In my last article, I covered how to predict the 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 of 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?
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 them 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 a 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 in any industry analysis.
In this, you need to study the competitive advantage 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.
They are:
- Barriers to Entry
- Supplier Power
- Threat of Substitutes
- Buyer Power
- Degree of Rivalry
Porter’s five forces model and competitive forces are extensively used while analyzing any industry.
5. Recent developments
Any industry analysis report isn’t just about studying a 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 aluminium industry, you should know the per capita consumption in the country.
In India, the per capita consumption of aluminium is 1 Kg, in the USA, it is 25 to 30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs.
Apart from consumption, you should also know the production of aluminium 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 business owners 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, competitive strategy, SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis, new competitors, business plan, competitive forces, and most importantly, don’t forget to mention the purpose of your industry analysis.
The concise overview of the industry should include its competitors and its operations.
You can write this in the next section. Write about similar products and services.
Now, with the overview aside, move on to 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 the statistical graph in this section.
The next sections should be about using Porter’s Five Forces model, competitive advantage, and a detailed write-up about its five factors, its use, and its repercussions in the industry.
Don’t forget to mention 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.
Read this guide to know the importance of industry analysis in equity research careers.
Industry Life Cycle
Now, we will see, different stages in the industry life cycle.
There are stages in everybody’s life like childhood, adult, middle age and then old age.
Likewise, there are four stages in every industry’s life cycle.
If you observe the Gaming industry closely, you will find that there are many firms out there having high investment rates, high rates of return on investments and low rates of dividend payout.
The same observation can be conducted on the steel industry and you will find firms with low rates of investment, low rates of return and higher dividends payout. What could be the possible reason for this difference?
Let’s find out.
In Recent times, better opportunities have been created by available technologies for substantially profitable investment of resources.
Patents safeguard new products and there are high-profit margins.
Such rewarding opportunities allure the firms in putting all profits back into the firm and the growth of firms, on average, is speedy.
However, the growth must slow down in due course of time.
Looking at the high-profit rates, more and more firms are encouraged to enter into the industry.
As a result, the competition increases affecting the prices and profit rates.
Advanced and new technologies start becoming more obvious, the extent of risks decreases making the entry easier.
The degree of reinvestment in these firms reduces as the internal opportunities become less lucrative and the cash dividends become high.
Eventually, cash cows are noticed in a mature industry.
By cash cows I mean firms having consistent cash flows, dividends, and low-risk levels.
Growth rates may be analogous to that of the overall economy.
High risk and high returns on investments are offered by industries in the initial stages of their life cycles.
On the other hand, low risk and low returns are offered by mature industries.
Thus, from the above analysis we can say that an industry life cycle can be classified into 4 stages:
Industry life cycle stages
Start-up stage in which growth is extremely fast, consolidation stage in which growth is not as fast as start-up stage but is faster than the general economy, maturity stage in which growth is not faster than the general economy and the relative decline stage in which the growth rate is less than that of the general economy.
1. Start-Up Stage
New technologies like personal computers or wireless communication portray the initial stages of an industry life cycle.
At this stage, it is very difficult to anticipate which firms will succeed; some firms will be a total success while some might fail completely.
Hence, the risk involved in selecting any specific firm in the business is quite high at this stage.
However, at this stage, since the new product has not yet flooded its market, there will be rapid growth in sales and earnings at the industry level.
Like, for example, in the 1980s, personal computers were a part of very few houses, while on the other hand, products like fans or even refrigerators were part of almost every household.
So naturally, the growth rate of products like refrigerators will be much less.
2. Consolidation Stage
Once the product has proved itself in the market, several leaders in the industry start surfacing.
The start-up stage survivors become more stable and market share can be easily envisaged.
Thus, the performance of the industry, in general, will be more minutely tracked by the performance of the firms that have survived.
As the product breaks through the market place and is used commonly, the growth rate of the industry is still faster than the rest of the economy.
3. Maturity Stage
The product has attained the full aptitude to be consumed at this stage by the users.
So, any growth from this point just tracks the growth of the economy in general.
At this stage, as the product gets more and more standardized, it compels the producers to compete heavily on a price basis.
As a result, the profit margins are lowered and add to the pressure on profits.
Most often, firms at this stage are referred to as cash cows as their cash flows are quite consistent but offer very little opportunity for growth of profit.
Instead of reinvesting the cash flows in the company, they are best milked from.
4. Relative Decline
In this stage following features are identified.
