Transcript DRI•WEFA Financial Services Vertical Kick-Off

Introduction to Global Insight’s
WIS Stock Sector Benchmarks
A New Tool for Financial Analysis
Presented by
Mark Killion, CFA
Managing Director
Global Insight’s World Industry Services
Copyright  2004 Global Insight, Inc.
WIS Stock Sector Benchmarks:
A New Tool for Financial Analysis
Agenda:
• Introduction to Global Insight’s latest measures for
sector investment research and corporate strategy
•
•
New Global Sector benchmarks organized into standard stock sector
classification that follow GICS and Dow-Jones
Easy point and click access to a unique multidimensional global data set,
which includes all sectors in all countries
• Sector indicators line up well with items in company
income statements: sales, profits, and costs
•
•
“Cleanest,” best measure of underlying, normalized profits and sales
Does not suffer from well-known “survivorship bias,” but is subject to “topdown” macro constraint for consistency and quality control
• Unique and consistent financial benchmarks that are
flexibly defined across country/regions and sectors
Copyright  2004 Global Insight, Inc.
2
What Stock Market Sectors are Included?
All of the Top-Ten Economic Sectors are Included!
In addition to over 40 additional industries and sub-sectors
(number of sub-sectors shown in parentheses)
•
•
•
•
•
Energy
Basic Materials (10)
Industrials (9)
Consumer Discretionary (9)
Consumer Staples (5)
•
•
•
•
•
Copyright  2004 Global Insight, Inc.
Health Care (2)
Financials (3)
Information Technology (3)
Telecommunications
Utilities
3
What Indicators are Included for Sectors?
WIS Includes Indictors that Line up Directly with Key Items
in Company Income Statements
•
Sector-level measures include:
•
Global Insight’s framework:
•
Sector sales and profits are key
to:
•
Our sector sales and profits are:
•
“Normalized” earnings growth
• sales, profits, and margins
• measured in US$ and Euros
• (forthcoming: CapEx, FCF)
•
•
•
understanding asset valuation,
credit quality, and cash flows
anticipating the CapEx cycle and
employment growth
Sector indicators are big “Peer
Group” benchmarks for use in
Credit Risk and Asset Valuation
•
•
Data derived from IRS/Tax filings
Sector data are components of
National Income Accounts (NIA)
• Top-down consistency
augmented by bottom-up B2B
and trade patterns
• Sales translated into profits via
operating and financial leverage
• The “cleanest” measure of
current operating performance
• More reliable than unconstrained
“bottom up” measures
• Free from “survivorship bias”
• Which will see fastest growth?
• Which sector stock prices are
relatively rich/cheap given the
outlook for growth and
volatility?
Copyright  2004 Global Insight, Inc.
4
How Do Stock Sectors Relate to Macro Economic Views?
“Top Down” Macro Outlook Drives Sector Conditions!
--Business cycle impact greatest in the short and medium term
Macro




