CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future
An analyst compares a company's historical operating margin with that of its industry peers and finds it consistently higher. The analyst's most appropriate next step is to:
The most appropriate next step is to investigate whether the margin advantage reflects a sustainable competitive advantage. Past outperformance only matters for forecasting if its causes, such as cost leadership or pricing power, are likely to persist. Assuming it widens or labeling the stock undervalued is premature.
- Aassume the margin advantage will widen each year
- Binvestigate whether it reflects a sustainable competitive advantageCorrect
- Cconclude the stock is undervalued relative to peers
Explanation
A higher margin is a finding, not a conclusion. The analyst should determine whether it stems from sustainable factors such as cost leadership or pricing power, or from temporary or accounting-related causes. Assuming widening or declaring undervaluation skips this step.
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