Equity Research HANDBOOK

http://equity-research.
com
Analyst Handbook
http://equity-research.com
Clients will pay us if we make them money or if we

make them smart.
2
The Ten Commandments
• Develop proprietary opinions based on primary research. Regularly check

with competitors, customers, and suppliers of each of your companies.
Develop unique approaches to financial analysis. Perform proprietary
surveys. Avoid at all costs simply repeating guidance or management
opinions unless you disagree with them.
• Be proactive. Strive to be the first to market with any new idea or piece of
information--if we aren’t, our competitors will. All information becomes a
commodity very quickly. Each analyst should be in front of the institutional
sales force no fewer than two to three times per week.
• Be provocative. Playing it safe turns into a loser’s game over time. It

dulls our senses and results in lackluster analysis with no impact on our
clients.
• Follow and publish regularly on at least 12-15 institutional-quality stocks

with market caps generally in the $300 million - $3 billion range and with
an average daily volume greater than 200,000 shares. Write all research
with an eye to the institutional market--it can always be encapsulated for
the retail client.
• Launch coverage on at least one new stock per quarter, pruning

unproductive names from the list as required.
• Maintain an above-average stock picking performance. According to a

Nelson’s survey, the average Wall Street analyst is right about 55% of the
time; our goal should be to be right 65%-70% of the time.
• Develop a following with our top accounts. Each focus account should be
contacted at least once per month. This list will be developed with the
sales force and will be monitored regularly.
• Cooperate with corporate finance. Every idea generated by corporate

finance deserves our attention, but be sure to operate within the
regulations that require a gatekeeper to be present for most
conversations.
• Expand our relationship with retail. Only a small amount of retail's equity
business is in our names, and it can be much higher with a modest
amount of additional effort. Treat the brokers that have substantial
3
positions in your stocks as you would an institutional client—add them to
your contact list. Talk to April Langel regularly about your stocks, maintain
an active Focus List, and speak to the entire retail department periodically
about your group and your best ideas. Return all calls from brokers within
24 hours. There should be regular visits to the branches, with a goal of 5 -
10 visits per year. Take company management to the major branches
and arrange field trips to local companies.
• Keep trading informed about anything that you think will impact a stock's
price and any clients who have indicated an interest in your stocks. Keep
tabs on our positions in your stocks. If you believe that there are events
that will substantially impact the price of a stock in the very near term, be
sure that the desk is either flat or on the right side of the trade, being very
careful not to front run the public disclosure of material, insider
information.
Greenwich Survey Findings

Greenwich Associates regularly surveys clients about what they want from the sell-side
and how they pay us. The following results should be used to guide us in developing
our institutional business.
• Who controls commissions has changed radically over the last fifteen
years. Where it used to be analyst votes that directed about 50% of
commissions in the mid 1980s, that has fallen to less than 25%. Portfolio
managers don’t fair much better, accounting for only about 30% of
commission flow. The big change over the last fifteen-plus years has
been the emergence of the buy side trading desks as the leading source
of commissions, now directing almost 50% of all commissions. This
suggests that not only should we focus on our buy side analyst and
portfolio manager counterparts, but we also need to focus on how we can
help our sales traders increase account penetration. In today’s voice mail
world, our sales traders are the only ones who can get a live person on
the other end of the phone with virtually every call.
• The top requirements for analysts to have credibility with clients haven’t
changed much over the years--they don’t want the sizzle, and they still
want the steak. The top four requirements ranked are:
◊ Detailed industry reports

◊ Detailed financial analysis—not just models
◊ Ability to explain recommendations
◊ Detailed company studies
4
Credibility alone, however, does not get us paid--it only gets us in the door.
Ideas and access are what ring the cash register, with the following being the
most important:
◊ Bottoms-up research with strong financial analysis

