Writing an Equity Research Report

Ivan Guidotti
Institute of Financial Analysis
University of Neuchtel
Valuation Process
The research report is the tangible outcome of the
valuation process.
The steps of the valuation process are:
Understanding of the business, competition, economic
environment,
Forecast of the company performance
Selection of the appropriate valuation model
Conversion of forecasts in value
Conclusion
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Research Report
It communicates the results of the valuation, but also how
you obtained them
Start by stating your recommendation
You recommend an investment, not a company!
Then explain your thesis, going more and more into the
details
Say enough without boring the reader: hit the key points
Find a persuasive line of arguments
The organization of your report is the key
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Characteristics of a good report
Based on timely and forward-looking information
Analysis, forecasts, valuation and recommendation are
internally consistent
Contains opinions (but distinguish them from facts!)
Uses clear and incisive language
Is objective and has a reasonable and adequate basis
Key assumptions are clearly identified
Allows a critique review
States the risk factors
Discloses the potential conflicts of interests
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Sections of the report
Compulsory for the CFA Institute Research Challenge
Investment summary
Business description
Industry overview and competitive positioning
Financial analysis
Valuation
Investment Risk
You can add other sections
Ex: corporate governance issues, forthcoming M&A activity
Do it if they are really relevant for the valuation
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Investment summary
It corresponds to an executive summary
Purpose
Communicate the large picture
Communicate the conclusions of the analysis
Recommend and investment action
Content
Brief description of the company and recent developments
Earning forecasts
Major conclusions supported by a valuation summary
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Business description
Reflects part of the first step of the valuation process
Purpose
Present the company into details
Content
Company description at a divisional level
Strategy description
History
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Industry overview and competitive
positioning
It is based on the first two steps of the valuation process
Purpose
Communicate a detailed understanding of the situation of the
company and its industry
Provide and explains the forecasts
Content
Industry analysis (opportunities and threats)
Competitive analysis (strengths and weakness)
Porter 5 forces, BCG matrix,
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Financial analysis
It supports the previous sections of the report, remember
to be forward-looking
Purpose
Communicate the detailed situation of the firm and how it will
evolve
Content
Historical performance of the company
Financial forecasts
Do not forget the key drivers: growth, profitability, and efficiency
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Valuation
It is built on the previous sections, consistency is very
important
Purpose
Communicate a clear and careful valuation
Content
Description and justification of the models used
Review the inputs of the model
Statement of conclusions
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Investment Risk
Readers have to be informed on the factors that may affect
the value of their investment
Purpose
Alert readers to the risk factors in investing in the security. Focus
on risk affecting the company, this is not a list of all potential risks.
Content
Possible negative developments at the industry, regulatory, legal,
and company level
Risks in the forecasts or in the inputs of the valuation model
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