Equity Research Report Writing

What is Equity Research Report?

Equity Research Report is a document prepared by Equity Research AnalystsEquity Research AnalystsAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading.read more or Financial brokers and focus on a specific stock or industry sector, currency, commodity or fixed-income instrument, or even on a geographic region or country. The contain recommendations as to why buy or sell that stock including DCF modeling, relative valuations, etc.

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Source: Equity Research Report Writing (wallstreetmojo.com)

Who are the Clients of Brokerage Firm?

A Financial broker is basically an intermediary between the clients and the investment world. Broker are organizations like J.P.Morgan, Goldman Sachs, Credit Suisse, Nomura, Morgan Stanley, etc. Clients are large investment funds like Pension Funds, Life Insurance Companies, Mutual FundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more, FIIs, etc.

Although brokers facilitate the investments, they also provide investment advice. Sometimes this investment advice is paid for by the clients. However, in most cases, the investment advice is provided for free. “Brokerage houses basically sell their Ideas.” They charge commissions on each transaction executed through their trading division.

Now think of this, there are more than 300+ brokerage firms who are connected to these clients. Each day clients receive more than 100+ research reports (ideas) emails from brokerage firms. Do you think the client has time to read all the research reports from head to toe?

We should understand that at best, clients may spend not more than a minute or two minutes reading your research report. Obviously, your financial statement analysis report, if this is so, a 50+ page report would not make any sense. A novel style research report is trash!

For the reasons above, research reports must be crisp, to the point, and precise. We explore later on the best practices for writing a research report.

Types of Equity Research Report

#1 – Initiation Report

• As the name suggests, these are the reports when the brokerage firms take coverage of the company. This means they started tracking the company for the first time.
• As this is the first research piece from the brokerage firm, it can typically be a detailed report and can vary from 20-50 page report
• This detailed report contains not only the stock details but also overall competition, industry dynamics, etc.

source: Religare research report

#2 – Sector Report

• Many times, brokerage firms come up with Industry or Sector reports on the update
• These reports again can be very exhaustive and helpful to clients
• This provides deep insights on Industry dynamics, competitors, government regulations, and key forecasts

source: Deutsche Bank research report

#3 – Strategic / Economic Reports

• These strategic or economic reports contain information on general macro economic, currency movements, commodities, etc.
• These reports are especially useful for portfolio managersPortfolio ManagersA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. read more to make a decision on country-specific fund flows.
• Also, research analyst makes use of these strategic reports to incorporate any important correlation with their sectors.

source: Citibank research report

#4 – Quarterly Result Reports

• These are 2-3 page report highlighting critical result updates.
• These reports are generally smaller reports and contain only vital highlights of quarterly/annual results

source: JPMorgan research report

#5 – Flash Reports

• Flash news reports could be anything important that is worth communicating to clients.
• Sometimes, it could even be just a quick email update or an alert.
• Events could be associated with the important management change, mergers, and acquisition, any deal announcement, critical regulatory change, etc.

Do’s & Don’ts of Equity Research Report Writing

Golden Rule

• Expectations from Dan Brown Novels are different; the climax comes at the last!
  Your Research Report is NOT anywhere close to novels, is diagonally opposite, target price/recommendations comes first!

KISS – Keep it simple silly!

• Readers hardly have 1-2 minutes to read your full report. They may not even scan even till the 2nd page.

Timely Reports

• Issuing the report in a timely fashion
  For Example, a result update report after 2-3 days may not be considered for reading

The client is sophisticated and professional

• Always use to the point and precise points

Equity Research Report Writing Standardization!

Report

Keep the report short (maximum 20 pages)
Use Headlines and comment flashes
Make the format and layout as uncluttered as you can

Style

Should be jargon-free – Avoid clichés, e.g., jack of all, the lion’s share
Be precise, clear, and concise
Use short words like ‘buy’ rather than ‘purchase.’
Use of active voice, e.g., ‘We forecast..’ is better than ‘it is forecasted to..’

Convention

Headings, Abbreviations
Bullet points, Currencies
Time, Dates
Names and Titles, Figures
Ranking, Upper Case, Lower Case, and Title Case

Charts and Graphs

Use charts and graphs – an appropriate picture really is worth a thousand words
Put data in a table

Discuss the risks

You need to discuss the risk.

