An industry prospects within the global business environment will determine how well or poorly a firm will fare , so industry analysis should precede the company analysis . Few companies perform well in a Poor industry , and even the best companies in an industry with a negative outlook is a bad prospect for Investment . Therefore , as an investor or investment manager , I have to pick industries before companies . As a highly aggressive investor searching for big returns with long time horizon , the best industries are the cyclical ones with high operating and financial leverage .
Moreover , basic matrial industries like oil , gold are the most cyclical with huge debt and riskiness . The Petroleum (Integrated) looks like an attractive investment for an extremely risky investor with these political tensions in the middle east . This industry is a mature, cyclical sector that encompasses several business lines. The typical company here conducts oil exploration and development programs, refines and markets oil, and may produce chemicals. The emphasis has long been on the “upstream” end, or exploration, since it generates the highest margins most of the time.
Industry profits and capital spending are broadly determined by the level and direction of oil prices. Factors influencing prices include supply and demand, the futures market, and long-term sector expectations . In the beginning , we have to search for the economy industry relation . We get the growth of GDP in USA and oil consumption per day also in USA , in order to predict the future position of our chosen industry concerning the expected economic indicators . We get the compounded rate of growth of dividends (D12/D01)^(1/) which is a negative number -5% , so we work on the average of ROE and RR .
The average growth=Average ROE* Average retention ratio =14. 634 % . Risk premium=5% in damodaran , then cost of equity=Rf+B(Rp )=1. 7+1. 4(5)=8. 7%. To be the most conservative we take growth much lower than its value 14. 63 % and lower than K . We take as 8% , and we get the DDM P=D1/(K-g) =D0(1+g)/(K-g) =0. 40328(1. 08)/(0. 087-0. 08) =62. 22$ which is much higher than its current price 51. 28$ , so at leat it is undervalued 62. 22-51. 28/ 51. 28=21. 33% at least . Finally , as a recommendation , we sugget to invest heavily in this stock which is extremly undervalued.