Equity Research

Equity Research primarily means analyzing company’s financials, perform ratio analysis,
forecast the financial (financial modeling) and explore scenarios with an objective of making
BUY/SELL stock investment recommendation. Equity Research analyst discuss their research
and analysis in their equity research reports. In this in-depth article on Equity Research, we
discuss the nuts and bolts of Equity Research –

What is Equity Research?

Equity Research explanation is quite simple. Let us look at this steps below
 1. Equity research is all about finding the valuation of a listed company (Listed companies
trade on stock exchange like NYSE, NASDAQ ,NSE,etc
2. Once you have the company under consideration, you look at the economic aspects like
GDP, growth rates , market size of the industry and the competition aspects etc.
3. Once you understand the economics behind the business, perform the financial statement
analysis of the historical balance sheet, cash flows and income statement to form an
opinion on how the company did in the past.
4. Based on management’s expectation, historical performances and industry competition,
project the financial statements like the BS, IS and CFs of the company. (also called as
Financial Modeling in Equity Research).
5. Use the Equity valuation models like Discounted Cash Flows, Relative valuations, sum
of parts etc to value the company
6. Calculate the Fair price based on the above models and compare the fair price with the
Current Market Price (stock exchange)
7. If the Fair Price < Current Market Price, then the company stocks are overvalued and
should be recommended as a SELL.
8. If the Fair Price > Current Market Price, then the company shares are undervalued and
should be recommended as a BUY.
Role of Equity Research

 Equity Research plays a very critical role that fills the information gap between the buyers
and sellers of shares.
 Reason is that at all levels (individual or institutional) may not have the resources or the
capabilities to analyze every stocks.
 Additionally, full information is not provided by the management due to which further in-
efficiencies are created and stocks trade below or above the fair value.
 Equity Research analyst spend lot of time, energy and expertise to analyze stocks, follow
news, talking to the management and provide an estimate of stock valuations.
 Also, equity research tries to identify the value stocks out of the massive ocean of stocks
and help the buyers to generate profits.

What is the Typical hierarchy in Equity Research firms?

  A typical hierarchy at an Equity Research firms starts with the Head of Equities/Head of
Equities at the top.
 Thereafter there are Analysts (senior) covering different sectors. Each analyst mostly cover
around 10-15 companies in a specific sector.
 Each senior analyst may be supported by an Associate, who in turn may be supported by a
couple of Junior Analysts.

What is the role of Head of Research?

 Head of Research act as a key member to manage the Equity research analyst team,
providing the team with leadership, coaching and guidance to ensure that the brokerage
goals and objectives are met.
 They oversee research reports publications, its editing as well as monitor the process of
analysis and brokerage recommendations
 They ensure that adequate support is provided to sales and trading teams
 Contribute to Equities by providing expert level inputs for overall strategy, goals,
initiatives and budgets
 Responsible for Analyst hiring, compensation, development and performance management
 Liaison with fund managers and the research teams.
What is the job of the Senior Analyst?
Below is an excerpt from a job requirement of a Senior analyst –

Source – Various
 Typically an equity research senior analyst would cover a sector with not more than 8-15
stocks. Coverage implies tracking these stocks actively. Senior Analyst tries to bring
maximum companies under coverage in the sector he/she tracks (initiating the coverage)
 Many senior equity analyst cover companies that investors may want to invest in. These
companies are like the high market capitalization companies or the ones with higher
trading volume and there could also be cases where investors want to invest in small cap or
mid cap companies with less analysts coverage.
 One of the most important responsibility of Senior Analyst is to come up with Quarterly
Results Update – results summary, expectation and performance against those
expectations, updating forecasts etc.
 Talking to the clients (buy side) and showcasing their calls on the stocks. They have to
diligently communicate buy sell recommendations of stocks. Additionally, they have to
articulate clearly why a certain stock should be included in their portfolio.
 Write important industry event updates like conferences or management meeting updates
 To update the Sales team, dealing and trading team about the latest news in the sector and
the company and keep them updated with the brokerage’s view on the same.
 Attending conference calls for important company updates, results etc
  Attend trade shows, meet company management, suppliers meetings etc

Responsibilities of an Associate

Below is the summary of Associate job description from efinancialcareers

 The primary job of an associate is to support the Senior Analyst in best way possible.
 An associate has a prior experience of around 3 years or so in similar industry.
 Updating the financial model, verifying the data and preparing the valuation models
 Working on various client requests like request of data, industry analysis etc
 Prepare draft Equity Research Reports (update of results, events etc)
 Work on client requests
 Participate in meetings and calls with clients on the stock under coverage.

