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How To Create A Research Report

This document outlines how to create a research report by understanding the company's story, assessing its risk profile, and valuing it. To understand the story, check company websites, determine if the stock suits the client, analyze revenue exposure, and identify revenue and cost drivers. The risk profile is assessed through the company's credit rating, competitive position, economic moat, risk factors, and financial leverage. Valuation involves analyzing financial performance, valuation multiples, the dividend discount model, and conducting a discounted cash flow analysis.

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Jayden Jiang
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66 views

How To Create A Research Report

This document outlines how to create a research report by understanding the company's story, assessing its risk profile, and valuing it. To understand the story, check company websites, determine if the stock suits the client, analyze revenue exposure, and identify revenue and cost drivers. The risk profile is assessed through the company's credit rating, competitive position, economic moat, risk factors, and financial leverage. Valuation involves analyzing financial performance, valuation multiples, the dividend discount model, and conducting a discounted cash flow analysis.

Uploaded by

Jayden Jiang
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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How to Create a Research Report

Barbara Gray, CFA


Presentation to Sauder School of Business, February 4, 2010

How to Create a Research Report


I. Understand the Story II. Assess the Companys Risk Profile III. Value the Company

I. Understand the Story


What websites should you check out to get up to speed on the company? Is the stock suitable for your client? What is the companys revenue exposure? What are the companys revenue and cost drivers?

Check Out These Websites to Get Up to Speed on the Company


Google Finance (finance.google.com)
Company snapshot

SEDAR (www.sedar.com)
Canadian company public filings

EDGAR (www.sec.gov/edgar.shtml)
U.S. company public filings

Seeking Alpha (www.seekingalpha.com)


Conference call transcripts and research notes 4

Is the Stock Suitable for Your Client? Investment Constraints


Liquidity: What is the companys market cap? Time Period: How long has the company been around for? When did it go public? Regulatory: What exchange or exchanges does the stock trade on?

Is the Stock Suitable for Your Client? Investment Characteristics


Safety of Principal: Is the company defensive or cyclical? Income: Does the company pay a dividend? What is the dividend yield? Growth: What is the companys life cycle stage?

Safety of Principal: Cyclical or Defensive?


Cyclical Consumer Discretionary Information Technology Energy Materials Industrials Defensive Consumer Staples Health Care Utilities Defensive/Cyclical Financials Telecommunications

What sector is the company in? Is the sector cyclical or defensive? What stage of the economic cycle are we in now? Does the sector lead or lag the economy? What is the investor sentiment towards the sector?
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Income: Dividend Yield


What is the companys dividend yield? What is its dividend payout ratio? Is the payout ratio sustainable or is the companys dividend at risk of being cut?
Dividend Cut Dividend Initiated

Winnebago (WGO) suspended cash dividend on Oct 16, 2008 The stock price dropped by 24%

Coach initiated a quarterly dividend on Apr 21, 2009 The stock price jumped by 15%

Growth: Company Life Cycle Stage

What life cycle stage is the company in? What is the growth outlook for the company? What is the level of competition? 9

Sector Characteristics: Market Share Breakdown


Highly Consolidated Market
Highly Fragmented Market
1st 10% All Other 15% 3rd 5% 2nd 20% 1st 60% All Other 83% 2nd 5% 3rd 2%

What is the companys market share? Is it a dominant player? Who are its competitors? Is the market becoming more fragmented or consolidated? Has the company been gaining or losing market share?

10

Revenue Exposure
Geographic Product/Service Line Distribution Channel Customers (Gender, Age Group, Income Level) How diversified is the company? What is driving the companys growth? How do profit margins compare within each segment? What macro-trends will impact the company? What is the companys growth strategy for each area? 11

Revenue and Cost Drivers


Revenue = Volume x Pricing/Mix Key cost components (COGS & SG&A): Cost of product/service Transportation Labour Lease expense Operating costs Which costs are fixed versus variable? Does the company have high or low operating leverage?
Revenue - COGS = Gross Profit - SG&A = EBITDA - D&A = Operating Income

12

II. Assess the Companys Risk Profile


What is the companys credit rating? What does this imply about its risk profile? How do you assess the companys business risk profile? How do you assess the companys financial risk profile?