◊ Ideas
◊ Regular follow up
◊ Electronic access to research--85% name First Call as primary
electronic source
◊ Telephone access to analysts is better than visits
Commission Productivity
Our productivity measured as nickel business per analyst is below our regional peers as
shown in the following table
Institutional Commissions Per Analyst ($ millions)

First Albany 1.5
Janney 1.4
Advest 0.6
Stifel 0.6
BB&T 0.5
Ferris Baker Watts 0.5
Ryan Beck 0.4
This is not difficult to fix--more stocks, larger cap (not large-cap), more ideas, and more
impact-oriented calls, and the regular commissions will take care of themselves.
Market Cap Targets

We could be ultra competitive at the lower end of the market cap range, but there are
simply not enough funds under management nor enough trading volume in this area to
make it a profitable business longer term. Data as of February 2004 shows that only
about 1% of institutionally invested funds measured by market cap and 4% by trading
volume were in nano- and micro-cap stocks.
Percent Of Total Stocks Mkt Cap Volume Inst Mkt Cap Inst Volume
Mega (10 Bil Plus) 6.0% 72.7% 35.9% 68.9% 40.1%
Big (3 -10 Bil) 8.1% 14.4% 20.7% 17.2% 25.5%
Mid (1 - 3 Bil) 13.5% 7.6% 15.9% 9.1% 19.1%
Small (300 Mil - 1 Bil) 20.4% 3.9% 11.6% 4.0% 11.0%
Micro (100 - 300 Mil) 17.6% 1.1% 6.4% 0.9% 3.2%
5
Nano (Less Than 100 Mil) 34.4% 0.3% 9.5% 0.1% 1.1%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
At the other end of the spectrum, we could become competitive on a research basis in
the mega- and large-cap arenas, but we do not have the capital to make major markets
or to do block trades in this high-end segment. Net net, we are only able to leverage
our research efforts in institutional commissions and other areas of the business in the
small-and mid-cap segments of the market. We do need, however, to follow a handful
of mega- and large-cap bellwethers to establish our industry expertise and to facilitate
our vote penetration at large voting accounts.
Our current mix is very reasonable, but somewhat meaningless since we have so few
stocks under coverage. At a 150-stock coverage level, the targeted mix would give us
about 100 mid-, large-, and mega-cap stocks that we need to effectively collect votes on
a broad base, while still being heavily concentrated in the small and mid-cap areas that
will allow us to differentiate our coverage.
Ryan Beck Research Coverage

Current Mix 2-year Target Mix
Mega 2% 5%
Large 32 15
Mid 25 40
Small 31 25
Micro 9 10
Nano 1 5
Morning Meeting
This is our most crucial interaction with the sales force and trading--without a high-
impact morning meeting, we cannot leverage our research, and ultimately will fail as an
organization.
Every analyst should strive to be in front of the sales force at least two to three times
per week. At first blush, this may seem like a difficult goal, but let’s look at a typical
example:
The basics: There are 22 trading days in the average month and let’s assume that a
given analyst is following 13 stocks (the average for all of Wall Street).
Ratings: Let’s assume that of the 13 stocks, one is on the Focus List, seven are
Buys, four are Holds, and one is rated Sell.
6
Frequency: At a minimum, all Focus List, Buys, and Sells should have a call two times
per month. Holds can be only once a month.
Content: Not every call has to be action oriented, although the more action the
better. The sales force (and the clients) need to be constantly updated as
events unfold to reinforce our point of view, and to give early warning of a
change in our point of view.
So, where does this leave us as to the number of calls?
Focus List 1x2= 2

