In my last article, I covered how to predict earnings of a company and today I am going to write about how to do industry analysis.
The Need for Industry Analysis
Industry analysis is an essential responsibility for an equity research analyst.
As an equity research analyst, you need to analyze a particular industry, see its past trends, demand-supply mechanics, and future outlook.
The industry analysis report sheds light on the economic health of the company, underlining the understanding whether it will be beneficial for the stakeholders to invest in such a company and offering recommendations and/or corrective actions to take in case of any untoward developments in the company.
As an equity research analyst, you might work on industries like Oil and Gas, Metal, Information Technology, Automobile, Financial Services, Infrastructure, Pharmaceuticals and Consumer durables.
In some companies, there is a dedicated industry analyst who will work in the assigned industry and provide the analysis.
However, as an analyst, you should be aware of industry dynamics and hence, it is important to know how to do industry analysis.
How to do Industry Analysis?
An industry analysis is a complicated and time consuming process. If any of the dimensions are missed, the whole analysis becomes faulty. Therefore, in this section, I have highlighted all the necessary steps telling you how to do industry analysis. Use these steps and apply it in your analysis.
What are the steps? Here you go:
1. Review available reports
Read all the available but relevant industry reports and statistics to see whether it makes sense to dig deeper.
Some of the reports you will find already contain in-depth information that the need for new industry analysis is eliminated.
However, it is unwise to depend on existing analysis reports as the market is always volatile and industry factors change constantly.
Therefore, pick up a current report and envisage its relevancy in the current market.
2. Approach the correct industry
An industry has sub-parts. For example, if you look at the chemical industry, you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes, Organic chemicals.
Therefore, it is important to focus on the relevant industry. Without this, it will be impossible to draw an accurate industry analysis report. So, take up an industry and find out the sub-industries. Select the one which suits the company’s purpose. Moreover, it is worthwhile to look at the different market segments in a particular industry.
3. Demand & supply scenario
As any economist will know, demand and supply are the primary factors governing any market. Hence, it becomes relevant to look into the demand-supply scenario for a particular product or industry by studying its past trends and forecasting future outlook.
You can do comparative analysis with other companies competing, in the same manner, to find out the economic health of the company under consideration.
Future demand and supply forecasting help investors understand the viability of future investments in terms of profits and losses.
4. Competitive scenario
This is the most important step of any industry analysis. In this, you need to study the competitive scenario using Porter’s Five Forces Model.
The model acts as the framework for industry analysis. Michael Porter, a famous strategist, and author, first came up with this model. In this model, five parameters are analyzed to see the competitive landscape.
- Barriers to Entry
- Supplier Power
- Threat of Substitutes
- Buyer Power
- Degree of Rivalry
The Porter’s model is extensively used while analyzing any industry.
5. Recent developments
Any industry analysis report isn’t just about studying the particular industry on a micro-level.
The analyst needs to incorporate influencing factors at the macro-level. These macro-level factors include recent industrial developments, innovation in your industry analysis report, sector valuations and global comparative valuation.
6. Focus on industry dynamics
The industry analysis should be specific to a particular industry and thus, it is important to focus and understand the industry dynamics. Your industry analysis should be in-depth and to-the-point.
For example, if you are tracking the aluminum industry, you should know the per capita consumption in the country.
In India, the per capita consumption of aluminum is 1 Kg, in USA, it is 25 to 30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs. Apart from the consumption, you should also know the production of aluminum worldwide.
The above six steps are important and you, as an analyst, should follow them.
The analysts in private equity, investments banks, equity research firms, investment research firms need this skill and if you know how to do industry analysis, you are ahead of 80% of the aspirants as this will not only impress your interviewer but also add immense value to you and the company hiring you.
How to Write an Industry Analysis?
In the last section, we learned how to do industry analysis and in this, we will see how to write one.
Writing is also a required skill as you need to present all the findings within a written report in a concise and clear manner.
Begin by writing a concise overview of the industry.
Mention historical data and the nature of the industry, including its growth potential.
State the influencing economical factors and most importantly, don’t forget mentioning the purpose of your industry analysis.
The concise overview of the industry should include its competitors and their operations.
You can write this in the next section. Write about similar products and services.
Now, with the overview aside, move on the detailed analytical presentation of the specific industry.
Highlight factors like geographical growth, consumer base, price fluctuations, past performances and income projections.
Use existing financial data and industry understanding to forecast industry growth for the next five or ten years. You can use statistical graph in this section.
The next sections should be about using Porter’s Five Forces model and a detailed write-up about its five factors, its use and repercussions in the industry. Don’t forget mentioning governmental regulations relevant to the industry.
Lastly, give long-term and short-term valuations impacting the industry such as any foreseeable problems impacting the business in a negative fashion and potential corrective measures. Wind up the industry analysis report with a very three or four line summarization.
Have you ever thought of learning the skill of industry analysis and want to know how to write an industry report?
Share your thoughts and experience here.