CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
An analyst classifies a manufacturer of luxury watches as a cyclical company. Which description of the firm's sales is most likely?
Sales of a cyclical company such as a luxury watchmaker rise and fall strongly with the business cycle. Demand for discretionary goods is sensitive to income and confidence, so it grows in expansions and drops sharply in contractions, unlike the stable demand of defensive firms.
- ASales are stable because demand does not respond to income
- BSales are tied to population growth rather than the economy
- CSales rise and fall strongly with the business cycleCorrect
Explanation
Cyclical companies sell products whose demand is sensitive to economic conditions, such as luxury goods and durable items. Their sales rise in expansions and fall in contractions. Stable demand describes defensive companies.
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