Policies
Slate of Demand
Scenarios
Prices and Exchange Rates
--Over longer time frames, technology and commercial patterns
“Feed Back” from the bottom up to shape the macro trend
Industry
 Output and Purchase
Requirements
 Consumer versus B2B
Sales
 Technology, Commercial
Linkages among Sectors
 Trade and Competition
Sector Data
Benchmarks Serve as a
“Gear Box” that
Connects Macro with
Companies!
Copyright  2004 Global Insight, Inc.
Company
 Trends in Sales Growth,
Cost Structure
 Market Penetration
 Prospects for Cash Flow
 Earnings Growth for
Asset Valuation
5
Who Provides the Sector Benchmarks?
Stock Sector Benchmarks is Created by Global Insight’s
World Industry Service (WIS)
• WIS expertise is a focus on sector markets: measuring
sector size, composition, and growth
• Track changing sources of growth in sales, costs, and
profits
• Aggregations and comparisons, consistency across 70
countries with global totals
• Common coverage: All sectors in all countries
• Detailed sector categories add up to total GDP
• Key indicators for each sector (sales, costs, profits…)
• Measure inter-sector relationships in B2B markets, trade
patterns, IT spending, and risk management
Copyright  2004 Global Insight, Inc.
6
An Example of the Outlook for Growth in Key Global Sectors
Global Recovery Will Lift Most Sectors
(% Growth in Inflation-Adjusted Sector Sales in 70 Largest Economies)
10
8
All Sectors
•
This is an example of global
sector sales growth, shown
over time, with a forecast
•
Sector indicators provided for
detailed as well as the high
level global view of all
sectors, such as this
•
“Drill down” from the highlevel global view into finer
definitions of sectors and
sub-sectors
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 •
“Drill down” as well as into
finer views of geographic
regions and countries
Manufacturing Sector
Services Sectors
6
4
2
0
-2
-4
Copyright  2004 Global Insight, Inc.
7
Start with High-Level View, Then Drill Down Into Sub-Sectors
and Industry Components
Services Held Up Better Than Manufacturing
(% Growth in Inflation-Adjusted Sector Sales for World and Key Regions)
Key Manufacturing Sectors
25
20
Key Services Sectors
Autos & Transport Equip.
16
Banking & Insurance
Chemicals & Refineries
14
Communications
Computers & Electronics
12
15
Wholesale & Retail
10
8
10
6
5
(
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-5
0
-2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-10
Copyright  2004 Global Insight, Inc.
8
Compare WIS Sectors with Peer Group Benchmarks from
Company Financial Statements – Telecommunication
Sector Example
World: Total Sales in the Telecommunication Sector (GICS = 50)
WIS – Worldwide Sales by Telecommunications Operations
Company Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere
Telecommunication Sector Sales – US$ Bill.
•
1600
1400
•
•
•
1200
US$ Billion
This graph shows how Global Insight’s WIS
lines up with aggregated company financial
data for the telecommunications sector
1000
800
600
•
400
200
Geographic coverage is the total world
WIS data (black line with diamond) is total sales
Aggregated company data (green line with
triangle) is sum of total sales reported by all
companies included in the GICS sector index
Top-10 companies (red dash with circle) show the
sum of total sales reported by the world’s 10
largest companies (largest in terms of sales)
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
0
•
•
•
WIS
Companies in GICS Index
Top 10 Companies (2002)
(Source: WIS Sector Data from Global Insight, Inc.; Company Data from
Worldscope; GICS Sector Peer Groups Assembled by WIS)
WIS is the widest measure of sector activity
•
•
includes all commercial activity in the sector
including privately held companies and
government owned enterprises
Is not distorted by balance sheet impacts
The ratio of Largest 10 Companies to Total WIS
sector sales is a Sector “Concentration Ratio”
Copyright  2004 Global Insight, Inc.
9
Compare WIS Sectors with Peer Group Benchmarks from
Company Financial Statements – Total
World Basic Materials Sector
World: Total Sales in the Basic Materials Sector (GICS = 15)
WIS – Worldwide Sales by Operations Located Anywhere
Company Peer Groups – Worldwide Sales by Publicly Traded Companies Headquartered Anywhere
Basic Materials Sector Sales – US$ Bill.
Basic Materials Sector Sales - % Growth
4500
50
4000
40
% Growth
3000
2500
2000
30
20
10
1500
1000
0
500
WIS
WIS
Companies in GICS Index
Companies in GICS Index
Top 10 Companies (2002)
Top 10 Companies(2002)
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-10
0
1984
US$ Billion
3500
(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)
Copyright  2004 Global Insight, Inc.
10
Sector-Operating Characteristics:
Industry Concentration Ratios
Sales Concentration Ratios for GICS 10 Economic Sectors, Total World
Energy
Telecomm Svs.
Utilities
Technology
Financials
Consumer Discr.
Health Care
Consumer Staples
Basic Materials
Industrials
0
10
20
30
40
50
(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)
Copyright  2004 Global Insight, Inc.
11
Sector-Operating Characteristics:
Coefficient of Variation (COV)
How Volatile is the World Sales Pattern?
Sector Growth, Standard Deviation of Growth, and the Ratio of Growth to Standard Deviation (COV):
(Inflation Adjusted Sales,1990-2002)
12
Average Growth Rate
Standard Deviation of Growth
10
Coefficient of Variation (COV)
8
6
4
Copyright  2004 Global Insight, Inc.
Medical
Technology
Industrial
Machinary
Transport.
Services
Banking &
Insurance
Comm.
Services
Autos
Comm.
Equipment
Computers
Drugs &
Medicines
0
Agricultural
Chemicals
2
12
Sector-Operating Characteristics:
Coefficient of Variation (COV)
Volatility of Sector Sales in Various Regions
The Ratio of Growth to Standard Deviation (COV)
(Inflation Adjusted Sales, 1990-2002)
3
US
2.5
EMU
Emerging Asia
2
1.5
1
Copyright  2004 Global Insight, Inc.
Medical
Technology
Industrial
Machinary
Transport.
Services
Banking &
Insurance
Comm.
Services
Autos
Comm.
Equipment
Computers
-0.5
Drugs &
Medicines
0
Agricultural
Chemicals
0.5
13
Compare WIS Sectors with Peer Group Benchmarks from
Company Financial Statements – Total
World Basic Materials Sector
How Do WIS Sector Profits Compare to Stock Index Peer Groups?
% Growth - Profits in Utility Sector
30
WIS
WIS
25
Basic
Materials
Utilities
% Growth
20
15
10
5
0
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
-10
1985
2005
2003
2001
1999
1997
1995
1993
1991
1989
-5
1987
40
35
30
25
20
15
10
5
0
-5
-10
-15
1985
% Growth
% Growth - Profits in Basic Materials Sector
(Source: WIS Sector Data from Global Insight, Inc.; Company Data from Worldscope; GICS Sector Peer Groups Assembled by WIS)
Copyright  2004 Global Insight, Inc.
14
Sales and Profits Indicators in WIS Stock Sector Benchmark
Facilitates Margin Analysis as part of ROE Framework
Operating Profit Margins (Excludes Depreciation and Write Offs)
(Comparison between United States, United Kingdom, and Continental Europe)
Operating Profit Margin for All
Companies in the Technology Sector
20
in the GICS Classification Scheme
•
Improvement in profit margins shown as
the most likely source of near-term
earnings growth in the technology sector
•
15
•
10
5
•
Financial Re-structuring has been in
vogue in many sectors
0
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02
-5
Framework analyzes the interaction
among operating leverage, capacity
utilization, and profit margins
Many sectors will need growth in CapEx to
generate high margins
•
•
•
United States
United Kingdom
Europe (X UK)
Copyright  2004 Global Insight, Inc.
CapEx funded with retained earnings
Return on investment and free cash flow
receives greater scrutiny
Yet any sizeable increase in M&A and
CapEx will limit room for improvement in
asset efficiency
15
Rank of Profits Growth Rate Forecasts Among the Top-10
Economic Sectors in the United States
Long-Term “Normalized” Sector Profits Growth
(Average Percent Growth of Operating Profits in the US, Forecast for 2004-08, Top-10 GICS Economic Sectors)
Forecast Published in Q3 2003
Health Care
•
WIS sector profits show the
underlying, normalized rate of
earnings growth
•
Sector forecasts consistent with the
“top down” analysis from Global
Insight’s World Economic Service
•
Show normalized sector growth after
the cyclical “bounce” of 2003
•
Rank growth across sectors for a
relative and comparative perspective
•
Compare sector performance across
the World, European, American and
Emerging Markets
Financial
Technology
Industrials
Total
Telecomm's
Energy
Cons. Discretionary
Materials
Utilities
Consumer Staples
0
1
2
3
4
5
6
7
8
9
Percent Growth of US$ Sector Profits
Copyright  2004 Global Insight, Inc.
Source: GII World Industry Service
16
Use WIS Sector Sales and Profits to Show Relative
Valuation of Securities
Sector PEG Ratio:

Combine sector measures for prices, profits growth, and sector risks
into a single valuation metric:




Uses two historical measures and one forecast measure
Prices: Price-to-Earnings Ratio (Historical P/E)
Growth: WIS Profits Growth Rates (Forecast)
Risk: Risk-of-earnings growth (Historical Volatility)

Sector PEG metric shows the relative over- and under-valuation of
sectors within a portfolio

Divide sector P/E ratio by the Coefficient of Variation (COV)

COV is defined as the profits growth rate divided by standard deviation
of growth
Copyright  2004 Global Insight, Inc.
17
How Much to Pay for Relative Sector Growth and Risk?
Sector PEG Ratio = Sector Stock Price Valuation Metric (P/E)
Adjusted for Sector Growth and Risk (COV)
(Historical Data for P/E is as of September 30, 2003; COV = Ratio of Forecast Normalized Earnings Growth to
Historical Volatility of Growth. Historical Volatility covers 1990-2001, Forecast (made in August 2003) covers 2004-08)
on
s
0
50
&
P
S
U
til
it
ie
s
vs
.
Te
le
c
om
m
.S
y
lo
g
ch
no
nc
ia
ls
Te
H
Fi
na
ar
e
C
th
ea
l
.S
ta
pl
e
s
ar
y
on
s
C
.D
is
cr
et
io
n
tr
ia
ls
us
M
at
In
d
C
B
as
i
c
E
ne
r
gy
er
ia
ls
40
35
30
25
20
15
10
5
0
P/E Ratio
PEG - P/E Adjusted by COV
Copyright  2004 Global Insight, Inc.
Source: S&P, GII World Industry Service
18
More Information?
Please Contact Us for a Personal Demonstration!
•
Mark Killion, CFA
Managing Director, World Industry Service
1-610-490-2547
[email protected]
•
Prem Premakumar
Applications Manager, World Industry Service
1-610-490-2525
[email protected]
Copyright  2004 Global Insight, Inc.
19