Buys 7 x 2 = 14
Holds 4x1= 4
Sells 1x2= 2
Total calls 22, or 1 per day for every day of the month.
Why two calls per month on Buy/Sell rated stocks? First of all, we aren’t doing our job if
we don’t speak with every company we follow at least once a month, preferably mid-
month so that the company has had time to look at its results for the previous month
and may be ready to change its guidance. Assuming you make this minimum level
contact, then you will have something to say to the sales force if it is nothing more than
“I spoke with management today, and everything seems to be on track.” It’s really that
simple, and there’s no excuse for not taking the high road on this issue.
You also get at least two freebie calls on each company near earnings release time--
first an earnings preview, then a first-impressions call if the company releases results
first, followed by a conference call later in the day, and then the analysis of the quarter.
As to the requirement for two or more calls on Buy/Sell rated stocks, let’s presume that
you want the sales force to know these stories better than your Hold rated stocks and
that you want them to make regular contact with the clients. The only way to
accomplish this is to give them fresh meat.
• Make your mid-month checks with the company and write it up for First
Call.
• Evaluate every news item on the industry and/or the company to see how
it fits with your investment thesis. If it confirms your thoughts, write it up.
If it doesn’t, don’t ignore it since your competitors won’t. If it appears to be
an anomaly, address it as such and take the sales force through your
thought process. If it might be the beginning of the unraveling of your
position, give the sales force an early-warning call and prepare them with
the signs you will be looking for, either to stay the course or to make a
change.
7
• Take the time to analyze ideas that you get from talking with clients. They
may raise a concern that you had overlooked, think a competitor has a
fresher view of the company, or suggest another way to look at a
company. Don’t just do the work for one client--flesh it out and use it to
increase your impact with the sales force and all our clients.
• Additionally, let’s not forget that our job isn’t done just because we
launched coverage on a new stock. The first few months after launch are
the easiest time to get the sales force’s attention since the idea still has
the taste of newness, and they will generally be more receptive to new
data and better ways to deliver the story.
How You Say It Is Oftentimes More Important Than What You Say
The structure of the call is crucial to get the sales force’s attention and to make it more
likely that they will deliver your message to the clients.
First of all, base your presentation on your First Call note. If you have structured it
properly, you have already laid out the call for the sales force. Your comments should
simply add color and make sure that the sales force understands the importance of the
information. Under no circumstances should you simply read the note to the sales force.
The salesmen and traders have to take what might be a two to three minute
presentation from research and condense it into a 30-60 second portfolio manager or
trader call. In order to help in this process, I would recommend that your presentation
(and to some extent, your write up) stay close to the following general format:
Always start your call as follows:
1) The company I'm going to discuss is:

Its symbol is:
It closed yesterday at:
2) We are changing our rating from ______ to ______ and our 20__ and 20__
estimates from ______ to _______, respectively.
OR
We are changing our rating from ______ to ______ and reiterating our 20__ and
20__ estimates of _______, respectively.
OR
We are changing our 20__ and 20__estimates from ______ to ______,

respectively, and reiterating our rating of ______.
8
OR
This is an information call that lends further support to our investment thesis
which is ______________.
3) Our price target for the stock is ______.
4) The principal reasons for these changes are:

1)
2)
3)
4)
5)
NEVER, NEVER, NEVER have more than five points in any call, and try to keep
it to three.
5) This is/is not proprietary information. It was obtained from a general meeting,
private conversation, proprietary analysis, etc.
6) As a result of these changes, I now appear to be in line with consensus...
OR
As a result of these changes I now appear to be at odds with the consensus of

______ because......
7) The stock's recent trading has been characterized by (if there is any significant
change in its trading pattern):
By providing a handout and a discussion format that is user-friendly, you will be