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Credit Rating
A companys credit rating depends on both its level of business risk and financial risk.
HIGH
AAA AA A BBB BB B CCC CC C CI R SD D

Business Risk

Financial Risk

Credit Rating

+
LOW

Investment-grade = BBB- and above Non-investment grade = BB+ and below

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Current Competitive Position


Low buyer concentration to firm concentration ratio Low bargaining leverage Low buyer volume Low buyer switching costs relative to firm switching costs Low ability to backward integrate Low differential advantage (uniqueness) of industry products

Porters Five Forces

Buyers

High barriers to entry (patents, rights, etc.) High economies of product differences Large brand equity High switching costs or sunk costs High capital requirements Low access to distribution High absolute cost advantages Large learning curve advantages Expected retaliation by incumbents Existing government policies

Low supplier switching costs Low differentiation of inputs Many substitute inputs Low supplier concentration to firm concentration ratio Low employee solidarity (e.g. labor unions) Low threat of forward integration by suppliers relative to the threat of backward integration by firms Low cost of inputs relative to selling price of the product.

No buyer propensity to substitute High relative price performance of substitutes High buyer switching costs High perceived level of product differentiation

Source: Wikipedia

Few competitors Slow rate of industry growth No intermittent industry overcapacity Low exit barriers Low diversity of competitors Low informational complexity and asymmetry Low level of advertising expense No/few economies of scale No sustainable competitive advantage

The more boxes checked off, the better the companys competitive position

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Economic Moat
Does the company have a WIDE, NARROW, or NO economic moat?

Source: http://www.flickr.com/photos/stevechamberlain/12922489/sizes/o/

Low-Cost Producer High Switching Costs

Intangible Assets Network Effect

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Company-Specific Risk Factors


Macro-Risk Factors Economic Foreign/Fx Weather Commodity Cost Interest Rate Micro-Risk Factors Product Sourcing Supplier Concentration Labour Environmental Liability Key Customer Dependency Product Liability Seasonality

What are the companys key risk factors? What are the trends in the relevant macro-risk factors? What actions is management taking to minimize the micro-risk factors?
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Financial Risk
Does the company face liquidity risk?
Does the company have any near-term debt maturities it may not be able to meet?

What is the companys financial leverage?


Ratios: Debt/EBITDA, Debt/Equity, Debt/Total Capital

Does the company have any debt covenants?


Search SEDAR/EDGAR for Credit Agreement or ask management Covenants will be defined as maximum Debt/EBITDA or minimum cash flow coverage ratio

How close is the company to breaching its debt covenants? 18

III. Value the Company


What is the companys level of financial performance? What are the different valuation multiples and how do you interpret them? What insight does the dividend discount model provide about valuations? Why is it important to do a DCF valuation?

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Financial Performance
1. Profitability
How do current profit margins compare to historical levels? What factors led to the companys margin expansion/contraction?

2. Growth

Historical growth rate for EPS? DPS?


Net Margin x Sales Turnover x Leverage 20

3. Return-on-Equity (ROE)

Valuation Multiples
P/S, EV/EBITDA, P/E, P/BV
How do current multiples compare to: Market multiple Industry peers multiples Companys historical multiples Factors that impact valuation multiples: Market: investor confidence Industry: industry trends & outlook, investor sentiment Company: growth outlook, risk profile, earnings stability, confidence in management
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Dividend Discount Model


Value of Stock = Div/k-g
Scenarios Base Discount rate - Growth rate = Divisor Dividend / Divisor = Value Change in Value k g k-g Div k-g V 10% 5% 5% $1.00 5% $20.00 Discount Rate Growth Rate Up Down Dividend Cut All Three 15% 5% 10% $1.00 10% $10.00 -50% 10% 0% 10% $1.00 10% $10.00 -50% 10% 5% 5% $0.50 5% $10.00 -50% 15% 0% 15% $0.50 15% $3.33 -83%

Value of a stock can vary significantly with changes in investors assumptions.

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Discounted Cash Flow (DCF)


Why is it important to do a DCF valuation (PV of companys future free cash flows)? Calculate the sensitivity in a companys valuation to changes in assumptions over next 10 years for:
Sales growth rate Cost structure and capex requirements Interest rates & tax rates Terminal growth rate (after 10 years) Discount rate (takes into account riskiness of a companys future free cash flows)

Determine how much of the companys value comes from its cash flows over next 5 or 10 years Is not impacted by current investor sentiment 23

So When You Think About Creating a Research Report


Check out the company on Google Finance, SEDAR/EDGAR, Seeking Alpha Determine if the stock is suitable for your client What is the companys revenue exposure and its revenue/cost drivers? What is the companys credit rating and what does it mean? Are there any potential red flags in its business or financial risk profile? What is the companys level of profitability, growth, and ROE? Does the companys valuation seem reasonable? What does the DCF model tell you about the potential upside/downside for the stock?

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