How to Write an Equity Research Report

What is an Equity Research Report?

An equity research report will typically focus on a specific stock or industry sector within a specific geographic region or country, and generally make buy or sell recommendations. These reports are produced by a variety of sources, ranging from market research firms to in-house research departments at large financial institutions or boutique investment banks.

Equity Research Report Structure

An equity research report can include varying levels of detail, and although there is no industry standard when it comes to formatting, there are common elements to all equity research reports. This guide includes some fundamental features and information that should be considered essential to any research report, as well as some tips for making your analysis and report as effective as possible.

Access the download to see a real-world example of an Equity Research Report, annotated to show each element discussed below.

Front Page Information

The research report should display basic information about the stock or company, including the company’s ticker symbol, the primary exchange where shares are traded, the primary sector and industry in which it operates, the current stock price and market capitalization, the target stock price, and the investment recommendation.

In addition, a security’s liquidity and float are important considerations for the equity analyst. The liquidity of a stock refers to the degree to which it can be purchased and sold without affecting the price. The analyst should understand that periods of financial stress can affect liquidity. A stock’s float refers to the number of shares that are publicly owned and available for trading and generally excludes restricted shares and insider holdings. The float of a stock can be significantly smaller than its market capitalization and thus is an important consideration for large institutional investors, especially when it comes to investing in companies with smaller market capitalizations. Consequently, a relatively small float deserves mention. Finally, it is good practice to identify the major shareholders of a firm.

In addition research reports will always show the contact details for the analysts and team responsible for publishing the report and making the recommendation.

Investment Summary

Research reports will always begin with a summary of why the report has been published, what action is recommended and the key catalysts for this. This can be the most critical element for the analysts as it must convey as much of the key information as possible and invite the clients to read on to find out more!

The first paragraph will almost always contain the recommendation (and whether it is new or unchanged) and the new target price (versus the old one) plus the main reasons for writing the note. This could be an initiation (an equity research team picking up coverage of the company), company results or broader country or market-related news flow.

The rest of the Summary page will reinforce the investment recommendations and provide opinions on further catalysts for the investment advice.

Once an initiation report has been published, equity research reports on the company tend to be a lot shorter and only contain information relevant to the current issues or news flow.

If it is an Initiation report it will likely include the following information segments to fully brief the reader on the company and its operations:

Business Description 

This section should include a detailed description of the company and its products and services. It should convey a clear understanding of the company’s economics, including a discussion of the key drivers of revenues and expenses. Much of this information can be sourced from the company and from its regulatory filings as well as from industry publications.

Industry Overview and Competitive Positioning

This section should include an overview of the industry dynamics, including a competitive analysis of the industry. Most firms’ annual reports include some discussion of the competitive environment. A group of peer companies should be developed for competitive analysis. The “Porter’s Five Forces” framework for industry analysis is an effective tool for examining the health and competitive intensity of an industry. Production capacity levels, pricing, distribution, and stability of market share are also important considerations.

It is important to note that there are different paths to success. Strength of brand, cost leadership, and access to protected technology or resources are just some of the ways in which companies set themselves apart from the competition. Famed investor Warren Buffett describes a firm’s competitive advantage as an economic “moat.” He says, “In business, I look for economic castles protected by unbreachable moats.”

Investment Summary

This section should include a brief description of the company, significant recent developments, an earnings forecast, valuation summary, and the recommended investment action. If the purchase or sale of a security is being advised, there should be a clear and concise explanation as to why the security is deemed to be mispriced. That is, what is the market currently not properly discounting in the stock’s price, and what will prompt the market to re-price the security?

It should also identify the key growth areas of the company and show analysis of regional or divisional sales and profits.

Valuation

This section should include a thorough valuation of the company using conventional valuation metrics and formulas. 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 a number of different metrics, including price/sales, price/earnings, price/cash flow, and price/book value. Because model outputs can vary, more than one valuation model should be used.

Valuation will also look at the debt and equity ratio in the company, along with its ability to generate cash flow and profits for the shareholders.

Financial Analysis and Forecasts

This section should include a detailed analysis of the company’s historical financial performance and a forecast of future performance. Financial results are commonly manipulated to portray firms in the most favorable light. It is the responsibility of the analyst to understand the underlying financial reality. Accordingly, a careful reading of the footnotes of a company’s financial disclosures is an essential part of any examination of earnings quality. Non-recurring events, the use of off-balance-sheet financing, income and reserve recognition, and depreciation policies are all examples of items that can distort a firm’s financial results.

Financial modeling of future performance helps to measure the effects of changes in certain inputs on the various financial statements. Analysts should be especially careful, however, about extrapolating past trends into the future. This is particularly important in the case of cyclical firms. Projecting forward from the top or bottom of a business cycle is a common mistake.

Finally, it can be informative to use industry-specific financial ratios as part of the financial analysis. Examples include proven reserves/shares for oil companies, revenue/subscribers for cable or wireless companies, and revenue/available rooms for the hotel industry.

Investment Risks

Along with the investment advice, research reports should also address potential negative industry and company developments that could pose a risk to the investment thesis. Risks can be operational or financial or related to regulatory issues or legal proceedings.

Although companies are generally obligated to discuss risks in their regulatory disclosures, risks are often subjective and difficult to quantify (e.g., the threat of a competing technology). It is the job of the analyst to make these determinations. Of course, disclosures of “qualified opinions” from auditors and “material weakness in internal control over financial reporting” should be automatic red flags for analysts.

Environmental, Social & Governance (ESG)

In addition, the financial institution’s clients will increasingly expect to see information on how the company manages the relationships related to Environmental, Social and Governance. Below are some examples within these three areas that can have a lasting impact on the company’s short- and long-term prospects:

• Environmental – how is the company working towards the conservation of the natural world? This can include climate change and carbon emissions, air and water pollution, energy efficiency, waste management, and more.
• Social – how does the company consider people and relationships? This can include community relations, human rights, gender and diversity, labor standards, customer satisfaction, and employee engagement.
• Governance – what are the standards for running the company? This can include board composition, audit committee structure, executive compensation, succession planning, leadership experience, and bribery and corruption policies.

Enroll in our online ESG course and learn to identify the principles of ESG and how they are applied to investment strategies.

If you are interested in a career as an equity research analysts or in fixed income research, our research analyst course covers all the key skills needed as either a sell side analyst in an investment bank or a buy side analyst working in an investment management firm.