positioning yourself for more broad-based and effective sales and trading follow through
on your morning meeting comments, as well as greater visibility with your clients.
First Call
First Call is by far the best way to leverage our research efforts and takes priority over
all other production and distribution efforts.
9
• First Call has the widest distribution, appearing on well over 30,000
individual desktops worldwide. Its data base contains almost 10 million
documents, so we have to be quick, punchy, and insightful in order to
battle for mind share.
• Clients view First Call as their primary and most important source of
information. A recent survey by Greenwich Associates found that
electronic distribution was the most important means of obtaining
information, with about 85% naming First Call as their preferred source for
obtaining research.
• According to a recent First Call survey, the five most important items in
their data base are displayed in the following list. Since we control the
content and timeliness of four of the five items, there is no acceptable
excuse for not being at the top of our game in giving customers what they
want.
• Earnings estimates
• Analyst recommendations
• Revenue estimates
• Company pre-announcements
• Growth rates
• You can get your message out even if an individual salesperson decides
to not make your call. Not all of the sales force will embrace all your ideas
due to different client requirements for market cap, sector focus,
investment goals, and so forth. First Call is the great equalizer.
• With such a large dependency on First Call by virtually every major and
regional brokerage firm, it is crucial to format research notes for maximum
impact. First Call surveys tell us that the average client spends only 10-15
seconds scanning the note, so the following approach is critical.
◊ The title should always begin with the stock symbol, followed by a
catchy headline.
◊ There should be a minimum amount of numbers.
◊ There should be three to five one-line bullets that tell the entire story
and that can be read in ten seconds.
◊ The bullets are not enough, however, and they must be followed by
some real, insightful research--not just reporting--written in a clear,
concise form.
10
• First Call notes must be posted by 8:00 a.m. to have any impact. This is
particularly important for mid- and large-cap stocks since the surveys suggest
that clients only read the first four to five notes that come across their
systems on a stock on any one day. Obviously, breaking news during the
day that requires a note can’t meet this requirement, and these notes should
be posted as soon as possible.
• Our goal is to be in the top ten brokers every quarter as to timeliness and
quantity of FC notes per stock. This generally means 75% of all FC notes
published before 9:30 and 4-5 FC notes per stock per quarter.
Basic Reports/Major Updates
There have been several surveys over the last few years that clearly suggest that we,
as research analysts, must do everything in our power to make our written product as
easy to use as possible, or it will be relegated to the scrap heap. The key points from
these various are:
• A portfolio manager will spend only 20-30 seconds on the first page of a
research report to decide whether or not to read it.
• If a PM decides to read a report, he will on average read only the first

three pages.
• Research reports should generally fall into three categories:
◊ 1-3 pages--distribute only on First Call

◊ 4-6 pages--always include quarterly earnings models
◊ 10+ pages--targeted at analysts and crucial for large voting accounts
Based on this input, we will put in place the following array of products:
The Street produces about 250 pages of company research per analyst per year. This
does not include industry updates, weekly/monthly overviews, and so forth. Our focus
on deliverables should be to improve our timeliness and quantity of reports while
improving the content.
Within the context of writing research reports that address both portfolio managers and
analysts, the following guidelines should be observed:
• New coverage should be launched with a report that is detailed enough to

tell the story including growth prospects, market segmentation,
competitive position, risk factors, valuation analysis, and a financial
forecast. It should contain at a minimum a detailed quarterly forecast for
the next two years. New coverage can be launched with either a short
11
report that covers only the highlights of the story or a long report that
addresses all the issues expected in a complete company report. The
approach chosen by the analyst should take into account several factors,
including the complexity of the story, the ability to turn around a complete
report quickly, the action in the stock, pending news, and so forth. In
general, coverage should not be launched until a first draft of the
complete report is in the editorial process.
• Launching coverage on a new industry or a new sector within a current

industry should be done with a "franchise building" report that provides in-
depth industry analysis as well as our normal detailed company analysis,
hopefully on two or more companies. This both establishes our credibility
with investors, and provides the building blocks for the franchise.
• Regular updates should be published as events unfold, but no less

frequently than once per quarter when financial results are released.
Stocks that are being actively recommended or that are seeing high
trading activity need more frequent written updates so that the sales force
has fresh material with which to work. All updates should include at a
minimum a detailed quarterly financial forecast.
• In general, comments from the morning meeting must be documented,

unless they are simply responding to news in the paper, comments from
other firms, response to questions, daily trading recommendations, or a
reaction to changes in stock price.
• All earnings and/or ratings changes must be detailed in a report that

includes the reasons for the changes and a detailed quarterly forecast.
• We will need to produce a monthly report that highlights our coverage.

