My first Equity Research Report

Hi People
I am a first year MBA student at a non target school looking to break into IB after about 4 years with a big 4.
My school has a student managed fund which I am keen on getting into as part of the analysts so that I can have real life experiencial learning.

To get in I have to write a report on xxxxx company which they have given with a view to making a @Buy" or "Sell" recommendation.

I am mostly new to this as I have just dealth with the accounting aspect of finance all my life, I am excited about it but I find that I need help.

I will appreciate any tips , advice, template anything useful to make me succeed.

Looking forward to it.

Comments (28)

 
Oct 17, 2017 - 1:39pm

Writing an ER report as an undergrad (Originally Posted: 09/26/2014)

Hi everyone,

I am an undergrad (non-finance major) interested in writing an ER report on my own (I am quite interested in a company and I want to prep pitching it as well as attaching the report in cold emails). I have read news/annual reports/industry reports and I have some ideas on the qualitative elements. How should I approach the technical parts of the report like obtaining revenue forecasting?

Many thanks!

Array
 
Oct 17, 2017 - 1:41pm

your best bet would be to do the WSP or BIWS program to understand modelling, if you are still in school try to participate in the CFA GIRC ... and when you say "....How should I approach the technical parts of the report like obtaining revenue forecasting?...." do you mean for the modelling or just knowing the figures ... because a report is impossible without the model ... also how much do you know about the "...technical parts..."

check these links
http://www.financewalk.com/2013/write-equity-research-report/
http://www.financewalk.com/2013/equity-research-report-writing-format/
https://scs.fidelity.com/research/scorecard/pdf/ERS%20Methodology.pdf
http://onepersonsrant.blogspot.com/2013/05/how-to-write-equity-research-report.html
http://www.cfainstitute.org/community/challenge/Documents/rc_equity_research_report_essentials.pdf

check all the links in this thread for additional help for a career in ER
http://www.wallstreetoasis.com/forums/overly-cautious-networking

just one research report does not cut it really, have stock pitches ready, etc ... the links in the thread above specify what is needed to prepare for a role in ER

and just so that you know ER analysts prepare the following types of reports:-
1. Morning briefs
2. Weekly updates
3. Initiation reports
4. Company research notes (these act as updates)
5. Sector analysis
6. Research notes related to the economy
a. Analysis of Federal Budgets
b. Analysis of the Monetary Policy
c. Event based reports
7. White papers

the types of reports prepared depend upon the industry practices in the country and the practices of every firm

 
Oct 17, 2017 - 1:42pm

Guidance, consensus, and your own forecasts.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.
 
Oct 17, 2017 - 1:43pm

Writing an Equity Research Report- question on comps (Originally Posted: 09/24/2011)

First off I have a very stupid question that I need answered even if you don't read the rest of my post. I know nothing about trading and stock indices and need to know, when creating a peer group for my comps, is it possible to use NASDAQ stocks as peers for a company traded on the NYSE, under ANY circumstances? Or is it completely inappropriate? I know foreign stocks are probably never appropriate, no matter how similar they are.

For those of you who want to give further advice. I am an undergrad student who wants to eventually break into equity research and has decided to write a detailed, full-length research report. I have no training whatsoever and have taken only an introductory finance course, so as a guide I have used the internet, as well as several popular valuation books (Damadoran, McKinsey, Applied Equity Analysis, Best practices for ER). Currently it is a 42 page initiation on LinkedIn (its long because I elaborate more on the processes/how I reach my conclusions so the reader isn't forced to assume I know what I'm doing).

Right now I'm working on comps and having a bit of trouble. Obviously there are no similar companies/businesses to LinkedIn (they make money 3 separate ways, almost like independent businesses). Competitors (like MSFT, GOOG, YHOO) are not appropriate peers, as they are mature companies with totally different characteristics. Instead, I am looking for companies based on similar cash flow characteristics, similar growth characteristics (growth in those cash flows), and similar risk characteristics (uncertainty of those cash flows). So rather than finding similar businesses I am looking for companies with similar risk/return characteristics.

The tangible criteria that I believe are relevant for this company in finding peers are:
-historical revenue growth (very strong 3 year average topline growth)
-performance expectations (extremely high long term estimates for earnings growth)
-low margins/unstable earnings/low or negative FCF/high re-investment (net investment or capex)
(These criteria help me find young, early stage growth companies with similar prospects for growth.)

As proxies for risk characteristics I look for:
-beta
-market cap
-capital structure/debt (LNKD has no debt)
-sector (has to at least be in technology sector, as that of course has implications for risk)

For cash flow characteristics I look at payout ratio (only companies with no dividend policy, Ideally I look for explicit statement by management that they have no intention to pay dividends in near future).

So, anyone have advice on how to do comps for a unique company like LinkedIn? Am I on the right track? I have had some luck but would welcome advice on how to go about finding these companies (screens or what)?

Also if you missed my question from the beginning, is it ever appropriate to use NASDAQ stocks as peers for a company whose stock trades on the NYSE? This is my main question.

