Page 126 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 4: Fundamental Analysis

were very high. But as competition grew among firms, lease rentals reduced and came down to Notes
a level where it became difficult for a number companies to survive. This period saw many
companies that could not survive the onslaught of competition of those firms that could tolerate
this onslaught of price war, could remain in the industry. The leasing industry today is much
pruned down compared to the mid-eighties.
Fast growing stage: This is the second stage when the chaotic competition and growth that is the
hallmark of the first stage is more or less over. Firms that could not survive this onslaught have
already died. The surviving large firms now dominate the industry. The demand of their product
still grows faster, leading to increasing amount of profits the companies can reap. This is a stage
where companies grow rapidly. These companies provide a good investment opportunity to
the investors. In fact, as the firms during stage of development grow faster, they sometimes
break records in various areas, like payment of dividend and become more and more attractive
for investment.

Security and stabilization stage: The third stage where industries grow roughly at the rate of
the economy, develop and reach a stage of stabilization. Looked at differently, this is a stage
where the ability of the industry appears to have more or less saturated. As compared to the
competitive industries, at this stage, the industry faces the problem of what Grodinsky called
"latent obsolescence" a term used to a stage where earliest signs of decline have emerged.
Investors have to be very cautions to examine those sings before it is too late.
Relative decline stage: The fourth stage of industrial life cycle development is the relative
decline The industry has grown old. New products, new technologies have entered the market.
Customers have new habits, styles, likes etc. The company's/industry's products are not much
in demand as was in the earliest stage. Still, it continues to exist for some more time.
Consequently, the industry would grow less than the economy during the best of the times of
the economy. But as is expected, the industry's decline is much faster than the decline of the
economy in the worst of times.

The characteristics of different stages of life cycle development of industries have a number of
implications for decisions. Investment at this stage is quite rewarding. However, for an investor
looking for steady forms with risk aversion, it is suggested that he should in general avoid
investing at this stage. But if he is still keen to invest, he should try to diversify or disperse his
investment price the risk. It would be quite prudent on this part to look for companies that are
in the second date i.e., fast growth. This probably explains the prevalent higher stock prices of
the companies of this industry.
From the investment point of view, selection of the industries at the third stage of development
is quite crucial. It is the growth of the industry that is relevant and not its past performance.
There are a number of cases where the share prices of a company in a declining industry have
been artificially hiked up in the market, on the basis of its good performance. But the fact of the
matter is that a company in such an industry would sooner or later feel the pinch of its decline
and an investor investing in such companies experiences a reduction in the value of his investment
in due course.
Having discussed various investment implications, it may be pointed out that one should be
careful while classifying them. This is because the above discussion assumes that the investor
would be able to identify the industrial life cycle. In practice, it is very difficult to detect which
stage of the industry is at. Needless to say, it is only a general framework that is presented
above. One can spangle this analysis with suitable modifications. In order to strengthen the
analysis further, it is essential to outline the features of the industry in detail. Due to its unique
characteristic, unless the specific industry is analysed properly and in depth with regard to
these, it will be very difficult to form an opinion for profitable investment opportunities.

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