Prospective financial analysis

Obviously, equity analysis has to take into account the company's profit prospects.

The historical evolution of the business does not tell all in that respect,
as things can change, sometimes drastically.

So what are the possible changes?

To foresee them is tricky. Here are a few research paths to help meet that challenge.

Many factors may change a firm's prospects upside-down

From time to time, a big novelty in people tastes, or in technologies, or in geopolitics,
creates deep changes in a given field of activity.

OK, everybody knows that, where is the surprise?

Well, what is surprising is that threatened firms in the old industry,
even the best ones, often neglect to exploit it.

This leaves an open playing ground for others.

Those unnoticed invaders take advantage of the siesta of the king.

They are either iconoclast pioneers, or players who just work in a parallel industry.

Composite materials, ignored by steelwork firms, became the realm of chemical firms.

Why those ex-champions' myopia?
Why are they prisoners of their own "roots" and unable to adapt to changes?

* It can be a simple lack of information, of attention, of curiosity, an "indifference"
    cocktail that makes underreact to "weak signals".

    It is true that the new realities seem like minor blips on the radar screen, are not
    directly visible as rather underground, and that the attackers are just annoying
    mosquitoes that don't seem to be worthy of interest.

* There are objective hurdles: those old stars are prisoners of their know-how,
     not fully depreciated equipments and other sunk costs.They might privilege
    short term results to long term ones,

*  Also, and maybe above all, here is a small reminder of behavioral finance,
     they are held up by mental commitments and anchoring.

- They are enclosed in habits and traditional schemata

- They hide their denial of reality / cognitive dissonance behind rationalizations
    (biased reasoning).

- They help them pretend that they still have a bright future just by keeping
   doing, with marginal changes, what they were good at.

The table below should appear in any financial analysis (*) just before the valuation sheet, itself based on future scenarios.

(*) See Analysis presentation page.

Also a "SWOT analysis" (Strengths, Weaknesses, Opportunities, Threats)
covering the areas below could help build the table.

Which evolutions in May have a decisive impact on	Technology	Society	Economy	Geopolitics	Others
1) Sales
2) Production
3) Prices
4) Costs
List of new (or existing) factors that will have the most impact		In a few months		In a few years
On the geographical zones of activity
On the industrial sector
On the firm

This takes into account that the prevailing wind pushing forward or backward may
change several time :in very unstable industries, a mutation may happen the next
months, then another one, or several others, in the next years.

Example: Let us take an aluminum producer, a firm very sensitive to the "business cycle". To add hot pepper to the game, let us suppose it has sizeable debts. In the short term, if we have a period of economic recovery, its sales, its prices, its profits, could enjoy the leverage and soar dramatically (sometimes to reach a top later, after believing that we had here a growth stock, the market is so mischievous!) But, in the medium tern, a decisive factor could menace it, for example (aside an economic climate pullback) a rise in electricity costs bigger than for its competitors located in countries where the juice is pouring. And, in the long term, what about the benefits of a possible conversion of the car industry to aluminum? Or on the contrary, a competition from titanium or composites?

In the stock market, we can thus, paradoxically:

• Gamble (temporarily) on a "lousy firm", if a temporary improvement of its results,
  still not anticipated in the market price, is foreseeable.

• Avoid (temporarily) a very fine firm in some circumstances.

The first sheet, to use without waiting, like extra-fresh eggs,vwill be made in accordance with what the market may anticipate in the near future.	The second sheet, that looks further ahead, is put in the fridge to use it later, just before the market notices th mistake it made on the short term.
This is insulting market efficiency and value analysis, It is political and opportunistic, it is underhand, sly and vicious... …But it is also common sense (see rational mimetic expectations)!

 

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