The Structure of the Equity Research Report

Advanced Company Valuation

U
Uppsala
l U
University
i it
Department of Business Studies

© Copyright 2005, Joachim Landström. All rights reserved

L0- 2

The equity research report template

Š Highlights Š Historical financial

Š Investment summaryy analysis
Š Valuation Š Estimates
Š Business description Š Investment risks
Š Other headings Š Disclosures
Š Industry description and
competitive position

© Copyright 2005, Joachim Landström. All rights reserved

1
L0- 3

Template sections

Š Highlights section
Î Tells the reader why
y theyy should read the report.
p
Î 1-2 sentences per bullet.
Î Be clear and concise.
Š Investment summary section
Î Make a longer statement about your recommendation.
Î Make assertions that back up your recommendation.
Î Leave support of assertions to the body of report.

© Copyright 2005, Joachim Landström. All rights reserved

L0- 4

Template sections

Š Valuation section
Î Used to jjustify
y yyour p
price target
g
Î Each of the models that you use should be presented. Do
not reiterate textbook material.
Î You should instead read professional report available on
the website and ponder how they wrote it. Then do
something similar.
Î Risks to the price target should be included (NASD, Rule
2711: h.7)
• Incorporated as a sensitivity analysis of the valuation based
on ERP, RNOA et cetera.
• See also slide # 9 on investment risk.

© Copyright 2005, Joachim Landström. All rights reserved

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L0- 5

Business description section

Š Describe business, products, finances, and strategy of

company (see also slide # 7)
company.
Š Relative importance of segments and products.
Š Highlight important assets or liabilities.
Š Special situations/earnings interruptions
Î M&As
Î Restructurings – effects/pay back expectations
Î Discontinued operations
Š Where
Wh i th
is the leverage?
l ?
Î Operating: fixed v variable costs
Š Value added
Š How to manage downturn

© Copyright 2005, Joachim Landström. All rights reserved

L0- 6

Template sections

Š Other headings
Î Use to make ppoints that do not fit in the rest of the report
p
Î Contains for example:
• Cost of capital calculations.
• Dilution of shares analysis.
• Large insider holdings, et cetera.

© Copyright 2005, Joachim Landström. All rights reserved

3
L0- 7
Industry description and
competitive position section
Š Describe the industry
Î Where in cycle does
industry excel
Î How has it performed in
previous cycles
Î Cyclical, Continuous
growth
Î Industry Maturity
Î Effects of recession/ slow
recovery
Š Forces affecting the
industry
Š Who are the competitors
Š Describe how the
company fits into the
industry
Š What are the factors that
affects the company the
most
Š Demand
e a d Environment
o e t
Î Elasticity of Demand
Î Speed of Product
Innovation
Î Rate of growth

© Copyright 2005, Joachim Landström. All rights reserved

L0- 8

Template sections

Š Historical financial analysis

Î Must be ratio based using a bottoms-up using the DuPont
and the leverage formulas
formulas.
Î Historical and comparison with industry.
• How as the company performed and how well in comparison with
industry.
Î Operating Perfomance
• Analyze the company using the DuPont formula
• Discuss significant components of PM and ATO
Î Financial Performance
• Analysis of NBC and its components.
Î Total Performance
• Analyze the company using the leverage formula.
Î See also slide # 5 on the topic of leverage.

© Copyright 2005, Joachim Landström. All rights reserved

4
 L0- 9

Template sections
Š Estimates section
Î Must be ratio based following leverage and DuPont-formula.

Î The analysis of the future should be done relating the company to

its peers in the industry.
Î Short run Operating Perfomance
• Analyze the company’s future using the DuPont formula
• Discuss significant components of PM and ATO.
• Justify the assumptions.
Î Short run Financial Performance
• Analysis of future NBC and its components.
• Justify the assumptions
Î Short run Total Performance
• Analyze the company’s future using the leverage formula.
• Justify the assumptions.
Î Long-run Performance
• Analysis of the horizon assumptions such as long-run profitability, growth, l-r
borrowing cost, et cetera.
Î See also slide # 5 on the topic of leverage.

© Copyright 2005, Joachim Landström. All rights reserved

L0- 10

Template sections

Š Investment risk section

Î Business risk/Financial risk
Î Disclose risks to your recommendation
• What would make you change your outlook for this
company?
Î Be specific and describe why they are risks
Š Disclosures section
Î Legalese
Î Make adjustments such that direct ownership or material
conflicts of interest are explicitly exposed.

© Copyright 2005, Joachim Landström. All rights reserved