Equity Research Report Overview For the equity research report, you will put yourself in the shoes of a stock analyst to study, examine, and value your chosen company before making a buy or sell...

I'm not really sure about the number of pages because some of the assignment is part of the first assignment. This is why I need the same expert.


Equity Research Report Overview For the equity research report, you will put yourself in the shoes of a stock analyst to study, examine, and value your chosen company before making a buy or sell recommendation based on the current stock price. An equity research report is generally prepared by equity analysts in investment banking houses to provide information to investing clients, advisors, and other interested parties about the stock’s future potential and to recommend a purchase or sale of the stock. The analyst would recommend buying a stock if he estimates the value of a share to be greater than the price which you can buy it on the market. Similarly, he would make a sell recommendation if he values the company below its current market price. There is some evidence that analyst reports are positively biased, because of lack of incentives to produce negative reports. Of course, you can prepare your own unbiased report and use it for your own internal consumption at the time of investing. The idea is to find good bargains and avoid buying overvalued stocks. This is tough because securities usually trade at their fair price if markets are fairly informationally efficient. There are several different valuation techniques. The valuation principle you will use for to estimate the firm’s value is known as the discounted cash flow method, or “fundamental valuation.” You will do this by first forecasting the expected future cash flows and then discounting those cash flows back to present value. The discount rate is based on the riskiness of the forecasted free cash flows. After these cash flows are discounted back to present value, you adjust the estimated firm value for debt and preferred stock outstanding, and divide by the shares outstanding for your target stock price. The report will contain the following sections: Executive Summary Analyst Name and Company, Firm being analyzed: Name and Ticker Symbol, Price on report date, Forecast horizon, Recommendation (Buy, hold or sell; or strong buy etc.), Target forecasted price, Highlights, Summary of analysis Qualitative Analysis Company profile or business description, Industry overview, SWOT analysis, Management, Major owners, News, Summary of technical analysis and charts Financial Statements Analysis Ratio Analysis and Interpretation, Earnings Forecast, Growth forecast, Trends over time and versus competitors Risk and Pricing Risk factors, Computation of Required return or discount rate, Calculate Fair Price, Compare with market, Recommendation Appendix: Actual financial statements The report usually contains an executive summary page with the key recommendation. This recommendation should be based on very solid justification. Next, the report details the qualitative analysis of the firm’s business and the industry conditions. Following this, is a financial statement analysis section which numerically forecasts earnings and future dividends. Finally, you assess the risk factors to compute the appropriate rate at which to discount future cash flows to arrive at the fair price that should be paid for the stock. Any factual information and the actual financial statements should be included in the appendix. The report itself should contain the interpretation of these facts. Where to start There are many potential sources of data and information about the company which you will need to gather and review when you are preparing the report. Every listed firm is legally required to file its statements at the publicly-accessible SEC (Securities and Exchange Commission) EDGAR website. They will also have information on the company’s own investor relations webpage. Bloomberg, Reuters, and the Wall Street Journal are good, albeit expensive, media and data sources for latest news about the company. A nice free website which is an excellent source of qualitative and quantitative financial information is Yahoo Finance. Gather all of your hard data and source material (financials, economic outlooks, competitors’ financials, etc.) and be sure to include them – formatted neatly – into your report’s appendix. Qualitative Analysis It is important to analyze each piece of information in your report. Don’t just copy it into the report; you must interpret it. What is the meaning of each piece of information and how it will effect stock’s fair value, in your opinion? Your analysis will begin by using qualitative factors and analysis to determine the business outlook. In other words, how will fundamental information affect future cash flows in the numerator of the valuation equation? Think about how every piece of information will affect future sales or revenues (i.e. the top line of the income statement). Will the sales increase due to economic recovery and growth OR will the sales decline due to competition and other factors? Also think about how this information will affect the bottom line (i.e. EPS, free cash flows, or dividends). Will the costs rise due to inflation, or will the firm successfully control costs and increase profitability? Keep in