This is used primarily as a marketing tool by the institutional sales force
and has minimal investment impact.
Research Report Structure
If one were to ask five different analysts and five different salespersons about the right
way to write a research report, there would surely be ten different answers. The only
way to get our arms around this question is to ask our clients--not a dozen at random,
but hundreds of clients. Prudential Securities did exactly that a few years ago, so we
don't have to reinvent the wheel. They hired an outside consultant who interviewed
over 350 clients (weighted about 2/3 portfolio managers, 1/3 buy-side analysts). The
outcome of the survey is summarized below.
Who's The Audience?
12
There are many right ways to write a research report, although two questions should be
answered by the analyst before it is published:
• Will I get a portfolio manager's attention with the first page?
• Have I supplied adequate added value for an analyst?
If the answer is yes to both questions, the internal structure should be flexible and
adapted to the specific situation--a stable growth company will certainly have a different
focus than a company recovering from a weak period. Not all reports will cover the
same subjects--in some cases, competition may be an important factor, in others it may
be new products or an analysis of recent acquisitions. In all cases, however, your
investment thesis must be laid out up front and address your recommendation, price
target, conclusions, and the foundation for your conclusions. Any risks should also be
spelled out.
Reports do have two very different audiences--portfolio managers and analysts. A

report focused on only one audience may never be read by the other. The following
discussion is a summary of ideas about how to write for both audiences--in most cases,
the ideas are only suggestions, but the portfolio manager structure is extremely
important if we ever expect him to read our reports at all.
Portfolio Manager
The key problem with the PM is to grab his attention and to get him to at least read our
investment thesis. This requires the following:
• The industry sector should be prominently displayed on the cover.
• If the stock is small- or mid-cap or international, there should be a very

brief description of the company on the cover.
• The rating on the stock must be prominently displayed on the cover of the
report.
• The investment-related story must be prominently summarized in two to

five bullets on the cover. If he gets past this level, he might read the first
two or three pages of the report.
• A summary earnings forecast should be on the cover. It should include a

two-year forecast, the P/E, dividend, shares outstanding, market cap, and
so forth.
• The investment thesis and analytical foundation for our investment

conclusions should be spelled out starting on the cover. A catchy
13
headline can be useful in gaining attention and should be directly tied to
the investment conclusion.
• The investment opinion section should address the following:
◊ It should state your recommendation and outline the most important

reasons for it, such as a forecast that deviates from the consensus, a
point of view that differs from most observers, a mis-valuation of the
stock, etc.
◊ It should have a "what if things go wrong" section.
◊ It should summarize your valuation assumptions and present a target

price.
◊ It should address the major assumptions in your revenue and earnings

forecast.
• The analyst's name, email address, and telephone number should be

prominently displayed on the cover so that the PM can reach the analyst
without fumbling through the report to try to find the author.
• If you have grabbed the portfolio manager's attention by this point, he may
skim the report. He won't read very much, however, so there should be a
liberal use of headings and/or comments in the margins that tell the story
even if he doesn't read a single word of the text. This is also true of
headings on tables and graphs--they should tell the story in the table such
as "Earnings Should Turn Up in the Fourth Quarter,” and not just state
something like "Quarterly Earnings Forecast."
Analyst
The buy-side analyst has a very different set of requirements than the portfolio
manager. While the same structure mentioned above is helpful in getting his attention,
he generally wants data more than he wants an opinion. The general topics that should
be covered include (1) a company profile that explains why the company is successful
(or unsuccessful), (2) divisional or product line breakouts, (3) a discussion of
management, (4) a detailed financial forecast, (5) a valuation analysis, and (6) for some
industries, a discussion of regulations.
In general, there is no such thing as too much data or too much analysis. Graphs and
charts can be helpful in telling a story, but the raw data is usually even more important
since most analysts have to write their own reports and normally don't have the time to
chase down the data with which we routinely work.
Company Profile
14
Whatever else this section does, it must address one key issue: How does this
company make money? Does it sell performance, hopes and dreams, or the better
mousetrap? What have been the keys to its success--do one or two products and/or
services account for the majority of its business? What products are the key to its
future?
Among the other basic questions are the following:
• How well does it do in its basic business? Is it growing slower or faster

