What is a Mature Industry?
A mature industry is an industry that has passed the introduction stage, growth stage, and shake out stage, but has not yet reached the declining stage. A mature industry is a stage in the industry life cycle that includes five stages – introduction, growth, shakeout, maturity, and decline – and as time progresses, so do the stages of the life cycle.
The period when an industry is in the mature stage is considered to be made up of mature companies – companies with a strong market share and an attractive business model. Also, a mature industry typically comprises a set market of consumers that it reaches, and generally, such consumers won’t grow as aggressively as an industry in earlier stages, such as the growth stage.
- A mature industry is one with an established market and customer base.
- Companies in a mature industry do not experience as much growth as one in a growth industry; thus, impacting multiples like the P/E ratio.
- Companies in a mature industry can be valued using traditional valuation methodologies.
Attributes of a Mature Industry
As mentioned above, a mature industry is one with a strong, set customer base and has typically reached the maximum amount of people that the industry will reach throughout its life cycle. Thus, for a mature company in a mature industry to improve profits, it is typically achieved through improving operational efficiencies to decrease costs or to expand through capital expenditures to capture a larger portion of the established market share of the mature industry.
Additionally, companies within a mature industry tend to have a lower P/E ratio. A large driver of a P/E ratio is the future growth of earnings; thus, since a characteristic of a mature industry is that there is no high level of future growth, it causes companies within a mature industry to have a lower P/E ratio.
Furthermore, high dividend yields are also an attribute for companies in a mature industry. Finally, mature companies may have excess inventory and working capital as they adjust from the previous stages in the industry life cycle.
As companies go through growth stages, they must increase working capital to keep up with rising demand for their product; it is especially true for non-service companies. However, there may be a lag effect between the growth of a company’s consumer base and working capital, which may lead to an unnecessary increase in working capital for the company.
Valuing Companies in a Mature Industry
Valuing companies in a mature industry generally follow the traditional valuation methodologies, including discounted cash flow analysis, precedent transaction analysis, comparable company analysis, a sum of the parts, and a leveraged buyout analysis. Because companies in a mature industry tend to have stable and consistent cash flows, a discounted cash flow analysis should give a good intrinsic valuation of a company.
Furthermore, a precedent transaction analysis will typically give the upper bound of a valuation range for a company in a mature industry. The reason behind the fact is because of the control premium. There is a premium to buying a company as a whole and being able to control the operations of that company; thus, a precedent transaction analysis will typically provide a higher valuation.
Additionally, a comparable company analysis in a mature industry will typically give a valuation close to the intrinsic value of a company because multiples for companies in a mature industry tend to not be inflated like those in a growing industry; it is similar to the reasons as to why the P/E ratio tends to be lower for a company in a mature industry.
A leveraged buyout analysis will provide a lower bound value for a company in a mature industry. It is because typically, private equity firms conduct leveraged buyouts, and they seek out internal rates or returns of around 20%. Thus, a leveraged buyout analysis will provide a lower valuation.
Finally, a sum of parts analysis can be conducted for a company in a mature industry with many different business components to it; thus, a sum of parts analysis can be very useful.
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