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National Association of
1st business day of month
Survey of purchasing
Purchasing Managers

*Many of these release dates are approximate.
Source: Charter Media, Inc.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition

396 Part FOUR Security Analysis

Economic Calendar Jan. 22 - Jan. 25

Last Week Next Week

. Time . . . Briefing Market . Revised
Date . Statistic For Actual . . Prior
(ET) Forecast Expects From
Jan 10:00 AM Leading Indicators Dec 1.2% 1.1% 0.8% 0.8% 0.5%
22 2:00 AM Treasury Budget Dec $26.6B $24.0B $24.0B $32.7B $32.7B

Jan 8:30 AM Initial Jobless Claims 01/19 376K 380K 395K 391K 384K
Jan 10:00 AM Existing Home Sales Dec 5.19M 5.25M 5.18M 5.23M 5.21M

F I G U R E 11.6
Economic calendar at Yahoo!

interest. These announcements are reported in the financial press, for example, The Wall Street
Journal, as they are released. They also are available at many sites on the World Wide Web,
for example, at Yahoo™s website. Figure 11.6 is an excerpt from a recent Economic Calendar
page at Yahoo!. The page gives a list of the announcements released during the week of Janu-
ary 22. Notice that recent forecasts of each variable are provided along with the actual value
of each statistic. This is useful, because in an efficient market, security prices will already re-
flect market expectations. The new information in the announcement will determine the mar-
ket response.

Industry analysis is important for the same reason that macroeconomic analysis is: Just as it is
difficult for an industry to perform well when the macroeconomy is ailing, it is unusual for a
firm in a troubled industry to perform well. Similarly, just as we have seen that economic per-
formance can vary widely across countries, performance also can vary widely across indus-
tries. Figure 11.7 illustrates the dispersion of industry earnings growth. It shows projected
growth in earnings per share in 2001 and 2002 for several major industry groups. The fore-
casts for 2002, which come from a survey of industry analysts, range from 10.5% for natu-
ral resources to 69.6% for information technology.
Not surprisingly, industry groups exhibit considerable dispersion in their stock market per-
formance. Figure 11.8 illustrates the stock price performance of 27 industries in 2001. The
market as a whole was down dramatically in 2001, but the spread in annual returns was re-
markable, ranging from a 50.3% return for the networking industry to a 25% return in the
gold industry.
Even small investors can easily take positions in industry performance using mutual funds
with an industry focus. For example, Fidelity offers over 30 Select funds, each of which is in-
vested in a particular industry.

Defining an Industry
While we know what we mean by an industry, it can be difficult in practice to decide where to
draw the line between one industry and another. Consider, for example, the finance industry.
Figure 11.7 shows that the forecast for 2002 growth in industry earnings per share was 16.7%.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition

11 Macroeconomic and Industry Analysis

2001 2002
Percent change from previous year

23.6 24.1 21.1 18.7
10.9 13.2
7.8 10.5
“10.1 “10.5

Basic Cyclical Noncyclical Cyclical Noncyclical Financials Industrials Information Resources Public
industries consumer consumer services services technology utilities
goods goods

F I G U R E 11.7
Estimates of earnings growth rates in several industries“2001 and 2002

But this “industry” contains firms with widely differing products and prospects. Figure 11.9
breaks down the industry into six subgroups. The forecast earnings growth of these more nar-
rowly defined groups differs widely, from 0.9% to 60.5%, suggesting that they are not mem-
bers of a homogeneous industry. Similarly, most of these subgroups in Figure 11.9 could be
divided into even smaller and more homogeneous groups.
A useful way to define industry groups in practice is given by Standard Industry Classifi-
cation, or SIC, codes or, more recently, North American Industry Classification System, or
NAICS codes. These are codes assigned for the purpose of grouping firms for statistical SIC and
analysis. The first two digits of the SIC codes denote very broad industry classifications. For NAICS codes
example, the SIC codes assigned to any type of building contractor all start with 15. The third Classification of firms
and fourth digits define the industry grouping more narrowly. For example, codes starting with into industry groups
152 denote residential building contractors, and group 1521 contains single family building using numerical codes
to identify industries.
contractors. Firms with the same four-digit SIC code therefore are commonly taken to be in
the same industry. Many statistics are computed for even more narrowly defined five-digit
SIC groups. NAICS codes similarly group firms operating inside the NAFTA (North Ameri-
can Free Trade Agreement) region, which includes the U.S., Mexico, and Canada.
Neither NAICS nor SIC industry classifications are perfect. For example, both J.C. Penney
and Neiman Marcus might be classified as department stores. Yet the former is a high-volume
“value” store, while the latter is a high-margin elite retailer. Are they really in the same indus-
try? Still, SIC classifications are a tremendous aid in conducting industry analysis since they
provide a means of focusing on very broadly or fairly narrowly defined groups of firms.
Several other industry classifications are provided by other analysts, for example, Standard
& Poor™s reports on the performance of about 100 industry groups. S&P computes stock price
indexes for each group, which is useful in assessing past investment performance. The Value
Line Investment Survey reports on the conditions and prospects of about 1,700 firms, grouped
into about 90 industries. Value Line™s analysts prepare forecasts of the performance of indus-
try groups as well as of each firm.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition

398 Part FOUR Security Analysis

F I G U R E 11.8 Wireless “34.7
Industry stock price
Utilities “21.9
performance, 2001
Telecommunications “28
Source: Thomson Financial.
Technology “31.7
Software & comp services “7
Retailing “2.4
Networking infrastructure “50.3
Natural gas “22.7
Multimedia “1
Medical delivery “2.3
Medical equipment 0.3
Leisure 3.3
Insurance “4.9
Home finance “3.1
Health care “15
Gold 25
Food & agriculture “0.5
Financial services “9.1
Energy service “21
Energy “12
Electronics “14.7
Developing communications “36.1
Defense Aerospace 1.2
Brokerage “9
Biotechnology “25
Banking 0.4

“60 “50 “40 “30 “20 “10 0 10 20 30
percent return

Sensitivity to the Business Cycle
Once the analyst forecasts the state of the macroeconomy, it is necessary to determine the im-
plication of that forecast for specific industries. Not all industries are equally sensitive to the
business cycle. For example, consider Figure 11.10, which is a graph of automobile produc-
tion and shipments of tobacco products, both scaled so that 1963 has a value of 100.
Clearly, the tobacco industry is virtually independent of the business cycle. Demand for to-
bacco products does not seem to be affected by the state of the macroeconomy in any mean-
ingful way: This is not surprising. Tobacco consumption is determined largely by habit and is
a small enough part of most budgets that it will not be given up in hard times.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition

11 Macroeconomic and Industry Analysis

F I G U R E 11.9
Estimates of earnings
60 growth in 2002 for
finance firms
Percent charge from 2001



19.0 19.0

Banking Financial Insurance Investments Leasing Savings and
services Loans

F I G U R E 11.10
Industry cyclicality.
120 Industry sales, scaled
so that sales in 1963
equal 100.
80 Sources: Passenger car sales:
Ward™s Automobile Yearbook,


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