Steps to Craft an Equity Research Report
Creating a crisp and well-structured equity research report is a highly valued skill for roles in #investmentbanking like equity research so you must know the process inside out.
Brokerage houses (#JPMorgan #Nomura #UBS) or securities firms create ERs for buy-side clients (hedge funds, banks, HNIs) to provide investment recommendations (buy/sell/hold).
The report should be a 10-15 page document that must include:
✅ Analyst recommendation and summary
✅ Company highlight and industry snapshot
✅ Investment Thesis
✅ Catalysts
✅ Financial analysis and valuation
✅ Risk factors and mitigation
✅ Disclosure and rationale of rating
Here's a step-by-step guide to help you draft an ER:
1. Fundamental analysis: Check the firm's publicly disclosed information, add macroeconomic analysis, devise a 5-year cash flow model and earnings forecast model. Once you've reviewed the operational and financial assumptions, evaluate the management and competitive environment, buyers, suppliers, substitutes, and use a Porter 5-forces model to understand their competitive advantage.
2. Company valuation: This will test your technical skills, esp. DCF skills (intrinsic valuation), relative valuation or sum-of-the-parts valuation method, as required.
3. Recommendation: Cut to the chase right at the beginning and clearly mention your recommendation—buy, sell, hold. You can also use terms like outperform/underperform/neutral based on your valuation.
4. Target price: Provide one based on your valuation along with the recommendation
5. Investment rationale: Explain why you think the share price will go up/down?
6. Share price chart: Include a price chart of the stock that will show the last 52-weeks’ share price movement.
7. Business model: Mention the analysis of the company’s business model and how will it perform in the next 2-3 years.
8. Key ratio analysis: Include market capitalization, Enterprise Value(EV), EBITDA, EV/EBITDA, and dividend yield (%)
9. Product profile and segment analysis: Evaluate the target stock's product profile, segments, and brands with current sales and forecasted revenue figures, cost, market size, the company’s market share, competition, and performance in domestic and other markets.
9. Economy-Industry-Company (E-I-C) Analysis: Cover the company’s fundamental analysis with supportive data.
10. Intrinsic and relative valuation: Perform DCF analysis and relative valuation (with the target’s peers based on P/E ratio, P/B ratio, Price to Sales (P/S), ROE and ROCE
11. Risk Analysis: Discuss any downside risks that you see to your valuation (raw material price hike or economic instability). Do mention any risks related to the firm as it’ll impact profitability.
Hit 👍 to let us know if you want us to discuss a specific stock's equity research report!
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