how to create a research report

8/3/2019 How to Create a Research Report

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1Barbara Gray,

CFA

Presentation to Sauder School of Business, February 4, 2010

How to Create a

Research Report


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How to Create a

Research Report

I. Understand the Story

II. Assess the Companys Risk Profile

III. Value the Company


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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?


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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


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Is the Stock Suitable for Your Client?

Investment Constraints

Liquidity: What is the companys market

cap?

Time Period: How long has the companybeen around for? When did it go public?

Regulatory: What exchange or exchanges

does the stock trade on?


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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?


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Safety of Principal:

Cyclical or Defensive?

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?

Cyclical Defensive Defensive/Cyclical

Consumer Discretionary Consumer Staples Financials

Information Technology Health Care Telecommunications

Energy Utilities

MaterialsIndustrials


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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?

Winnebago (WGO) suspendedcash dividend on Oct 16, 2008

The stock price dropped by 24%

Dividend Cut Dividend Initiated

Coach initiated a quarterlydividend on Apr 21, 2009

The stock price jumped by 15%


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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?


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Sector Characteristics:

Market Share Breakdown

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?

Highly Consolidated Market

1st

60%

2nd

20%

3rd

5%

All Other

15%

Highly Fragmented Market

1st

10%

2nd

5%

3rd

2%

All Other

83%


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Revenue ExposureGeographic

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 eacharea?


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Revenue and Cost Drivers Revenue = Volume x

Pricing/Mix Key cost components

(COGS & SG&A):

Cost of product/service

TransportationLabour

Lease expense

Operating costs

Which costs are fixedversus variable?

Does the company havehigh or low operating

leverage?

Revenue- COGS

= Gross Profit

- SG&A

= EBITDA

- D&A

= Operating Income


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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 businessrisk 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 ofbusiness risk and financial risk.AAA

AA

A

BBB

BB

B

CCC

CC

C

CI

R

SD

D

Credit RatingFinancial Risk

+ =

Business Risk

HIGH

LOW

Investment-grade = BBB- and above

Non-investment grade = BB+ and below


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Current Competitive Position

No buyer propensity to substitute High relative price performance of substitutes High buyer switching costs

High perceived level of product differentiation

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 buyer concentration to firm concentrationratio

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

Low supplier switching costs Low differentiation of inputs Many substitute inputs

Low supplier concentration to firmconcentration ratio

Low employee solidarity (e.g. labor unions) Low threat of forward integration by suppliers

relative to the threat of backward integration byfirms

Low cost of inputs relative to selling price of theproduct.

Source: Wikipedia

Porters Five Forces

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

Buyers

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?

Low-Cost Producer

High Switching Costs Network Effect

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


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Company-Specific Risk Factors

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?

Macro-Risk Factors Micro-Risk Factors

Economic Product Sourcing

Foreign/Fx Supplier Concentration

Weather Labour

Commodity Cost Environmental Liability

Interest Rate Key Customer Dependency

Product LiabilitySeasonality


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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 askmanagement

Covenants will be defined as maximum Debt/EBITDAor minimum cash flow coverage ratio

How close is the company to breaching its debtcovenants?


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III. Value the Company

What is the companys level of financialperformance?

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?

3. Return-on-Equity (ROE)

Net Margin x Sales Turnover x Leverage


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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, investorsentiment

Company: growth outlook, risk profile, earningsstability, confidence in management


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Dividend Discount Model

Value of Stock = Div/k-g

Base

Discount Rate

Up

Growth Rate

Down Dividend Cut All Three

Discount rate k 10% 15% 10% 10% 15%

- Growth rate g 5% 5% 0% 5% 0%

= Divisor k-g 5% 10% 10% 5% 15%

Dividend Div $1.00 $1.00 $1.00 $0.50 $0.50

/ Divisor k-g 5% 10% 10% 5% 15%

= Value V $20.00 $10.00 $10.00 $10.00 $3.33

Change in Value -50% -50% -50% -83%

Scenarios

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 ofcompanys future free cash flows)?

Calculate the sensitivity in a companys valuationto 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 valuecomes from its cash flows over next 5 or 10 years

Is not impacted by current investor sentiment


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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 itsrevenue/cost drivers?

What is the companys credit rating and what does itmean?

Are there any potential red flags in its business orfinancial 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 potentialupside/downside for the stock?

how to create a research report

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