Anatomy of Equity Research Report – First Page

Having understood the types of equity research reports, let us now look at the anatomy of the Research Report. The first page is the most crucial page of the report. There are critical sections with the report –

1. Recommended Target PriceTarget PricePrice Target in the context of stock markets, means the expected valuation of a stock in the coming future and the valuation may be done either by the stock analysts or by the investors themselves. For an investor, price target reflects the price at which he will be willing to buy or sell the stock at a particular period of time or mark an exit from their current position.read more & Stock Data
2. Investment Report Summary
3. Estimates & Valuation

source: Merrill Lynch research report

1. Target Price & Stock Data

• This section contains the target price and other financial data
• The idea of this section is to get a quick glimpse of key variables like Market CapitalizationMarket CapitalizationMarket capitalization or market cap is the total market value of all the outstanding shares and is calculated by multiplying the outstanding shares with the current market price. Investors use this ratio to determine the company's size rather than using total sales or total assets.read more; Daily traded Volumes, Shares Outstanding, ROE, free float, etc.

source: Merrill Lynch research report

2. Investment Report Summary

• This primarily contains 2-3 most important aspects of the report
• One discussion point is generally on the valuations and the risks associated with the company

source: Merrill Lynch research report

3. Estimates & Valuation

• This section contains key estimates like Net Income, Profit, Dividends, etc. This section provides a quick glimpse of key forecasts to the clients
• In addition, the report also contains valuation sections with key multiples like PE RatioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, Price to Book Value RatioPrice To Book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more, EV/EBITDAEV/EBITDAEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more, etc

source: Merrill Lynch research report

Equity Research Report Writing – Case Studies

Case Study 1 – General Guidelines

“1Q FY09 GDP rose 7.9% v/s 8.8% last quarter and 9.2% in 1QFY08. Growth was led by agri up 3%, industry up 6.9%, and services up 10%. GDP by expenditureGDP By ExpenditureThe Expenditure Approach is one of the methods for calculating a country's Gross Domestic Product (GDP) by adding all of the economy's spending, including consumer spending on goods and services, investment spending, government spending on infrastructure, and net exports.read more indicates that while consumption growth at 7.9% was higher than trends in 1QFY08, investment growth decelerated to 9%- the first time below double-digits since 4QFY03. We expect these trends to continue in FY09.”

Some things to note in the above example
1QFY09 is used for representing 1st fiscal quarter of the year 2009 (writing in this style saves a lot of space for the report)
Observe how the increase and decrease in growth rate
v/s = versus
We expect….

Case Study 2 – Using Numbers

Heading – Solid 1Q Execution, But Orders Slow
Heading should be to the point and catch!

Solid 1Q09 Execution Drive Surprise; Rec. PAT +70%; Buy
We up L&T EPS by 3-4% over FY09-10E following Street-beating 1Q09 with Rec. PAT Rs4.9bn, +70%YoY +30% ahead of consensus. The company hiked guidance on FY09 sales growth to 30-35% v/s 30% earlier. However, the key worry was slowed order inflows (+24% v/s 30% guidance). An EPS CAGR of 36% (FY08-10E) & creation of vehicles of future growth through high-end power equipment, shipyard, and big project wins at IDPL, railways, defense, Nuke & Aerospace domains are potential triggers. We cut PO to Rs3450 (3950) to factor in market/stock de-rating, higher risk-free rateRisk-free RateA risk-free rate is the minimum rate of return expected on investment with zero risks by the investor. It is the government bonds of well-developed countries, either US treasury bonds or German government bonds. Although, it does not exist because every investment has a certain amount of risk.read more (9% v/s 8%) for Infra SPVs, and discount to realty SPV.

Case Analysis
Always subordinate numerical information to a non-numerical idea.
Y-o-Y – used year over year
“+70%” used to indicate a growth of 70%
CAGR = cumulative average growth rate
The language used is very professional.

Case Study 3 – Using Tables

Case Study 4 – Valuation Discussion

Case Study 5 – Risk Discussions

Using Readability Statistics – Flesch-Kincaid Grade

Readability statistics can provide significant inputs regarding the sophistication of your research report. Below is a quick summary of using Readability Statistics –

• In Word, click on the Windows button in the top left corner of your screen,
• Then click on Word Options; when you are in the Word Options pop-up, click on Proofing on the left;
• When correcting spelling and grammar in Word, make sure that Show readability statistics is checked.

Now, run spelling and grammar checks through your document.  At the very end of the process, the Readability Statistics will pop up.

This score relates to US school grade levels. A score of 8.0, for instance, means that your writing it geared toward an eighth-grade reading level.

• For those who are not based in the US, grade levels relate to actual age as follows.
  1st Grade 6–7
  2nd Grade 7–8
  3rd Grade 8–9
  4th Grade 9–10
  5th Grade 10–11
  6th Grade 11–12
  7th Grade 12–13
  8th Grade 13–14
  High school 9th Grade (Freshman) 14-15
  10th Grade (Sophomore) 15-16
  11th Grade (Junior) 16-17
  12th Grade (Senior) 17–18

So a Flesch-Kinkaid Grade Level score of 10 will mean that you are aiming roughly at ‘an educated reader’ of about 15 years old.

You need to remember that your research report is for sophisticated /educated users, and it should contain 12 and above grade.

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This article has been a guide to Equity Research Report Writing. If you learned something new or enjoyed the post, please leave a comment below. Let me know what you think. Many thanks, and take care. Happy Learning!

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