Standard & Poor’s Equity Research Methodology

BOTTOM-UP COMPANY ANALYSIS

Products
Company Fundamental Analysis 1
Company Valuation Analysis Review and Services

MACRO AND ECONOMIC Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 Retail
Advisor Insight
ANALYSIS
Review public Conversations with Prepare 3-Year Review financial Assess: Finalize Earnings Analyst uses multiple criteria for valuing Establish Intrinsic Value Decide STARS recommendation Supervisory Custom Newsletters
information company manage- Preliminary assumptions Model a company, including: analyst review Equity Liaison Desk
When conducting bottom-up ment for detailed Earnings Model with company as ■ Management team ■ Intrinsic Value Analysis ■ Target Price over 12 months ■ Incorporate risk assessment rating for regulatory
information appropriate for com- Industry Surveys
company analysis, analysts are ■ 10K’s ■ Competitive ■ Determine earnings ■ Relative Valuation ■ Analyst assigns a Risk Ranking into overall STARS ranking (For and compliance
expected to incorporate Macro ■ EPS Growth Rate pany guidance (e.g. more details on Standard & Poor’s MarketScope
■ 10Q’s environment quality ■ Sum of the Parts Assessment (High/Medium/Low) of purposes
and Economic Analysis. ■ Establish relationships earnings comparisons) Risk Ranking Assessment, Model Portfolios
■ Annual Reports ■ Earnings Prospects ■ Suppliers ■ Evaluate corporate projected share volatility and risk
with new companies ■ Risk Assessment – Analyst incorporates a call 1-800-357-0769.)
■ Balance sheet governance of capital loss NetAdvantage
■ Conference ■ Buyers “risk premium” to derive a valuation
■ Most meetings with and cash flows
Investment Policy Calls ■ Substitutes ■ Project Standard Pocket Guides
companies done via
Committee (IPC) & Poor’s Core Sector Scorecard
phone; some in-person ■ Barriers to entry
Earnings, S&P’s Stock Guides
■ Meets weekly and is
meetings ■ Regulatory more accurate, Criteria / Definition ■ Company value
responsible for determining ■ Obtain a better environment proprietary repre- ● P/E trading history Stock Reports
understanding of: sentation of the Intrinsic Value Analysis ● High/low in cycle The Outlook
Standard & Poor’s analytical
views on investment trends ● Trends true performance ■ Determine security’s “intrinsic value” based on discounted ● Current P/E level justification
● Leverage/margins of a firm’s ongoing “free” cash flow (DCF) analysis. Estimates of future “free” cash ■ Valuation vs. appropriate index
operations
Institutional
■ Mission: ● Efficiency programs Standard & Poor’s Core Earnings Calculation flows are discounted back to current dollars, including variables
Compustat Data
Ensure Standard & Poor’s like risk assessment and capital structure Sum of the Parts
● Costs - current, Equity Insights
views are reached through a changes Included Excluded ■ Present value of shares vs. current share price ■ Determining “fair value” of a stock by determining private
deliberative, consistent process ■ Employee stock option grant expense ■ Goodwill impairment charges ■ 10-15 year projection market values for a firm’s individual units Industry Surveys
that involves input from a ■ Restructuring charges from ongoing ■ Gains/losses from asset sales ■ Defined parameters around DCF to make it more reasonable ■ No clear comparison and/or conglomerate Institutional Equity Reports
diverse group of Standard & operations ■ Pension gains (e.g. interest rate inputs) ■ Break divisions up as stand-alone business units IPC Notes
Poor’s senior analytic personnel ■ Write-downs of depreciable or ■ Litigation or insurance settlements ■ Calculate a relative value for each division Monthly Investment Review
amortizable operating assets and proceeds Relative Valuation ■ Arrive at a blended valuation
■ Analysis includes: Sector Watch
■ Pension costs ■ Reversal of prior-year changes ■ Assessing a security’s relative value by comparing appropriate
■ Purchased research and and provisions financial ratios across peer groups US Financial Notes
● Interest rate forecasts Risk Assessment
development expenses ■ Comparison with industry group ■ Technicals
● Market performance forecasts ■ Merger/acquisition related expenses ● Price/Earnings (P/E)
■ Insider buying
■ Unrealized gains/losses from ● Efficiency
■ Beta
● Economic, political and related hedging activities ● Margins
developments of interest to
investment community
● Consensus concerning effect
of such developments on S&P’s Ongoing Analytical Review
view of financial markets,
including recommended
percentage asset allocation Ongoing Analytical Review
among stocks, bonds and cash Step 11 Repeat Steps 1, 2, 3, 7, 8, 9 ■ Continuous committee-based evaluation of STARS recommendation ■ Constant updates for covered companies from primary sources. Goal: 7-8 updates per year
● Quarterly updates published and distributed ● Material events ● Changes in recommendations ● Stock Report updates ● MarketScope updates ● First Call notes

Sector Strategy Step 1 Step 2 Step 3 Step 7 Step 8 Step 9

and Guidance
■ Chief Investment Strategist
provides guidance on past and
current sector trends and
forecasts top and bottom
performing sectors.
Company Coverage Criteria
■ Group Sector Heads meet 1 Standard & Poor’s analysts’ access to information will
regularly with Global and always be subject to applicable legal requirements concerning
Regional Research Directors to Core STARS Coverage Criteria Additional Coverage Criteria Deletions to Equity Coverage Number of Companies Covered Per Analyst fair disclosure.
incorporate input from equity 2 Excluding Standard & Poor’s parent, the McGraw-Hill

analysts from all sectors to
formulate a collective bottom-up
investment strategy. This
bottom-up input, in the context
of past and current sector
trends and macro-economic
projections, support S&P’s
holistic sector weight strategy
and recommendations.
■ All S&P 500 Index 2 ■ S&P Composite 1500 Index constituent ■ Negative corporate actions ■ 20-25 companies Companies.
■ 300 of the S&P MidCap 400 Index ■ Significant trading volume (bankruptcy, mergers and acquisitions) The equity research reports and recommendations provided by
Standard & Poor’s Equity Research are performed separately from
■ 200 of the S&P SmallCap 600 Index ■ Market capitalization ■ Dropped from S&P Composite 1500 Index any other analytic activity of Standard & Poor’s. Standard & Poor’s
Equity Research has no access to non-public information received
■ Key non-U.S. stocks ■ Corporate actions (mergers/acquisitions, spin-offs) ■ Stock price < $5/share by other units of Standard & Poor’s. Standard & Poor’s does not
■ Emerging growth companies ■ Lack of investor interest trade on its own account.