Responsibilities of a Junior Analyst

Here is a snapshot of Junior Equity Analyst responsibilities.

source – careers.societegenerale.com
 The main responsibilities of Junior Analyst is to support the Associate in every format.
 Majority of the work done by Junior Analyst is related to data and excel etc
 Also, Junior Analyst may be involved in doing primary research, industry research,
coordinating with clients etc
 Maintaining the industry database, charts, graphs and financial models etc.

Typical Day at an Equity Research Firm

7:00am – Reach office

 Check emails from traders and sales people
 Check the stock markets (Asian Markets that open first)
 Check for all the news related to your sector
7:30am – 8:00am Attend Morning Meeting
 Morning meeting is nothing a formal discussion of the recommendations before the market
opens along with Sales & Trading Team
 In this morning meeting, all analysts present their views on key developments in their
sector along with the Head of Research or Equities presenting their views on the general
markets.
9:00am – Market Opens
 Follow the Market, look for key developments in your sector
  Try to rationalize if there is any rapid stock price movements
10:00am – Regular Work
 Perform regular research analyst duties like Client Requests, Financial Model updates,
 Follow the News and keep a close check
11:00am – Regular Work / Client Discussions
 Discussion with buy side clients for any explanation of research/calls
 Continue doing your regular maintenance work
3:30pm – Market Closes
 Capture the market movements of the company under coverage for the day closure.
 Check if there is anything that the clients should know and work accordingly.
4:00pm – Work on New Research Publications
 Work on the new research piece for publication (next day or in coming days)
 Generally, a research analyst targets atleast 1 to 2 research pieces every week.
7:30-8:00 – go Home
 If there is no earning season (company results), then the typical go home time is 7:30-
8:00pm. However, during earning seasons there is no surety when you will reach home.
 You need to fully prepare the result update report and keep it ready for next day early
morning publication.
Who pays for Equity Research?

 For Independent Equity Research firms: Independent equity research firms do not have
a trading and sales division. They perform financial analysis with an idea of charging a
Fees on per report basis
 For Major Equity Research firms: Fee income is earned by brokerage trades (Soft
Dollars). To understand this in detail, let us look at the diagram below –
 As noted above, on one side is the Buy Side firms like Hedge Funds, Pension Funds,
Insurance Companies, Mutual funds etc.
 On the other side are the sell side firms like JPMorgan, GoldManSachs, Credit Suisse etc.
 The buy side firms manage portfolio and they are required to invest their portfolio as per
the investment objective.
 Investment objective may mandate these companies to keep a portion of their assets in
Stocks etc.
 In such cases, the buy side analysts seek advise of the sell side analyst for investment
decisions.
 The advise or the idea provided by the sell side analyst is literally for FREE.
 Once the buy side analyst has take the decision of investing in the stock, the buy side
analyst may look forward to executing the trade through the Trading division of the sell
side firm
  The trading division will in turn charge a commission for executing the trade at the
lowest price.
 The commission in return are basically the earnings of the research firms.

Equity Research Professional Approach

So what is your work like as an Equity Research Professional. Equity Research analysts follow
stocks and make recommendations on whether to buy, sell, or hold those securities using
Fundamental Analysis. Equity Research is a very challenging job, where an analyst may be
required to spend more than 12-14 hours a day.

For creating a professional Equity Research Financial model, an expert analyst recommended
approach is as follows –

Economic Analysis / Industry Analysis / Company Analysis

 The very first thing you need to take care of while doing a professional analysis is to learn
about the economic parameters affecting the industry, the industry dynamics, competitors
etc.
 For example, when you are analyzing Alibaba, you should know about each and every sub
divisions of Alibaba and its competitors.
Fundamental Analysis
 You should be awesome at Fundamental Analysis. Fundamental Analysis
means performing Ratio Analysis of the company under consideration.
  Before you start ratio analysis, you should populate atleast the last 5 years of financial
statements (Income Statement, Balance Sheet and Cash Flows) in excel.
 You should prepare a blank excel sheet with Separate Income Statement, Balance Sheet
and Cash Flows and use neat formats
 Populate the historical financial statements (IS, BS, CF) and do the necessary adjustment
for Non-recurring items (one time expenses or gains).
Do the Ratio Analysis for Historical years

Preparing a Professional Financial Model

 Company management does not provide the future financial projections of the company.
Therefore, it is important as a research analyst to project this data. Forecasting the
financials of the company is known as Financial Modeling.
Valuations – DCF
 Valuation is primarily done using two methods – a) Discounted Cash flow and b)Relative
Valuations.
Once your financial model is ready, you can perform Discounted cash flows as given in the steps
below –