 
Oct 17, 2017 - 1:45pm

Ok, thats what I figured. On the other hand, I should eliminate foreign companies from consideration, correct?

Very interesting that you brought up EV/# of users. I havent decided what metrics Im going to use yet but had considered a non-financial metric like that. If I was evaluating google, which has similar companies (yahoo) that would be much easier, but as it is, there are no websites that offer similar services to linkedin. Wouldnt my peer group need to be made up entirely of internet companies (probably even social media/recruitment service providers) for me to use a metric like EV/# of users or EV/# pg views?

Thanks for the advice, much appreciated.

 
Best Response
Oct 17, 2017 - 1:47pm

Free Beer!...If You Review My ER Report (First Try) (Originally Posted: 09/19/2012)

Morning Monkeys,

I'm sure you've all been waiting with bated breath to look at some amateur's first try at an ER report. Hopefully this won't be an utter and complete waste of your time, but I somehow suspect it will be. So, for those of you kind enough to take a look at it and offer some constructive (or unconstructive) criticism and/or editing notes, let me thank you in advance.

Yesterday I posted a question about some of the funnier aspects found in an ER report and after reading everyone's experiences, I was able to make some key changes to my "report" namely, a better title. Now, is my new title funny, original, or the least bit entertaining? No, it's dumb, but hey, gotta start somewhere, right?

At any rate, I'm not kidding about the free beer if you take a look at it, but I do have a few caveats so that I'm not shelling out several thousand dollars on you hard drinking monkeys out there:

1) You need to live near me, which, sadly for most of you, is Richmond, VA. Since this site is called "Wall Street" Oasis, I suspect out of the 40-50 thousand users, this probably means there's 9 who live in this area. But, if there's a lot of response (highly unlikely given the request), maybe I'll come and park a keg in Zuccoti Park or something (assuming there's no dirty hippies in the area.)

2) In order to get said free beer, when we meet, you'll need to be prepared to discuss it constructively for, let's say, 3-8 minutes.

3) At some point in your career, someone needs to have paid you to do equity research. So, if you're some college junior at University of Richmond, stick to the comments section, it's not that I don't care what you think, it's just that I'm not willing to pay for it.

I should note, I'm actually fairly good at modeling, but most of my work is with actuarial models as opposed to financial models, so I've tried to keep the valuations simple so I don't look like a complete idiot. Also, my professional career and college coursework have all been mathematics, so my level of financial analysis knowledge is limited to what's in the CFA level 1 material (passed in June!) So, expect stupid errors.

Anyways, thanks again to everyone who takes time out of their day to take a look at this. I'm sure it's awful for a variety of reasons, but I've tried to support my conclusions the best I could. Looking forward to hearing what you think.

https://docs.google.com/open?id=0BzgRTYOUIJE5LUlXdUxiY0pocVE

Thanks monkeys!

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."
  • 3
 
Oct 17, 2017 - 1:48pm

Just a brief comment, your report lacks 2 key elements:

1) charts/graphs. Investors only skim the top of reports and will only read full reports if they really like the intro/idea You need to grab attention in the first paragraph and have less text and more visuals.

2) Where are your forecasts? I want to see what you think the numbers will look like over the next few years. Show us your DCF model in the back as an appendix too.

I will get a copy of a JPM report and send it to you when I have a bit more time.

Other than that, good attempt, keep it up!

 
Oct 17, 2017 - 1:49pm

Ok ER reports aren't lab reports. You don't have to write step by step your DCF model. Just tag on the DCF model IS/BS/CF on the appendix. Also instead of listing numbers like 2008-2011 ROE numbers u had, use tablets. Also the analysis is weak, but expected.

Last pro-tip, imagine us analyst/associates/fund managers got hundreds of these to go thru a week, so you want to present it short and sweet. don't write out list of numbers in the body of the paragraph when u can just show it. This isn't college English 101 anymore where bsing enhances grades, we hate all the extra words. If you can convert some of those sentences into charts, tablets, graphs instead it would be a lot better.

 
Oct 17, 2017 - 1:51pm

Agree with above points. Shrink the title - it takes up too much room on the front page. State upside to current price (and what current price is!).

Open Table's growing revenue? How fast? Does this translate to EPS? Is it generating cash?

Get 1 or 2 attractive graphs for the front page. Scatter the rest throughout as appropriate, or put in appendix.

Agree with the need for forecasts. Get 3Q12, 2012, and 2013. You list some attractive parts of the business (eg international expansion) but how does this impact EPS? And how do your ideas differ from consensus?

You also haven't clearly articulated how you are valuing this- PE? Cash flows? It's clear if you read the report that you are using a DCF, but say so up front. Personal preference, but I like to come up with a value some other way, then use a DCF to sanity check it. Of course, your DCF should incorporate your projections.

 
Oct 17, 2017 - 1:53pm

Never, NEVER write a research report that says 'I think' or 'my opinion'. Always use "WE" or "OUR OPINION". It gives it more authority. No professional would make that error.

You give a price target without a current price. Don't make me do work. Give me the current price.

You can abbreviate millions of shares and things like that.