- Costs become counter-optimal
- Sales volume decline or stabilize
- Prices, profitability diminishes
- Profit becomes more a challenge of production/distribution efficiency than increased sales.
Which industries do you think will give the highest returns in the next 2-3 years?
I am sure, you are now clear about the different stages in the industry life cycle.
Want to become a sector or business specialist?
Here are some courses that will help you to become a top-class industry analyst.
hey this is shiva,
thanks for this articles its very helpfull to me , what are the main points should be list out in market trend and Competitors analysis report- hope positive reply form you –
thanks–
Hi,
I suggest you read at least 5 annual reports/ Equity research report of the companies in a particular industry. In industry outlook/market outlook section, you will get the main points for THAT industry.
How do I go about doing an industry analysis of Machine Learning in health care
Hi Aanika,
Please follow the steps mentioned in the guide above and you will be able to do it. Also, read Annual Reports of companies that provide Machine Learning in Health Care. I suggest you read reports of 5 companies for the last 3-5 years and you will understand the key pointers in the industry.
Avadhut
Thanks! I found your articles very helpful and interesting. I don’t have a background in finance, investment or marketing but have been asked to teach a course that looks at a sector from the point of view of a company operating in the same sector.
My students have no background in business studies either.
How can I do this? Your input will be invaluable.
Thank you again!
Hi Prema,
Email me for a detailed career coaching session.
Can you please guide me with any extra tips for Indian banking industry and some parameters for comparison?
Hi Aparna,
Kindly check our online program for this.
We plan to do an industry analysis about the pottery industry but the problem is that we do not have those needed data to do the analysis. What to do?
Hi Anne,
I am sure Central Government agencies in your country publish industry reports every year. Please check these reports to get the data.
Hi
I want to do an industry analysis for the power sector.
How can I find the demand and supply scenario for the same?
Hi Nikita,
Please read Economy reports published by Government Statistics. Also, some private agencies do this research and publish reports.
where do we get industry reports ?
Hi Advik,
You can search on Google. Many sites will give these reports.
hi, am doing analysis of Cocoa Industry
hi sir, thanks so much for such a valuable article. i am currently doing analyticalresearch on the future of regional airline carriers in the UK. can you please help on what to include in the study.
Hi Alex,
Read the guide again. You can check our Industry Analysis courses for the same.
I have to do an industry review for the retail industry in Barbados and after alot of searching I can’t really find any info. Any tips on how to go about it?
Hi Ruby,
How about contacting Govt research agencies. High chances are that they keep this information.
sir,
I want to analyis Rail & metro Industries, could you pls help me
Hi Gaurav,
I suggest you learn the art of analyzing any industry.
Please contact me to know how you can learn this.
Nice Writer, Thank You
Good and simple article
sir. I want to analyse international universities.. what is the first step.. and on what steps I need to focus on..
Dear Manjot,
What’s the purpose to analyze international universities?
Great Info. I am in the process of writing a trend analysis on cut flowers and live plants in the UAE market. Help?
Hi,
How can I help?
Hello Sir, Please am doing an analysis of two companies in food producing sector.Am done with the ratios analysis. Could you please guide me through the next step?
Dear Dyana,
Please apply Porter Model now.
My school kids need to learn to do a basic industry analysis. Do you have a plan I could follow to help them write it? I’m not a marketing or finance teacher and this task is very challenging.
After reading your article I realise I will have to explain Porters 5 forces to them.
I’d be happy to have any input from you.
Thanks
Dear Poly,
Please go ahead.
Thank you very much for this article. It helped me understand quicker!
Great article! Even the comments hold valuable info!
Cheers,
Mike
Hello sir, I’am student from Malaysia and now taking the Bachelor of Fiance and Banking. i have a task to find out the oil and gas industry analysis. can you help me?
Dear Azmi,
Join this course.
Hi Sir,
I need to do industry analysis on Fertilizers segment. Can you help me with how i can start and what things to cover and refer some material for analysis.
Thanks in advance.
Dear Jitendra,
Please read ALL the articles in this category.
Hi Avadhut,
This is a great article thanks for sharing, very helpful. I’m doing a fairly in-depth industry analysis on the global music streaming industry and was wondering if you had any relevant information or data you could share, or point me in the direction of?
I will be doing using Porter’s 5 forces as well as a PESTEL analysis of the near environment, so am looking for a lot of different data points and info, so whatever you have I’m sure would help.