Calculate FCFF as discussed in class and the handbook (Will be provided)

Apply a suitable WACC post the calculation of the capital structure
Find the Enterprise Value of the Firm
Find Equity Value of the Firm after the deduction of Net Debt
Divide Equity Value of the Firm by the total number of shares to arrive at “Intrinsic Fair Value”
of the company.
Recommend whether to “BUY” or “SELL”

Valuation – Relative Valuations

 Relative valuation is based on comparing the valuation of the company under
consideration with valuation of other firms. There are valuation multiples used to value
companies like PE, EV/EBITDA, P/BV etc.
The common approach is given below.

 Identify the comparable based on the business, Market Capitalization and other filters
 Identify the suitable valuation multiple to be used for this business.
 Use the average valuation multiple to find the valuation of the company
 Suggest “Undervalued” or “Over-valued”.

Research Report
 Once you have prepared the financial modeling and find the fair valuation of the company,
you need to communicate this to your clients through Research Reports. This research
report is a very professional in nature and is prepared with lot of caution.

Equity Research Skills-set

Here is an excerpts from the Equity Research Job Requirements Description –

Key highlights to note from this excerpt is –

 MBA is a plus (not a necessity). If you are an MBA then you have certain advantages,
but if you are a graduate, you should not get disheartened. You have a chance if you prove
your interest in finance.
  A financial discipline is not essential, but you must have a strong interest in the financial
markets with excellent quantitative and analytical skills.
 You should be fluent in English and have excellent verbal and written communication
skills.
 You possess intellectual curiosity, focus and creativity, and have a keen research instinct
with creative problem-solving abilities.
 Strong proficiency in Microsoft Excel and Powerpoint
 CFA designation – This is one important designation that the finance industry respects.
Try to ensure that you take CFA examination and pass atleast a couple of levels.
I wrote a detailed post on the skills required to enter into Equity Research. My top 5 skillset
required to enter the Equity Research Industry are –

1. Excel Skills
2. Financial Modeling
3. Valuations
4. Accounting
5. Report Writing

Insitutional Investors ranking suggests that in 2014, the best research firm was Merril Lynch
Bank of America, second place was taken by JPMorgan and Morgan Stanley came third.
Apart from the top 3 above, there are other notable equity research firms (listed below)

Deutsche Bank Standard Chartered Bank

Credit Suisse Cornerstone Macro

UBS Wolfe Research

Barclays BNP Paribas Securities

Citi CIMB Securities

Nomura Cowen and Co.

Goldman, Sachs & Co. Berenberg Bank

CLSA Asia-Pacific Markets Citic Securities

Wells Fargo Securities CRT Capital Group

VTB Capital Empirical Research Partners

Sberbank CIB J. Safra Corretora

Santander Keefe, Bruyette & Woods

ISI Group Kempen & Co.

Daiwa Capital Markets Otkritie Capital

Jefferies & Co. Raymond James & Associates

Mizuho Securities Group Renaissance Macro Research

SMBC Nikko Securities SEB Enskilda

Macquarie Securities ABG Sundal Collier

HSBC Amherst Securities Group

Banco Português de Investimento Antique Stock Broking

Batlivala & Karani Securities India Autonomous Research

BBVA Helvea
BGC Partners Ichiyoshi Research Institute

BMO Capital Markets Corp. ICICI Securities

BOCI Research ING Financial Markets

Brasil Plural Intermonte

Commerzbank Corporates & Markets JB Capital Markets

Davy Kepler Capital Markets

EFG-Hermes LarrainVial Corredora de Bolsa

Equita S.I.M. Lazard Capital Markets

Fidentiis Equities MainFirst Bank

Gazprombank N+1 Equities

Goodbody Stockbrokers Oddo Securities

Guggenheim Securities Okasan Securities Co.

Handelsbanken Capital Markets Oppenheimer & Co.

Samsung Securities Petercam

Stifel Rabobank

Strategas Research Partners Redburn Partners

UniCredit Washington Analysis

Vontobel Zelman & Associates

Equity Research essentially means preparing an estimate of company fair valuation

for recommending the buy side clients. Though, as a research analyst you may spend 12-16
hours a day at office, however, this is a dream job for many who love Finance and Financial
Analysis. If you like to work in a challenging and dynamic environment, then this is one
career you must consider. Not only equity research job rewards analyst with relatively higher
compensation, but also, it provides excellent exit opportunities.