Equity Research Report Writing

Equity Research Report is a document prepared by Equity Research Analysts or Financial brokers. An equity research report may focus on a specific stock or industry sector, currency, commodity or fixed-income instrument, or even on a geographic region or country. Research reports generally, have some recommendations as to why buy or sell that stock including DCF modeling, relative valuations etc. In this post we will look at the basics of Equity Research Reports with practical case studies and examples. We also look at the tips and tricks to improve your Equity Research Report Writing.

• What is Equity Research Report?
• Who are the clients of Brokerage Firms?
• Types of Equity Research Report
  • Initiation Report
  • Industry / Sector Report
  • Strategy/Economics Reports
  • Results Update Report
  • Flash Report
• Do’s & Don’ts of Equity Research Report Writing
• Equity Research Report Writing Standardization
• Anatomy of Equity Research Report First Page
• Equity Research Report Writing – Case Studies
• Using Readability Statistics – Flesch-Kincaid Grade

What is Equity Research Report?

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A document prepared by an analyst or strategist who is a part of the investment research team in a stock brokerage or investment bank. A research report may focus on a specific stock or industry sector, a currency, commodity or fixed-income instrument, or even on a geographic region or country.  Research reports generally, but not always, have “actionable” recommendations (i.e. investment ideas that investors can act upon).

Source: Investopedia

Key Takeaways

• The equity research report is a communication from a securities firm to its clients with a very specific purpose.
• It is intended to help an investor make a decision about the allocation of resources.
• All other purposes are secondary.

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Who are the Clients of Brokerage Firm?

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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 Funds, 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 transactions 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 receives 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 you 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

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Initiation Report

• As the name suggest, these are the reports when the brokerage firms takes 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

Sector Report

• Many a 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

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 managers to take decision on country specific fund flows
• Also, research analyst make use of these strategic reports to incorporate any important correlation with their sectors.

 

source: Citibank research report

Quarterly Result Reports

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

source: JPMorgan research report

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 key management change, mergers and acquisition, any deal announcement, key regulatory change etc

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

Golden Rule

• Expectations from Dan Brown Novels is different, climax comes at the last!
  Your Research Report are 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

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, 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 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 important page of the report. There are key sections with the report –

1. Recommended Target Price & 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 Capitalization, 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 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 the key estimates like Net Income, Profit, Dividends etc. This section provides a quick glimse of key forecasts to the clients
• In addition, the report also contains valuation sections with key multiples like PE, Price to Book Value Ratio, EV/EBITDA 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 expenditure indicates that while consumption growth at 7.9% was higher than trends in 1QFY08, investments 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 quarter fiscal year 2009 (writing in this style saves 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. Company hiked guidance on FY09 sales growth to 30-35% v/s 30% earlier. However, 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 rate (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 growth of 70%
CAGR = cumulative average growth rate
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 a great 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 check 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  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

Other useful articles –

• Free Float Market Capitalization
• Equity Research vs Private equity differences
• Equity Research vs Sales & Trading differences
• Equity Research vs Investment Banking differences
• Equity Research Course

What next?

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!