Financial Industry Analysis, Research & Ratios ► (edit / improve)
Industry Analysis evaluates the major industry characteristics that affect investments. Company specific factors drive the performance of individual companies, but macro-economic factors can affect the performance, stock prices, growth rates, and chart movements of any stock, currency, or commodity. Review industry research before trading.
| Industry Statistics | Stat | Notes |
|---|---|---|
| Stock Research Rating | HOLD | … |
| Potential (safety margin) | -2% | … |
| WACC Discount Rate | 13% | … |
| Comparative Multiples | Stat | Notes |
| Revenue EV Multiple | 1.6x | … |
| EBITDA EV Multiple | 14.6x | High ~ Bad for investors |
| EBIT EV Multiple | 19.6x | High ~ Bad for investors |
| Cash Flow EV Multiple | 22.8x | Low ~ Good for investors |
| Book Value EV Multiple | 1.0x | … |
| Discounted Cash Flow (DCF) | Ratios | Notes |
| Revenue Growth | 14% | High ~ Good for investors |
| EBITDA Margin | 18% | … |
| EBIT Margin | 16% | … |
| Cash Flow Margin | 11% | … |
| Taxes Rate | 42% | High ~ Bad for investors |
| Debt-Equity Ratio | 5% | … |
| ROIC | 3% | … |
| Reinvestment Rate | -6% | … |
| WACC Discount Rate | Rates | Notes |
| Risk Free Rate | 4% | Low ~ Good for Investors |
| Cost of Debt | 7% | Low ~ Good for Investors |
| Equity Risk Premium | 5% | … |
| Debt Required Return of Debt | 5% | … |
| Required Return of Equity | 9% | … |
1 Investment potential (margin of safety) is a weighted average of the discounted cash flow (DCF), the enterprise value (EV) market multiple, and the Warren Buffett investment method.
2 The weighted average cost of capital (WACC) for the industry is a broad representation of the WACC for each individual company. A sub-industry WACC offers both stability and accuracy for each individual company.
Description: The financial services industry includes companies whose sales come from the management of money for individuals and institutions. Financial services companies include banks, insurance companies, brokerage, wealth management, and credit card companies (see full financial description: competitors, industry ratios, best stocks, market leaders, aggregate SWOT Analysis, and streaming industry news).
Profit Analysis: The best way to profit from financial service stock investments is to find the most undervalued investments (Wall Street and Main Street buy ratings) during economic recessions. Those investments should be undervalued (see Wall Street on left side), and have high Main Street Common Sense investment ratings (see Main Street on right side). Interest rates are also lowest during this time period, which decreases the cost of borrowing money for financial service companies.
When an economic recovery occurs, financial stocks tend to outperform the general stock market, because consumers and businesses quickly resume spending on items such as cars or business loans they wanted, but resisted obtaining during tougher economic times. Eventually financial stocks become overvalued, because profits and stock prices increase past their fair values. During the last stages of an economic business cycle, just before a recession, it is best to sell financial stocks, because they are likely to decrease in price. Interest rates are highest at the end of recessions to fight inflation by making money for banks more expensive. Expensive (overvalued) stocks with low Main Street Common Sense ratings should be sold at any time to invest in better stocks. Two buys ratings are the best and two sell ratings are the worst possible stock investments.
Trading Strategy: During economic recessions, consumers and businesses tend to cut back on expenses and investments to save money during tough economic times. Bank loans, equity or debt raising, general spending and many other financial activities slow during recessions. Less spending decreases business revenue and eventually decreases the stock prices of financial services companies. During economic recoveries, consumers have a greater desire to spend money and make business investments. Higher spending increases business revenue and eventually increases stock prices. During longer economic expansions, financial services may actually increase faster than the general market due to large investments by companies and mergers and acquisitions between companies. Consumers have more confidence in the stock market and increase stock investments and private business investments. Over-investment leads to higher inflation and higher interest rates, which make it harder to obtain money.
The return on money lent minus the expense of borrowing money equals the profits for many financial services companies. When interest rates increase, this raises the expense of borrowing money. Generally, interest rates increase near the end of the expansion phase of the business cycle to slow the potential for inflation. Interest rates are generally lowest during recessions, because inflation risk is lowest and the government wants to encourage business investments by making money relatively cheap to obtain.
