Stockhub:How to Write an Equity Research Report

Our primary objective is to provide sound advice grounded in scientific reasoning and rigorous data analysis to make a qualitative equity research report.

Disclaimer: The advice provided in this report is based on the current financial data and trends observed. It's essential to note that financial markets are subject to volatility, and past performance is not indicative of future results. Always exercise due diligence and consult with a financial advisor before making any investment decisions.

First of all, keep in mind that there is no single way to create a report, so if this approach does not resonate with you, consider a different one. The purpose of equity research is to provide the reader with all the information needed to determine whether this is a suitable investment and to assess its risk.

Introduction and Executive Summary

Different parts:

• Company Mission and Operations Summary:
  • Start with a powerful introduction.
  • Include key facts about the company’s scale, sector, and main products or services.
• Valuations Summary:
  • Keep this section short but impactful.
  • Include key findings.
  • Be clear about the investment thesis.

Example:

“Safran is committed to catalyzing aviation safety and sustainability with innovative solutions.

The company is renowned for its commitment to innovation and excellence. Operating across aircraft propulsion, aircraft equipment, and defense segments, Safran delivers cutting-edge solutions that cater to the evolving needs of the aviation and defense industries worldwide. With a strong focus on research and development, the company continuously pushes the boundaries of technology, striving to enhance the performance, efficiency, and sustainability of its products while fostering collaborative industry partnerships to drive progress in these domains.

Assuming that Safran implements certain growth strategies and other relevant assumptions, the expected return of an investment in the company over the next five years is approximately 5.21%. This translates to an annual return of around 1.04%. In practical terms, a £100,000 investment in Safran is projected to grow to approximately £105,210 in five years' time.”

Operations

Different parts:

• Company history
  • Overview of the company's genesis and significant milestones.
  • Timeline: Highlighting pivotal dates and achievements.
• What's the mission of the company?
  • Overview of the company's genesis and significant milestones.
  • Timeline: Highlighting pivotal dates and achievements.
• Offerings
  • Divisions Overview: A broad overview of the different divisions or departments within the company.
  • Products & Services: An outline of the main products or services provided by each division.

Research and Development: (optional)

Different parts:

• Assess the company’s R&D efforts in the context of its sector.
• Highlight innovation capabilities.

Market Analysis

Different parts:

• Total Addressable Market (TAM):
  • Definition: Briefly describe what constitutes the Total Addressable Market for the company's product or service.
  • Quantification: Estimate the market size. This could be in terms of revenue, units, customer base, or any other relevant metric.
    • Source-Based Estimation: If using external research or reports to quantify, mention the source and provide a citation.
    • Methodology: If deriving TAM using a logical or scientific method, describe the approach taken. This might involve market extrapolation, top-down/bottom-up analysis, or other methods.
    • Assumptions: Clearly outline any assumptions made during the estimation process.
• Serviceable Available Market (SAM):
  • Definition: Describe what portion of the TAM is available for the company to serve, considering its current capabilities and constraints.
  • Quantification: Estimate the SAM, narrowing down from the TAM.
    • Methodology: Describe the approach taken to arrive at the SAM. This could involve segmenting the TAM based on geography, product type, distribution capacity, etc.
    • Assumptions: Clearly outline any assumptions made during this segmentation process.
• Serviceable Obtainable Market (SOM):
  • Definition: Describe what portion of the TAM is actually available for the company to serve, considering its current capabilities and constraints.
  • Quantification: Estimate the SAM, narrowing down from the TAM.
    • Methodology: Describe the approach taken to arrive at the SAM. This could involve segmenting the TAM based on geography, product type, distribution capacity, etc.
    • Assumptions: Clearly outline any assumptions made during this segmentation process.
• Market Trends & Dynamics
  • Overview: Discuss current market trends, potential disruptors, technological advancements, regulatory changes, or other factors that might influence the TAM, SAM, and SOM.
  • Implications: Analyze the potential impact of these trends on the company's market positioning and future growth prospects.

Competition

Different parts:

• Competitors Analysis:
  • Identification: List the primary competitors in the market.
  • Evaluation Criteria: Define the parameters on which competitors will be assessed. This could include market share, product quality, innovation capability, distribution network, customer loyalty, etc.
  • Comparative Analysis: Based on the established criteria, provide a detailed comparison of the company with its competitors. Highlight both strengths and areas of improvement.
  • Tables outlay: Presenting the results of this analysis in a table can be beneficial.
• Competitive Advantage
  • Framework Application: Utilize models like Porter's Five Forces to assess the competitive environment and the company's positioning within it.
  • Sustainable Competitive Advantages: Identify and describe the long-term advantages that the company possesses over its competitors.
• Market Positioning
  • Overview: Describe how the company positions itself in the market in comparison to competitors.
  • Differentiators: Highlight what sets the company apart from others, be it product features, service quality, customer experience, or any other unique selling proposition.