Thanks again.
Mike
Dear Mike,
Please run a specific search on Google for this.
Hello,
Thank you for putting this here. I’m asked to write market/industry analysis about storybooks, what can I start with, please?
Dear Adeniran,
Please start learning the industry: 4 Ps – Product, Place, Price, Promotion.
Hello sir,
thanks for the valuable information. i was asked to do an industry report on the financial services sector. Any help and sample report?
Thank you
Dear Wumi,
Please do the secondary research.
Hello Sir , i have been asked to do an industry analysis of a certain bank what can i start with.
Dear Munache,
Follow the steps mentioned in the above guide. Also, read this guide too.
Thank u sir
Im asked to do an industry analysis on wedding planning, any help?
https://www.loc.gov/rr/business/wedding/
Thank you so much
Am glad to meet you
Hello. 🙂 I was asked to do an industry analysis report on the hotel industry, specifically on Grand Central Enterprises Berhad. Would you kindly help me explain it more in detail? What exactly is the internal business process? I’m kinda new to this accounting course as well. Thank you. 😀
Hi,
It’s not possible to explain this here.
What you can do:
1. Read Govt agencies industry reports on the hotel industry
2. Read Annual reports of companies which are in hotel industry, preferably of 3 companies of the last 3 years.
3. Read the industry outlook section in Annual reports to have an insight.
Hope this helps. 🙂
Hi, I am try to do an industry report for mineral transport. But most of the information I’ve found is talking about transportation and mineral industry. Could you tell me where I need to start it.
Thank you!
Hi Tim,
You can take clues from these reports.
What you can do:
1. Read Govt agencies industry reports on the mineral industry
2. Read Annual reports of companies which are in the mineral industry, preferably of 3 companies for the last 3 years.
3. Read the industry outlook section in Annual reports to have an insight.
Hope this helps. ?
Hi! Thanks for the article. I work in the Corporate Development Department of an Investment Company. As a department we are expected to assist the Investment team to focus on specific sectors/industries where there are opportunities for purchasing private equities – usually in companies that require funding to grow and expand. So we highlight to the Investment team the sectors/industries that show growth potential. Basically, we need to base our recommendations based on certain quantitative & qualitative parameters after conducting (not on a company level – as that will be done by the Investment team themselves) sector & Industry Analyses. We are a department of 3 and would love to receive some training in this field. Please advise if you are able to deliver such training, or else please direct us to the appropriate body that does that. We are willing to treat this as a formal corporate training. Thanks.
Hi Suad,
Yes, we will be able to deliver this. Kindly contact me.
hi im asked to do an industry analysis on winery industry…. could you maybe walk me through i should do pleaseee
thank you
Hi Vaitai,
This will help.
Hi, I have two questions!
I am task to do an industry analysis for the global construction market.
1) I am having troubles finding data for the global market 🙁 Any recommendations?
2) Where can I find an example of an industry report. Not just a website teaching me the steps.
Thank you!
Hi Bi,
1. If you’re working in a company, they must have databases like Bloomberg. Use it to your advantage.
2. This should help.
Australian Retail Industry and ecommerce industry Research. I need stats on total retail sales by Australian state comparing total ecommerce sales and total in store sales.
Will somebody guide me how to proceed ?
This might help.
Please let me know about the Financial Engineering. Whats it scope? and Its application.
Hi Zulfiqar,
Financial Engineering is a combination of finance and mathematics. It’s also called quantitative finance/ mathematical finance.
You’ll find its application in different fields- corporate finance, structured products (derivatives), risk management, investment banking, hedge funds and money management.
Thanks for your valuable info.
Is Financial Engineering has it application in Accounting?
Hi Zulfiquar,
It’s other way round 🙂 Financial Engineering takes concepts from Accounting, Finance and Math.
Hi Avadhut,
My Background –
My Qualifications
MBA Finance,
CFA Level 1,
NSE Level 2,
Experience
Loan admin @Commercial Mortgage servicing company(Mortgage servicing) – 1 year
Finance Admin@ Manufacturing firm(Preparing balance sheets,audit,budgeting sales, inventory) – 1 year
My Questions
1) i would like get into a equity research firm as equity research analyst or any firm where i would work on price valuation of bonds and derivatives. How do you suggest i go for it and Please list specific skills for each of them?