than its industry? Is its success tied to the market in which it operates or
can it stimulate new demand in other markets and/or geographies? Is it
early to market with new products or is it a "me too" company?
• What is its competitive position? Is it gaining or losing share? Is its

market in its infancy or is it mature?
• What are the key determinants of financial performance? What are the
key levers for the future--revenue growth, market share, expense control,
expanding/contracting margins, financial leverage?
• What are the company's near-term and long-term goals--product,

markets, growth, financial?
• Is the company planning to diversify its business? Has it done it before

and was it successful? Is it planning acquisitions? Has it successfully
acquired businesses before?
• Is it expanding geographically? Are its international operations growing

faster than the U.S.? Are they as profitable?
• In a regulated industry, what is happening in Washington and at the

state/local level?
Divisional/Product Breakout
This section should focus on the major divisions and/or the major product lines in each
division. At a minimum, it should address the sales and earnings growth of the
company's divisions and geographies as well as the revenue of its major product lines.
For each major division/product line, it should also consider:
• What is the range of forecasts by product line for sales, margins,

profitability? How is profitability tied to changing volumes? What impact
does product mix have on overall profitability?
15
• Where are the company’s products manufactured? Is there any currency
impact? What changes have there been in material costs, labor, fuel,
overhead, etc.?
• Are R&D expenses increasing or falling rapidly? Is there a substantial

change in R&D planned for new products? Are abnormal expenses being
incurred due to opening new plants, changes in product line, etc?
• What can be learned from the company's customers, suppliers, or

competitors? Are its products being challenged by new competitors, new
technologies, or new business ideas?
Management
While this is sometimes not particularly important for very large-cap stocks, it is crucial
for small- and mid-cap companies. This section should address those issues that are
central to your investment thesis--simply naming the management and their experience
generally does not add much value.
• How is the company structured? Do the structure and compensation

programs provide adequate incentive? Are there controls to reduce
unpleasant surprises?
• Who are the key management? What is their experience? Have they
done this before? What are their ages and compensation? Do they own
much stock?
• How deep is its understanding of the markets in which it operates? Is it

on top of competitive trends? How does it deal with changing economic
trends? Is the past performance of the company the result of current
management?
• What is the management's ability to forecast its business and to control its
manageable costs? What are its assumptions about future trends? Are
they reasonable?
• Are current problems/errors being glossed over?
• Is management concerned about good relations with investors? Is

management's image being accurately communicated to investors?
Earnings Forecast
16
• A short-term quarterly forecast (the previous, current, and next fiscal year)
including year-to-date results should be made. Projections should show
complete quarterly income statements with a discussion of each major
component of the projection.
• A long-term annual forecast should be made. In addition to the normal

income statement, it should consider the following:
◊ It should analyze the trend in sales, margins, earnings, etc., with

accompanying rationale. Where possible, it should be made by line of
business. If growth is accelerating or decelerating from the historical
trend line--why? The discussion should consider changes in the
company's major markets, its competition, new products, changes in
expense structure, etc.
◊ Patterns in sales and earnings should be discussed. Economic

impact, product cycles, unusual developments, etc., should be
analyzed.
◊ Confidence levels of your forecast should be discussed, both relative

to the trend as well as to year-to-year forecasts.
• Quality of earnings should be discussed. Consider the following:
◊ Are reported earnings changes coming primarily from operations, or

are changes in other income, tax rates, shares outstanding, etc.,
unduly affecting reported results?
◊ Is the reported growth being generated internally, or is it coming from