Calculate beta yourself. Define the timeframe you want to tell your story and use "=linest(,)" in excel to calc beta using the historical data.

I'm not going to opine on the stock itself and form your opinion of it. Overall, nice first try.

 
Oct 17, 2017 - 1:54pm

SirTradesaLot:
Never, NEVER write a research report that says 'I think' or 'my opinion'. Always use "WE" or "OUR OPINION". It gives it more authority. No professional would make that error.

You give a price target without a current price. Don't make me do work. Give me the current price.

You can abbreviate millions of shares and things like that.

Calculate beta yourself. Define the timeframe you want to tell your story and use "=linest(,)" in excel to calc beta using the historical data.

All of this advice and more. Maybe its just me, but because of the IB focus of WSO everyone gets way too hung up on DCFs.

Try building your own bottom up IS model and run out the line items for the next 2-3 years. (3rd year number is always a bit iffy, especially in a growthing business like OpenTable.) Buy-siders aren't going to read your report because of your valuation, they want to know your opinions on changing condititions (revenue growth, changes in GPM, SG&A leverage).

When it boils down to it, I'm much more interested in reading a sell-side report that has a big earnings divergence from consensus.

 
Oct 17, 2017 - 1:56pm

Also, thanks to everyone who took a look and offered me all of this great advice. I really appreciate it.

If/when I should ever meet any of you, remind me that I owe you some drinks.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."
 
Oct 17, 2017 - 2:00pm

oh dear! reading that was really fun.

Ok, just to warn you, I may come off a bit of an ass in this post but I think you need that more than a pat on the back. I am a hedge fund analyst, so I am part of your target audience.

Reading your report I get so many red flags on this company that there is no way I would agree on the BUY recommendation you've got unless I have to do my own research from scratch. That renders your report useless to me. I'll put the comments in bullet points to avoid writing war and peace 2. Of course what the previous posters said is very valid.

a) Target price needs to be rounded. $67.12, I mean ".12"?? You calculated what the price should to the second decimal? No..Just round it to $67.00 or $67.50 or something similar.
b) First page is awful. Where is the summary of current financials? I want to see current price, float, shares outstanding, market cap, a couple of relevant ratios, ipo price (if recent, which would matter), daily/average volume, stock price chart maybe? or EPS growth chart maybe?
c) you mention that the company has posted continuous growth despite the restaurant business being seasonal. Can you explain why? I mean, unless I understand how they are able to achieve this great results I'm not going to be convinced it's legitimate.
d) Again on growth, is growth accelerating or decelarating? If the latter then that's the reason for the stock price tumbling. A lot of times investors get happy and pile on a stock that seems to have explosive growth, expecting that very explosiveness to continue. If growth starts petering out then 'they're out' as well. So, what's growth been doing in the last year? What about EPS?
e) Talking about EPS, what are their margins like and respective growth. How is OpEx following up top line margins? What about their revenue streams from existing customers, you mentioned these increased, BUT how much room for growth is there? In other words, is growth going to come from new customers or is there a good % coming in from upselling to existing ones? I need to understand where the revenue and growth is going to come from.
f) The CEO leaving is a massive clue on why the price went down. You don't address the reason he left, which is critical. These type of companies are sometimes a one-man-show where the CEO had all the vision, passion etc. to drive and execute the strategy of the company. If he was -as it seems- such a vital exec then without him where is the company going to go?
g) Acquisition in UK, did they buy cheap or expensive? You're not telling.
h) What are the main catalysts that will push the price higher? anything expected in the short/mid-term? Or is it business as usual and grow annually like clockwork? If it's so lucrative there have to be competitors, where are they? (btw, that one liner that the main competitor is 'the phone' was really-really funny! I haven't laughed at a WSO post for a long time..in a good way..but remove it cause it looks dumb). If there is no competition in such a big potential market then you need to figure out 'why?'. If there is, you're not mentioning it or you haven't done your work properly.
i) there are many-many-many other points I could make about the business but I think the above will give you some steer to start improving your analytical comprehension first and the report style/formatting/type-up second.

So, after all this criticism I also want to add that it was a decent effort from a non-professional. Decent not so much in content (due to the points I mentioned above) but it is obvious that you put some work hours in it. You're on the right track and if you really like this kind of work there are many ways you can improve, which is always a good thing. Loads to learn and a steep learning curve ahead but keep at it and it will work itself out.

Remember that if you put the time in your work then the others will be more willing to give you feedback.

 
Oct 17, 2017 - 2:01pm

justanother:
Ok, just to warn you, I may come off a bit of an ass in this post but I think you need that more than a pat on the back. I am a hedge fund analyst, so I am part of your target audience.

This is precisely what I'm looking for, and no, you came across as a guy who took the time to read an amateurish report and offered well reasoned suggestions and some well deserved criticism. I mean, you don't post a report on an expert community's website and expect everyone to give you an "A for Effort!" That would be inherently useless anyways.

Good looks and thanks again for reading! I really appreciate you taking the time.

P.S. The "phone is their biggest competitor" was actually from their own 10K. I too thought it was hilarious.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."
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