Bertrand Groslambert Skema Business School. Portfolio Management 1. Course Outline

Transcription

1 Industry analysis Bertrand Groslambert Skema Business School Portfolio Management 1 Course Outline Introduction (lecture 1) Presentation of portfolio management Chap.2,3,5 Introduction to Bloomberg Modern Portfolio Theory (lectures 2-4) The risk return framework Chap.1 Efficient capital markets Chap.6 The price of risk Chap.7,8 Asset pricing models Chap.9 Fundamental Analysis (lectures 5-8) Analysis of financial statement Chap.10 Industry analysis Chap.12,13 Absolute and relative valuation analysis Chap.11, 14 Stock market valuation analysis Chap.12 Technical analysis (lecture 9) Chap.15 The asset management industry (lecture 10) Portfolio management strategies Chap.16 The different types of investment companies Chap.24 Evaluation of portfolio performance Chap.25 NB: chapters refer to Reilly & Brown 8th and 9th ed. Portfolio Management 2 1

2 Economic/Business Cycles Interest Stock Taux Actions Activité Economic rates market Economique activity Inflation Portfolio Management 3 Economic/Business Cycles Portfolio Management 4 2

3 The Business Cycle and Industry Sectors Rotation strategy Portfolio Management 5 The Business Cycle and Industry Sectors Cyclical or Structural Changes Cyclical changes in the economy arise from the ups and downs of the business cycle Structure changes occur when the economy undergoes a major change in organization or how it functions Rotation strategy is when one switches from one industry group to another over the course of a business cycle Portfolio Management 6 3

4 Structural Economic Changes and Alternative Industries Social Influences Demographics Lifestyles Technology Politics and Regulations Economic reasoning Fairness Regulatory changes affect numerous industries Regulations affect international commerce Portfolio Management 7 Structural Economic Changes and Alternative Industries Excerpts from JPMorgan Retail Pharmacy (CVS/OW, WAG/N) Same-store sales trends given the weak macro environment Impact of generics in 2013 Promotional environment due to efforts to retain/recapture scripts Impact of healthcare reform on prescription utilization Portfolio Management 8 4

5 Evaluating the Industry Life Cycle Five Stage Model Pioneering development Rapidly accelerating industry growth Mature industry growth Stabilization and market maturity Deceleration of growth and decline Portfolio Management 9 Evaluating the Industry Life Cycle Portfolio Management 10 5

6 Evaluating the Industry Life Cycle Portfolio Management 11 Evaluating the Industry Life Cycle Portfolio Management 12 6

7 Evaluating the Industry Life Cycle Portfolio Management 13 Evaluating the Industry Life Cycle Portfolio Management 14 7

8 Analysis of Industry Competition Competition and Expected Industry Returns Porter s concept of competitive strategy is described as the search by a firm for a favorable competitive position in an industry To create a profitable competitive strategy, a firm must first examine the basic competitive structure of its industry The potential profitability of a firm is heavily influenced by the profitability of its industry Portfolio Management 15 Competitive Structure of an Industry Porter s Competitive Forces Rivalry among existing competitors Threat of new entrants Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Portfolio Management 16 8

9 Merger with Alliance Boots Credit Suisse Health Care Conference, discussion with Wade Miquelon, CFO of Walgreen: As I'm sure you read, we have entered into a merger agreement with Alliance Boots and we'd like to say that we're the first global pharmacy-led health and wellbeing enterprise. I think that this really has a chance to change the game, change and shift the paradigm in our industry. And by the time I'm done speaking, I hope that you will agree with me. A word about Alliance Boots; they've been around a long time, I think about 150, 160 years, over 100,000 employees operating in 26 countries and a very successful business. And I would say probably outside the U.S., they are the icon in pharmacy and Alliance is, I think, the best-in-class player internationally in distribution and wholesaling. And together, we believe there's a phenomenal opportunity to not only create significant scale and economic benefit but also, like I said, change the paradigm and enhance our capabilities for the people that we serve and work with in a way that will be very hard to replicate. Portfolio Management 17 Estimating Industry Rates of Return Estimating the Expected Growth Rate (g) Earnings and dividend growth are determined by the retention rate and the return on equity Earnings retention rate of industry compared to the overall market Return on equity is a function of the net profit margin total asset turnover a measure of financial leverage Portfolio Management 18 9

10 Estimating Industry Rates of Return Estimating the Expected Growth Rate (g) Determined by the growth of earnings the proportion of earnings paid in dividends In the short run, dividends can grow at a different rate than earnings due to changes in the payout ratio Earnings growth is also affected by compounding of earnings retention g = (Retention Rate) x (Return on Equity) = RR x ROE Portfolio Management 19 Estimating Industry Rates of Return ROE RR Portfolio Management 20 10

11 Estimating Industry Rates of Return Portfolio Management 21 Estimating Growth Based on History Historical growth rates of sales, earnings, cash flow, and dividends Three techniques 1. arithmetic or geometric average of annual percentage changes 2. linear regression models 3. log-linear regression models All three use time-series plot of data Portfolio Management 22 11

12 Change in the market structure? Credit Suisse Health Care Conference, discussion with Wade Miquelon, CFO of Walgreen: Historically, retail has been from location, location, location as the key and I think it will play a key role moving forward. And as I said we have 8,000 stores and not just stores, but on the best corners I think versus any peer set with the best format for where the future is going. But the world is changing and even though we have these best corners and even though America lives closest to Walgreens with about two-thirds of population living within three miles; it's important that we take this game and we move it from location, location, location to also experience, experience, experience. Portfolio Management 23 Global Industry Analysis The macroeconomic environment in the major producing and consuming countries for this industry An overall analysis of the significant companies in the industry and the products they produce What are the accounting differences by country and how do these differences impact the relative valuation ratios? What is the effect of currency exchange rate trends for the major countries? Portfolio Management 24 12