to be least affected
in a recession?
a. Cyclical
b. Interest-rate sensitive
c. Growth
d. Defensive
(d, easy)
22. Which of the following industry categories is said to be "bought to be
sold?"
a. cyclical
b. defensive
c. growth
d. countercyclical
(a, moderate)
23. Which of the following is not considered an interest-rate sensitive
industry?
a. building industry
b. banking industry
c. financial services industry
d. tobacco industry
(d, easy)
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24. Which of the following sectors was adversely affected by the recent
accounting changes requiring the expensing of stock options?
a. manufacturing
b. technology
c. energy
d. utilities
(b, moderate)
True-False Questions
What Is An Industry?
1. The Value Line Investment Survey covers approximately 90
ndustries.
T, moderate)
2. The NAICS puts companies to industries based on the activity in
which they are primarily engaged.
(T, moderate)
3. A source of industry rankings in terms of expected performance over
the next 12 months is The Value Line Investment Survey.
(T, moderate)
The Importance of Sector/Industry Analysis
4. It is a relatively simple matter of finding industries that will perform
well in the short run.
(F, moderate)
Analyzing Sectors/Industries
5. In the expansion stage, products become more standardized.
(F, difficult)
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6. One limitation of the life cycle approach is that not .all companies fall
into a specific category.
(T, easy)
7. The expansion stage of the industry life cycle is probably of most
interest to investors.
(T, moderate)
8. Since performance is not always consistent, an industry's track record
should not be of much concern to investors.
(F, moderate)
9. The pioneering stage offers the greatest risk for investors.
(T, easy)
Using Sector/Industry Analysis As An Investor
10. The food industry is a good example of a countercyclical industry.
(F, moderate)
11. Growth industries often perform well during economic setbacks.
(T, moderate)
12. Countercyclical and defensive are different terms for the same industry
type.
(F, moderate)
13. Buying stocks in low P/E industries produces higher average returns in
up markets but also higher average losses in down markets.
(F, moderate)
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Short-Answer Questions
Analyzing Sectors/Industries
1. How can historical performance help the analyst assess the future prospects
for an industry?
(moderate)
Answer: Historical performance tells the analyst where the industry has been. It
provides a starting point. The analyst adds judgment and information
about new products, markets, competition, etc. to reach an opinion
about the future prospects of the industry for the future.
2. In which stage of the industry life cycle is it most difficult for the analyst to
assess industry prospects and identify the leading companies?
(moderate)
Answer: The pioneering stage is most difficult because the long-run
viability of the industry has not yet been proven. What seems like the
way of the future may turn out to be a passing fancy. Companies have
not proven which ones will be able to rise above the competition and
prevail in the long run.
3. What are four basic aspects of qualitative assessment of industries?
(easy)
Answer: Historical performance, competition, government effects, and
structural changes.
4. What are the five competitive factors identified in the Michael Porter model?
(easy)
Answer: The threat of new entrants, bargaining power of buyers, rivalry
between existing competitors, threat of substitute products or services,
and bargaining power of suppliers.
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5. Give several examples of government effects on industries.
(moderate)
Answer: For example, deregulation in the financial services industry has
removed barriers to competition among institutions; allowing
supermarket banking, where the customer can have checking and
savings, borrow money, make securities investments, and buy
insurance all under one roof. Another example is the public and
government sentiment against tobacco products, which has led to
increased federal taxes and law suits filed by state governments against
tobacco companies.
6. When should companies in cyclical industries be bought?
(moderate)
Answer: An investor would like to buy cyclical stocks in a recession when
earnings prices are low relative to historical standards. Interestingly,
P/E ratios are often high because earnings are depressed relatively
more than prices. When the economy strengthens, so will company
earnings and prices.
Using Sector/Industry Analysis As An Investor
7. Differentiate between defensive industries and countercyclical industries.
(easy)
Answer: Defensive industries are least affected by recessions and economic
downturns; whereas, countercyclical industries go against the business
cycle.
8. Would it be useful to the analyst to compare industry data to basic economic
data such as the GDP or consumer spending?
(moderate)
Answer: An analyst often looks for industries that are growing faster than the
economy as a whole or gaining a increasing share of consumer dollars.
A relevant economic measure can be found for specific industries.
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Critical Thinking/Essay Questions
1. What industries do you think will be the growth industries of the next
decade?
(moderate)
Answer: This one is certainly open-ended and open to debate. A few
possibilities include computer hardware and software, communications
in various forms, anything related to the Internet, robotics, genetic
engineering, financial services, and medical services. Global and
domestic possibilities abound. The greatest ones will be products or
services that do not yet exist.
2. Portfolio diversification often focuses on cross-industry diversification to pick
up correlation coefficients and risk-expected return characteristics that create
the portfolio effect. Suggest a realignment of "industry" classifications to
reflect fundamental relationships sought through the more casual traditional
industries.
(difficult)
Answer: "Industries" might be defined in terms of riskiness relative to the
market (i.e. betas) or to specific economic variables (i.e. correlation
coefficients) rather than on the types of products they produce. The
resulting new "industries" might be much the same as the old ones, but
there might be greater ease in asset allocation. Mutual fund annual
reports would categorize companies according to betas or correlation
coefficients rather than according to traditional industries (e.g.
aerospace, pharmaceuticals, etc.).
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