Factors on Pricing Power and Price Competition
Barriers to Entry High barriers to entry generally entail more pricing power and less price competition, while low barriers to entry usually mean less pricing power and more price competition. Restaurants typically have low barriers to entry, and thus the…
Industry Life Cycle Models
An industry’s life-cycle position often has a large impact on its competitive dynamics, making this position an important component of the strategic analysis of an industry. Life-Cycle Stages Embryonic: an industry just beginning to develop, characterized by slow growth, high…
Characteristics of Representative Industries
A valuable comparison may include the following elements: major companies, barriers to entry, level of concentration, impact of industry capacity, industry stability, life-cycle, price competition, demographic influences, government & regulatory influences, social influences, technological influences, and business cycle sensitivity.
Factors that Influence Industry Growth, Profitability, and Risk
External factors affecting an industry’s growth include macroeconomic, technological, demographic, governmental, and social influences. Macroeconomic Influences Cyclical or structural trends may have significant effects on the demand for an industry’s products or services. An industry’s sales and profitability may be…
Elements of a Thorough Company Analysis
A thorough company analysis will involve an examination of the company’s financial position, products/services, and competitive strategy (a company’s plans for responding to external threats and opportunities). There are two primary competitive strategies: a low-cost strategy and a product/service differentiation…
Overvalued, Fairly Valued, and Undervalued Securities
When a security’s current market price is approximately equal to its value estimate, the security is considered to be fairly valued. Conversely, when the market price exceeds the value estimate, the security is overvalued, and so the security is undervalued…
Major Categories of Equity Valuation Models
There are three major categories of equity valuation models: present value models, multiplier models, and asset-based valuation models. Present Value Models/Discounted Cash Flow Models These models estimate intrinsic value based on expected future benefits, usually based on expected dividends (dividend…
Market Value vs. Intrinsic Value
The market value is the price at which an asset can currently be bought or sold. The intrinsic value/fundamental value is the value placed on it by investors if they had a complete understanding of the asset’s investment characteristics. In…
Intrinsic Value of a Preferred Stock
The intrinsic value of a non-callable, non-convertible preferred stock can be calculated in much the same way as a share of common stock, except the expected sales price is replaced by the par value of the preferred shares. $$ V_0=\sum_{t=1}^n\frac{D_t}{(1+r)^t}+\frac{F}{(1+r)^n}$$…
Gordon (Constant) Growth Dividend Discount Model and Two-stage Dividend Discount Model
Gordon (Constant) Growth Dividend Discount Model As the name implies, the Gordon (constant) growth dividend discount model assumes dividends grow indefinitely at a constant rate. $$ V_0=\frac{D_1}{r-g} $$ Where: \(D_1\) = expected dividends in year 1 Note that this is…