2) Most of the Financial Modelling courses i find teach company valuations, Financial statement projections… do you know any course where i can learn to model pricing of bonds and derivatives
3) I find most of the equity research jobs ask for specific industry expertise, how do i develop knowledge about a specific industry
Thanks
Hi Rancho,
1) Equity research firms are into equities, not into bonds or derivatives. No idea of skills required for the role.
2) You should go for financial engineering programs. Check NISM programs.
3) Read this post once again. Take any industry which you understand well…at least basic level. Then take 3-4 companies in that. Read Annual reports of these companies thoroughly – from first page to last page. You will understand the business model of these companies. Then look at the major players in the industry and see how do they run the business.
Hope this helps.
Hello sir, I have finished with the financial analysis of the companies ( Sunpharma, SPARC, Wyeth, Ajanta Pharma, Natco) like ratios and balance sheet analysis.
So what is the next step should I follow that I can give a call on this companies.
Prasenjit,
Next step is to do fundamental analysis of these companies. If you think these companies are fundamentally strong, then, the next step is to do Discounted Cash Flow valuation and relative valuation.
How should I proceed for Discounted cash flow valuation?
You can Google it for the steps or wait for our videos.
okkk. thank you sir…
Avadhut
Great article, I am currently doing a research internship and would like to do an industry analysis of gaming & lottery industry. Can you please guide me as to how to proceed. Your advice will be greatly appreciated.
Hi Kelis,
Gaming and Lottery are two different industries and you need to see competitive landscape, demand supply side and use Porter’s 5-forces model to do the analysis.
Gaming Industry Links:
https://www.esrb.org/about/video-game-industry-statistics.jsp
https://www.byreputation.com/gaming-industry-statistics_a/329.htm
https://www.wisegeek.com/what-is-gaming-industry-analysis.htm#did-you-know
How to research any industry :
https://www.virtualpet.com/industry/howto/search.htm
Take a clue from these links.
All the best 🙂
Regards,
Avadhut
Thank you.
Hi Avadhut,
I am currently doing my summer internship. I want to perform an industry analysis on “Online Confectionery Gifting worldwide” to estimate the business potential and take a decision about launching a new website.
Can you please guide me through this.
Regards
Ajay
Hi Ajay,
You need to do market research for that. If you don’t have the resources, find a report by research agencies.
Regards,
Avadhut
Hello Sir, I am doing my summer internship in equity research. I have taken up the pharma sector, So if you can kindly guide how should I proceed and what should be my ultimate goal(the final output) that will be getting. I would be really thankful if you can guide me as I am unable to understand what should I do as I am not getting much of cooperation from my mentor.
Hi Prasenjit,
If you have taken Pharma industry for analysis, then your goal should be to find out top 3-5 companies for investment.
First of all use Porter’s 5-forces model on Pharma industry. You can also visit this link for more information.
Use your own parameters to select the best companies.
Hope this helps.
Regards,
Avadhut
Thank you very much sir, You are really helpful.
Hello Sir,
I would request you guide me, like what parameters should i select for selecting the best companies.??
Thank you.
Hi Prasenjit,
Here are some important parameters that you can use:
Financial Parameters for stock selection:
•CAGR % in Sales and Profit
•Your view about investing in this sector
•Gross Profit % over last 8-10 years
•Operating Profit % over last 8-10 years
•Whether Operating Cash Flow > Net Profit
•Operating Cash Flow = Net Income + Noncash Expenses + Changes in Working Capital
•Debt-Equity Ratio –Lower the better
•Current Ratio – Better than 1.5 preferable
•Dividend Payout ratio
•Altman Z-Score
•Capital Turnover Ratio for last 10 years
•Return on Equity and Return on Capital (ROE & ROCE) for last 8-10 years, higher ratios (15%+) shows management’s capital allocation skills.
•Return on equity (%) = Earnings / Shareholders’ funds
•Return on capital employed (%) = Operating profit / Shareholders’ funds + debt (and similar)
Thank you very much sir..
Great Article, Really helpful for me.
Thank you very much sir.
Thanks for Such valuable information..on Industry analysis..really..can u please explain a practical example of industry analysis while we do fundamental analysis of a particular stock??
Hi Anand,
Glad that you liked the article.
Keep reading the articles. In coming few weeks I will be covering that too.
Regards,
Avadhut
Thanks for making understand by taking famous concept of Michel Porter, i am also looking forward to some practical example of industry analysis.
Hi Sir,
Thanks for your valuable inputs, it has been really helpful. i hope you will keep up this good work
Thanks Syed for appreciation and love.