THE BASICS: WHAT IS AN EQUITY RESEARCH REPORT?
An equity research report is a document prepared by an equity research analyst (or someone who has the skills) to provide insight on whether investors should buy, hold, or sell the shares of a listed company.
There isn’t an industry standard when it comes to the format of an equity research report but there are some fundamentals you need to consider when compiling content for one.
In an equity research report, an analyst lays out their recommendation, target price, investment thesis, valuation, and risks.
Some of the best reports we have read covered the following aspects:
- Overview
- Business description
- Industry analysis
- Investment summary
- Valuation
- Financial analysis
- Investments risks
- Environmental, social, and corporate governance (ESG)
- Recommendation
Let’s expand on each of these below:
THE OVERVIEW
It is good practice to start with some basic information about the company. This includes:
- the company’s ticker symbol and exchange where it’s listed
- the primary sector it operates in
- its current stock price
- a target price
- a market cap
Check the exchange the company is listed on for all of the above.
BUSINESS DESCRIPTION
Here, you would include a detailed description of the company and its products and services.
Look to include the key drivers of revenue and expenses. Where can you get this? Check the company’s financials.
PERFORM AN INDUSTRY ANALYSIS
This will include an overview of the industry dynamics, including a competitive analysis of the industry.
A Porter’s Five Forces tool is useful here.
Find peer companies which you can use to compare (
Google is your friend).
INVESTMENT SUMMARY
Most analysts include a brief description of the company, significant recent developments, an earnings forecast, a valuation summary, and the recommended investment action.
If the purchase or sale of a stock is being advised, there should be a clear explanation as to why the stock is deemed to be mispriced. Why is the market currently not properly discounting the stock’s price? What will prompt the market to re-price the security?
VALUATION
This is the fun bit where you will include a thorough valuation analysis of the company.
It is worth noting that equity valuation models can derive either absolute or relative values. Absolute valuation models derive an asset’s intrinsic value and generally take the form of discounted cash flow models.
Relative equity valuation models estimate a stock’s value relative to another stock and can be based on several different metrics.
Macabacus valuation and finance-related materials could be useful to you at this point.
FINANCIAL ANALYSIS
A detailed analysis of the company’s historical financial performance and a forecast of future performance is key. You’ll generally find a company’s financial statements in their investment centre (on their website).
INVESTMENT RISKS
At this juncture you need to address the potential negative industry and company developments that could pose a risk to the investment thesis.
The company’s business plan and integrated report always cover some of this, but also think practically about risks that might impact on a business. They could be financial, operational, regulatory, legal or even technological.
Some analysts do add both a PESTEL analysis and SWOT analysis in this section of the report.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE (ESG)
You can’t run away from ESG, so here’s a quick refresher on the topic and what you need to consider.
Environmental: how is the company working towards the conservation of the world via mitigating carbon emissions, air and water pollution and working on energy efficiency etc?
Social: how does the company consider people, the communities they work in and relationships with stakeholders?
Governance: is the company applying the King IV principles when it comes to board composition, audit committee structure, executive compensation, succession planning, leadership experience and bribery and corruption policies?
YOUR RECOMMENDATION
Whatever you do, don’t forget to include a recommendation.
What should you recommend include? It must notify readers whether the stock is a buy or sell or hold and why.
Finally, here is an example of an equity research report we went through and liked for your reference.
Happy report crafting!