mind that sales often have patterns such as seasonality, trends, business cycles, growth through innovation. So when you are projecting the future sales all these trends and patterns should be helpful in making a more accurate forecast. First, try to forecast how the overall economy will perform in the forecasting period. If the economy grows most firms are likely to share the fruits of that growth. If the economy will be in recession than most firms will experience declining sales. There are some exceptions such as Walmart or inferior good manufacturers, which may do well in recession. Take this into account when you are analyzing the GDP growth rate, which is usually forecasted by economists and should help you to predict the firm’s growth. Now determine the stage of the industry’s life cycle. Industries in the pioneering stage may have losses in their initial years – Amazon had huge losses in the initial years after the website was launched – but then these firms can earn high profit margins as the product is established. To determine how qualitative factors will affect your firm’s top and bottom lines, you’ll need to use your own opinions, research and creativity. This may include relevant news articles, technical analysis/charting, a SWOT (Strengths, Weaknesses, Opportunities, Threats) matrix, and knowing the major shareholders and managers of the firm. The possibilities are endless, but for your report, you’ll ultimately need to forecast revenues and expenses, so you’ll need to justify them with your analysis. To analyze management and ownership of the firm you need to ask yourself: Who is running the firm that you are analyzing? What is their background, skill set, and experience? How are they paid? Cash compensation may leave managers unmotivated, options may lead managers to take on too much risk, bonus compensation may lead to earnings manipulation. Therefore, the best practice firms tend to use cash plus restricted stock unit compensation for their managers. Most importantly, try to examine management’s track record of allocating capital. i.e. how does management makes use of profits once they have been earned? This is important because poor allocation of your profits can destroy great business, regardless of how much profit you make. If you making dumb investments with that profit, it won’t help you much in the long‐run. Quantitative Analysis Financial Statement Analysis is done to assess the financial health of a firm. Within this section, you will compute and interpret various types of ratios, and highlight any changes in these ratios over time and any major differences in ratios across the firm and its competitors. The next goal is to project the firm’s EPS in the next year. The best places to start are current and historic financial statements, (We already have this data!) and use your qualitative and ratio analysis to determine why revenue, expenses, earnings and cash flows are moving up and down each year. For projecting future expenses, it is useful to common size the historic and current statements as % of sales and then use the ratios for forecasting next year’s expenses, being sure to factor in our qualitative analysis. Now to get the earnings per share we divide the net income by the number of shares outstanding. A short cut to find the number of shares outstanding is to divide the Market capitalization by price. But be mindful that firms can add more shares in future through equity offerings, and (more commonly) the exercise of stock options by its executives. If so, then you should increase the number of shares outstanding for the future. Historic Data Common Size Average & Adjust Forecast 2009 2008 2009 2008 2010 Sales or Revenues $14.6 Billion 13.5 8% growth 9.9% Growth 8.95% adjust down to 6.5%; recession $15.5 Billion Various Expenses (% of sale) $12.5 Billion 11.3 86% of sales 84% of sales 85% adjust down to 83%; cost cutting measures $12.9 Billion Net Income $2.1 Billion $2.2 Billion $2.6 Billion EPS 1.94 1.97 2.32 Risk Analysis and Pricing Next you’ll analyze the risk of the firm to estimate an appropriate discount rate. The discount rate should increase as the firm’s cash flows gets riskier. Some people just use a “common sense” rate of required return. Others rely on sophisticated mathematical modeling to determine the risk premium (the additional return in order to compensate investors for uncertainty about the stock’s future performance) on the stock. To do this, you will require the risk free rate plus a risk premium. The proponents of the advanced mathematical models claim that only systematic risk (and not idiosyncratic risk) is rewarded in the stock market. This type of risk is caused by macro factors such as changes in interest rates, GDP growth, supply shocks, financial crisis. Therefore, to measure systematic risk, we estimate the covariance of the stock returns with the market portfolio. This covariance is called beta (β). Beta estimates a stock’s systematic risk. Unsystematic risk is not rewarded because you can easily reduce or eliminate it by holding well diversified portfolios. The Capital Asset Pricing Model provides a framework for computing the required return from the stock. Essentially, discount rate that you will put into the dominator of the valuation equation would be the required return according to the CAPM. This required return is: ?(??) = ?? + ??[?(??) −