Equity Research Methodology 031604
Equity Research Methodology 031604
Equity Research Methodology 031604
MACRO AND ECONOMIC Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 Retail
Advisor Insight
ANALYSIS
Review public Conversations with Prepare 3-Year Review financial Assess: Finalize Earnings Analyst uses multiple criteria for valuing Establish Intrinsic Value Decide STARS recommendation Supervisory Custom Newsletters
information company manage- Preliminary assumptions Model a company, including: analyst review Equity Liaison Desk
When conducting bottom-up ment for detailed Earnings Model with company as ■ Management team ■ Intrinsic Value Analysis ■ Target Price over 12 months ■ Incorporate risk assessment rating for regulatory
information appropriate for com- Industry Surveys
company analysis, analysts are ■ 10K’s ■ Competitive ■ Determine earnings ■ Relative Valuation ■ Analyst assigns a Risk Ranking into overall STARS ranking (For and compliance
expected to incorporate Macro ■ EPS Growth Rate pany guidance (e.g. more details on Standard & Poor’s MarketScope
■ 10Q’s environment quality ■ Sum of the Parts Assessment (High/Medium/Low) of purposes
and Economic Analysis. ■ Establish relationships earnings comparisons) Risk Ranking Assessment, Model Portfolios
■ Annual Reports ■ Earnings Prospects ■ Suppliers ■ Evaluate corporate projected share volatility and risk
with new companies ■ Risk Assessment – Analyst incorporates a call 1-800-357-0769.)
■ Balance sheet governance of capital loss NetAdvantage
■ Conference ■ Buyers “risk premium” to derive a valuation
■ Most meetings with and cash flows
Investment Policy Calls ■ Substitutes ■ Project Standard Pocket Guides
companies done via
Committee (IPC) & Poor’s Core Sector Scorecard
phone; some in-person ■ Barriers to entry
Earnings, S&P’s Stock Guides
■ Meets weekly and is
meetings ■ Regulatory more accurate, Criteria / Definition ■ Company value
responsible for determining ■ Obtain a better environment proprietary repre- ● P/E trading history Stock Reports
understanding of: sentation of the Intrinsic Value Analysis ● High/low in cycle The Outlook
Standard & Poor’s analytical
views on investment trends ● Trends true performance ■ Determine security’s “intrinsic value” based on discounted ● Current P/E level justification
● Leverage/margins of a firm’s ongoing “free” cash flow (DCF) analysis. Estimates of future “free” cash ■ Valuation vs. appropriate index
operations
Institutional
■ Mission: ● Efficiency programs Standard & Poor’s Core Earnings Calculation flows are discounted back to current dollars, including variables
Compustat Data
Ensure Standard & Poor’s like risk assessment and capital structure Sum of the Parts
● Costs - current, Equity Insights
views are reached through a changes Included Excluded ■ Present value of shares vs. current share price ■ Determining “fair value” of a stock by determining private
deliberative, consistent process ■ Employee stock option grant expense ■ Goodwill impairment charges ■ 10-15 year projection market values for a firm’s individual units Industry Surveys
that involves input from a ■ Restructuring charges from ongoing ■ Gains/losses from asset sales ■ Defined parameters around DCF to make it more reasonable ■ No clear comparison and/or conglomerate Institutional Equity Reports
diverse group of Standard & operations ■ Pension gains (e.g. interest rate inputs) ■ Break divisions up as stand-alone business units IPC Notes
Poor’s senior analytic personnel ■ Write-downs of depreciable or ■ Litigation or insurance settlements ■ Calculate a relative value for each division Monthly Investment Review
amortizable operating assets and proceeds Relative Valuation ■ Arrive at a blended valuation
■ Analysis includes: Sector Watch
■ Pension costs ■ Reversal of prior-year changes ■ Assessing a security’s relative value by comparing appropriate
■ Purchased research and and provisions financial ratios across peer groups US Financial Notes
● Interest rate forecasts Risk Assessment
development expenses ■ Comparison with industry group ■ Technicals
● Market performance forecasts ■ Merger/acquisition related expenses ● Price/Earnings (P/E)
■ Insider buying
■ Unrealized gains/losses from ● Efficiency
■ Beta
● Economic, political and related hedging activities ● Margins
developments of interest to
investment community
● Consensus concerning effect
of such developments on S&P’s Ongoing Analytical Review
view of financial markets,
including recommended
percentage asset allocation Ongoing Analytical Review
among stocks, bonds and cash Step 11 Repeat Steps 1, 2, 3, 7, 8, 9 ■ Continuous committee-based evaluation of STARS recommendation ■ Constant updates for covered companies from primary sources. Goal: 7-8 updates per year
● Quarterly updates published and distributed ● Material events ● Changes in recommendations ● Stock Report updates ● MarketScope updates ● First Call notes
analysts from all sectors to ■ All S&P 500 Index 2 ■ S&P Composite 1500 Index constituent ■ Negative corporate actions ■ 20-25 companies Companies.
formulate a collective bottom-up ■ 300 of the S&P MidCap 400 Index ■ Significant trading volume (bankruptcy, mergers and acquisitions) The equity research reports and recommendations provided by
investment strategy. This Standard & Poor’s Equity Research are performed separately from
■ 200 of the S&P SmallCap 600 Index ■ Market capitalization ■ Dropped from S&P Composite 1500 Index any other analytic activity of Standard & Poor’s. Standard & Poor’s
bottom-up input, in the context
Equity Research has no access to non-public information received
of past and current sector ■ Key non-U.S. stocks ■ Corporate actions (mergers/acquisitions, spin-offs) ■ Stock price < $5/share by other units of Standard & Poor’s. Standard & Poor’s does not
trends and macro-economic ■ Emerging growth companies ■ Lack of investor interest trade on its own account.
projections, support S&P’s
holistic sector weight strategy
and recommendations.