One of the most powerful tools at investors’ disposal is equity research reports. Wall Street firms employ some of the sharpest minds in the industry who study companies with publicly traded stocks. These analysts delve into every aspect of the company, from its financial statements to its management team and competitors. Equity research reports provide solid analysis and the opinions of the analysts who follow the companies and their stocks extremely closely.
What Is an Equity Research Report?
An equity research report is a detailed report written by an analyst at a sell-side firm or independent investment research firm that analyzes the company’s business and finances and gives the analyst’s opinion of the company’s prospects and future stock price.
Analysts are experts in the companies’ businesses, finance, and industries they follow. They research a company’s financials, performance, and competitive landscapes. They also create models to predict metrics like future earnings per share, sales, and a target price for the stock.
Analysts keep a close eye on every move of the companies they follow and update their equity research reports at least once a quarter after the company issues its quarterly earnings report. If significant material changes occur mid-quarter, the analyst will write an update to their research report in a flash report.
An example of an equity research report is a report on Apple written by a sell-side analyst from Argus. This report includes the analyst’s analysis and opinions about the company’s financials and future revenue and earnings predictions. The report also provides the analyst’s target price estimate and rating.
Important Components of a Typical Equity Research Report
The typical equity research report includes components that dig into the company’s financials, industry landscape, risks, and other vital aspects that can materially affect the company’s future business performance and stock price.
Recent Results & Company Announcements
Shortly after a company announces its quarterly results, an analyst will issue a new equity research report. This report will include an analysis of the recent quarterly results, including EPS, sales, and various financial metrics like EBITDA and profit margins.
When releasing quarterly results, a company often makes announcements in a press release or through a conference call between management and the analyst community. The equity research report will include an analysis of these company announcements.
Organizational Overview and Commentary
An equity research report typically summarizes the company’s organizational structure. This summary outlines the management structure and the company’s major divisions.
If the company makes any significant structural changes, such as appointing a new CEO or shutting down a division, the analyst will discuss the implications of these changes in the equity research report.
Valuation Information
Perhaps the most impactful part of an equity research report is the valuation analysis provided by the research analyst. The analyst provides an overview of the company’s performance through this analysis.
The valuation information included within an equity research report includes margin analysis, EPS and sales estimates, the stock’s target price estimate, and other valuation and financial metrics calculated through a deep dive into the company’s financial statements.
Estimates
An analyst uses a company’s reported results and their own research into the company’s operations and the industry to calculate various estimates. The most prominent estimate is the EPS estimate, the analyst’s estimate for earnings per share for future quarters and fiscal years. Analysts also calculate forecasts for sales, margins, and other financial metrics.
Many equity brokerage reports include a target price estimate, which is a short-term estimate for the stock’s price. An analyst may also issue a rating for the company’s stock, such as buy, sell, or hold.
Financial Histories
An equity research report typically contains financial data going back several years on both a quarterly and fiscal year basis. The analyst uses this financial data to perform an analysis of the company’s financial health and create projections.
While research reports typically do not include complete financial statements, the reports often include important line items, valuation ratios, and financial metrics in tables which the analyst will reference in the commentary.
Trends
Evaluating trends is a big part of an analyst’s job; equity research reports discuss these trends. The report includes trends like year-over-year and quarter-over-quarter growth rates for metrics such as EPS, sales, and margins.
The trend analysis gives an excellent overview of the growth of the company. For example, suppose sales significantly grew year-over-year, but EPS was stagnant. In this case, the company may be facing higher expenses, and the analyst will dive into the financial results and attempt to uncover the cause of the problem.
Risks
Many equity research reports include a section that describes the risks the company and investors may encounter. These risks may include economic headwinds, an increasingly competitive landscape, and company-specific risks like failed product launches or management changes.
In-Depth Industry Research
While analysts are experts on the companies they follow, they are also experts on the companies’ industries. Equity research reports include the analyst’s evaluation of the industry trends, the competitive landscape, and how the company’s prospects align with changes within the industry.
Buy Side vs. Sell Side: What Role Do Both Sides Play?
Buy-side and sell-side firms play different roles in financial markets, and it is vital to understand the role of each.
Buy-side firms, such as hedge funds, pension funds and asset managers, have money to invest. They buy stocks and other investments and are fiduciaries of their client’s money. Sell-side firms, such as brokerage houses, sell investments to their clients, including buy-side firms.
Sell-side firms employ analysts that write equity research reports. The sell-side firms provide these equity research reports to their buy-side clients. Buy-side firms use these equity research reports to help make investment decisions.
Other Types of Research Reports
Analysts produce several types of equity research reports. These include initiation of coverage reports, quarterly results reports, flash reports, and sector and industry reports.
Initiating Coverage Reports
When a sell-side firm begins covering a stock, the first analyst report is called an initiation of coverage report. This report gives the analyst’s first take on a company and its stock. Many investors pay attention to initiation of coverage reports because they provide a fresh perspective on a stock.
Quarterly Results Reports
After a company reports its earnings, an analyst will issue a new research report incorporating recent results. The analyst discusses the results and what went wrong and right in the last quarter. The analyst will also calculate new financial projections based on the results, company guidance, and management commentary.
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Flash Reports
Analysts issue flash reports when significant material changes involving the company, or the company’s industry, occur. An analyst may issue a flash report if the company’s CEO resigns, the company initiates a significant stock buyback program, or other major news breaks. In a flash report, the analyst will discuss the relevant news and how it may impact the company and its stock price.
Sector Reports
Sell-side firms also issue sector reports. The sector reports will dive into trends within the sector, a high-level analysis of the top companies in the sector, and past and future predicted performance of the stocks within the sector.
Industry Reports
Like sector reports, industry reports discuss the competitive landscape and major players within an industry. An industry is a subset of a sector. For example, the technology sector includes the semiconductor, personal computer, and cloud computing industries. Industry reports focus on a narrower industry rather than a broader sector.
Equity Research Report Example
Although each sell-side firm has a unique style for presenting analysts’ research in equity research reports, most contain similar types of information. Let’s conclude our discussion of equity research reports by looking at a recent Microsoft report written by Argus analyst Joseph Bonner after the company issued its fourth quarter 2022 results.
The report starts with several tables of key statistics, such as financial and valuation ratios and the analyst’s investment thesis. The table also includes the analyst’s rating and target price for the stock.
The report continues with the analyst’s investment thesis for Microsoft stock. This thesis briefly explains the analyst’s rationale for his Buy rating on MSFT stock.
A section detailing recent developments within the company, which the analyst derives from the company’s earnings report and conference call, is followed by a look at select financial data. An analysis of growth rates for several key metrics like revenue and margins leads to an overview of risks that investors of Microsoft may face.
Equity research reports offer investors a great way to harness the power of Wall Street analysts. These analysts live and breathe the companies they follow. Investors can use their expertise to advise them in the investing process.