Team

Different parts:

• Board of Directors:
  • Provide background information and qualifications.
  • Discuss any potential conflict of interest.
• Chairman of the Board of Directors:
  • Explain the role in strategic decision-making.
  • Assess alignment with the company’s objectives.

ESG and Sustainability Outlook

Different parts:

• Provide a balanced view using Sustainalytics’ ESG risk level scale to compare the company to its peers.
• Consider including a materiality matrix.

Risks

Advice:

• Try to divide different risks into 3 to 4 bigger categories.

Different possible parts:

• Financial, Business-Specific, and Legal Risks:
  • Explain how each risk specifically affects the company.
  • Try to finally the overall risk of the company. (Generally high return = high risk)

Financials

Different parts:

• Give an overview of the latest fiscal year.
• Explore the last years financial trend to explore the direction the company is taking.
• Financial Performance Analysis: Present the past 4 to 5 years total revenue, net income & EBITDA; this explains the current financial situation of the company.

Discounted Cash Flow (DCF)

Advice:

• Be transparent about assumptions (WACC, growth rate)
• Offer multiple scenarios.
• No need to present the full DCF table, rather put it in annex.
• Include and sensitivity analysis and if possible, compute the elasticity of each parameter i.e., the percentage change in one variable in response to a percentage change in another variable.

Trading Comparables (Comps)

Advice:

• Select the Universe of Comparable Companies
  • Operational similarities (e.g., similar business models, products, or services).
  • Comparable size (revenue, assets, market capitalization).
  • Geographic presence (e.g., firms operating in similar regions or markets).
• Make a tier 1 list of 8-10 companies that you will use for the analysis.
• Make a tier 2 list of 8-10 companies as a backup.
• Calculate Valuation Multiples (some multiples might be more adapted to a certain industry, make your own research)
• Some common Multiples:
  • Price-to-Earnings (P/E)
  • Enterprise Value-to-EBITDA (EV/EBITDA)
  • Enterprise Value-to-EBIT (EV/EBIT)
  • Price-to-Book (P/B)
  • Price-to-Sales (P/S)
• Median & Mean: Calculate the median and mean of each multiple across the comps. These can act as benchmark figures.
• Value the Target Company: Apply the median (or mean, depending on your preference and the distribution of data) multiples to the metrics of the target company. This will provide a range of valuations.

• Sensitivity Analysis: Given the potential for variation in multiples, consider running sensitivity analyses to see how changes in selected multiples can impact valuation.

Trading Comparables (Comps)

Advice:

• Dividend Stability: Ensure the company has a history of stable or growing dividends. DDM is best suited for mature, dividend-paying firms.
• Be transparent about assumptions (required rate of return, expected dividend growth)
• You might want to do a single or multistage dividend model; just be clear about what model you are using.
• Use CAPM for the Required Rate of Return
• Sensitivity Analysis: Given uncertainties in growth rates and the required rate of return, conduct sensitivity analyses to understand how changes in these variables can impact valuation.

Monte Carlo Simulations (Optional)

Advice:

• Explain the model clearly.
• Describe the range of outcomes and probability distribution.
• The purpose of these simulation is to see all the possible outcomes and/or to assess if the company is in the short term over or undervalued compared to its historical returns
• You can you use the Python code provided in this report

(https://stockhub.co/research/Safran_SA#Monte_Carlo_Simulations_for_Stock_Price_Predict ions_-_Python_Code)

Appendix and References

Advice:

• Provide supplemental material, chart, tables…

Qualitative report examples

Airbus SA:

• https://stockhub.co/research/Airbus_SE
• Good overall structure and detailed DCF as well as a Monte Carlo Simulation

Tesla:

• https://stockhub.co/research/Tesla,_Inc.
• Thorough report.
• Good risk assessment, competition assessment
• Strong financial model using lifecycles with different growth stages.

Final thought

Diving deep into valuations using methods like DCF, Comps and has been insightful. But let's keep in mind, no model is perfect. They're all built on certain guesses about the future, and sometimes, life throws curveballs. It's always a good idea to not put all our eggs in one basket; mixing and matching models and keeping our assumptions in check is the way to go. And, while numbers do tell a story, trusting our gut and using some good old-fashioned common sense can't be undervalued. Let's keep learning, adapting, and investing smartly.