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.

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 at least 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 (onetime expenses or gains).

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
Apply a suitable WACC post the calculation of the capital structure
Find the Enterprise Value of the Firm (including the Terminal Value)
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 Multiple, EV/EBITDA, PBV ratio etc.

The common approach is given below.

·         Identify the comparable based on the business, Market Capitalization and other filter

·         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.