How to Write an Equity Research Report ?

 

Financial Analysts or equity research analysts working in brokerage firms or sell-side analysts write equity research reports.

In this post, we’ll see the structure of useful equity research reports.

 

What is equity research report?

 

As per the Financial Industry Regulatory Authority (FINRA), the definition of equity research report:

“Research report” means a written or electronic communication which includes an analysis of equity securities of individual companies or industries, and which provides information reasonably sufficient upon which to base an investment decision and includes a recommendation.

If you read the above definition carefully, you’ll understand that the report can be of an individual company or of an industry. The definition also says that the research report should provide reasonably sufficient information and the report should include a recommendation.

Let’s see the process of writing an equity research report in detail.

Equity research report writing process

 

 

After completing fundamental analysis, financial statement analysis, ratio analysis, and  valuation, the last part in equity research process is writing equity research report.

As an analyst, you need to analyze the industry and the company first and then write the equity research report.

This is important to write the equity research report in such a way that your clients understand every word of it. It’s also important to include relevant analysis that you’ve done in the report.

Let’s see each step of writing equity research report in detail.

 

1. Company fundamental analysis

a) Macroeconomic Analysis

b) Checking public information of the company

c) Discussion/ interviews with company management

d) Prepare 5-year cash flow model and earnings forecast model

e) Review your operational and financial assumptions

f) Assess management and competitive environment, buyers, suppliers, substitutes, porter 5-forces model that tells you competitive advantage of the company.

 

2. Company valuation analysis

1. Use intrinsic valuation—Discounted Cash Flow(DCF) method

2. Relative valuation

3. Sum-of-the-parts valuation method, wherever required.

 

Pointers for writing equity research report

 

 

I’ve created a list of pointers purely based on my experience and observations and a bit of research about dos and don’ts while writing equity research report.

1. Clear view of the company

Before writing the report, have a clear view of the company in terms of—Investment rationale, risk assessment, key growth drivers, cost drivers and revenue drivers .

2. Recommendation/Rating

Clearly write the company’s name at the top of the report and mention your recommendation—buy,sell, hold. You can also use the words—outperform, underperform, neutral or accumulate based on your valuation.

Have an image of an equity research report in your mind, and so you won’t miss these details.

Usually, there are templates available in your company and you need to write the report using these templates.

3. Target price

You need to mention target price based on your valuation along with recommendation.

4. Investment rationale

Write clearly your investment rationale. Why do you think the share price will go up/down?

5. Share price chart

Include a price chart of the stock that will show last 52-weeks’ share price movement.

6.Business model

Mention the analysis of the company’s business model and how will it perform in next 2-3 years.

7. Key ratio analysis

Include important ratio analysis of the company and 52-week high-low share price on a stock exchange. Include market capitalization, Enterprise Value(EV), Earnings Before Interest Tax and Depreciation (EBITDA), EV/EBITDA, and dividend yield (%)

8. Product profile and segments

Analyze the company’s product profile, its various segments and brands. Include current sales and forecasted revenue figures, cost, market size , company’s market share, competition, the company’s performance in domestic and other markets.

9. Economy-Industry-Company (E-I-C) Analysis

Cover company’s fundamental analysis with supportive data.

10. Intrinsic and relative valuation

Perform DCF analysis and relative valuation. Relative valuation should be done with the company’s peers on the basis of Price-Earnings ratio (P/E), Price to Book ratio (P/B), Price to Sales (P/S), Return on Equity (ROE) and Return on Capital Employed (ROCE).

11. Reasoning for recommendation

Write a proper reasoning for your recommendation. For example—Why to buy the stock or why not to buy the stock. So, your reasoning has to be strong.

12. Unlock the value

Write what can unlock/increase/reduce the value of the company.

13. Legal matters

If the company is battling any case, write what could be its effects on the stock price.

14. Common industry points

While writing industry reports, write the points which are common for all players in the industry, for example: regulatory limitation, excise duty, oil prices, etc.

15. Covering all the areas in equity research report

While writing the equity research report, assume that the reader is new to the company and he doesn’t have any idea about its business. So, your report should include precise information about—product, financials, management, market, future plans of the company, growth estimates, and the risk factors of the company.

In short, as an analyst, your eequity analysis report writing process should be structured and you should follow the dos and don’ts mentioned in this post.

Sample equity research reports:

Equity Research Report PDF

Western Digital Corp

HUL

Asian Paints

If you have any queries, Speak Your Mind.