acquisitions? What is the internal growth rate?
◊ Is financial reporting accurately reflecting the sustainable earnings

power? How are inventories, receivables, pension accounting, taxes,
etc., affecting reported results?
◊ What is currency translation doing to its competitiveness? To its

reported results?
◊ What is the potential of dilutive equity offerings? Is the company

repurchasing its shares?
Financial Position and Capital Requirements
• The balance sheet and cash flow analyses should focus on those items
that are key to your investment thesis and should include quarterly
17
forecasts if they are required to support your investment thesis. This
analysis may include the following:
◊ How realistic is the balance sheet? Are assets or liabilities overstated

or understated? How have acquisitions influenced the balance sheet?
◊ Does a ratio analysis--inventory turns, DSO, current ratio, capital turns,

etc.--provide any additional insights into the company?
◊ What is the debt level? Is it affected by short-term swings in interest

rates? What are its repayment obligations? Does it have adequate
cash flow to cover them?
◊ When will it run out of cash? Is it more likely that it will raise debt or
equity? When? At what rate?
◊ Does it pay a dividend? Is it likely to be raised? Can it afford it?
• A return on investment analysis is often very revealing. It should include

an analysis of capital turnover, return on total capital (pretax), return on
equity, and a measure of financial leverage.
Valuation
• Valuation analysis can differ widely by industry sector, market

capitalization, and growth rate. It should be considered carefully, for there
is rarely only one answer to: What should the stock sell for?
◊ What is the basis for your valuation? Should it be judged by relative

P/E, absolute P/E, P/E to growth, price/sales, price/book, etc?
◊ How does it sell relative to similar companies? Relative to its historical

pattern?
◊ How have changes in the market, interest rates, competitive situation,

economic developments affected its valuation relative to its historical
levels?
◊ How would you rate its stability, quality of earnings, growth rate,
profitability, etc., relative to its peers and their relative valuations?
• What are the dominant trends in investor psychology and the structure of
the market that could influence your conclusions from above?
• What is the resultant price target?
18
Production Targets
While each analyst will develop his or her own approach to generating business,
publishing our research is the cornerstone of our business. It not only increases the
trust of the sales force and clients as well as opening doors to other potential business,
it makes you a better analyst.
In many respects, publishing is for the analyst, not for the reader. It makes you think
and should result in new ways to look at a company or your industry sector. It tests
your models and forecasts. It tells you whether your valuation techniques and resulting
price targets make sense. Net net, it tells you how well you are doing your job.
While the following are only guidelines, I’m always hard pressed to understand how
some analysts think we can generate substantial commissions with anything less:
• First of all, if it is worth talking about, it is worth writing down. If it is worth

writing down, it is worth posting on First Call. If it is worth posting on First
Call, it is worth getting it there before 8:00 a.m. so it has some impact. And if
it is worth all this effort, it is worth expanding into a published report--
something meaningful--not just the two to three bullets and a handful of
paragraphs from the First Call note.
• There should be a goal to launch a new company every quarter, trimming

unproductive stocks to make room. These reports should be complete and
insightful as described earlier.
• There should be major updates at least once per year on your best ideas--it’s
hard to convince the sales force and clients that you are up to date on all the
issues if you never publish any fresh, major research.
• There should be a report published every time you change ratings, change
earnings outlooks, or there is a major event with one of your companies. A
one to two page report is usually not enough.
• Earnings previews are required on all your companies. These can be short
unless you are making changes to estimates or ratings. Combining these
into a single report that is published two to three weeks before the first
company reports is an efficient approach, and you may want to consider
following up with a brief First-Call-only note the day before results are due.
• It is absolutely mandatory that we respond quickly to all earnings reports--

there is no excuse for not having a First Call note within hours after earnings
are released, and the published report should be out the next day.
19
• Industry reports are crucial in convincing clients that we really do know what
we are talking. This is always the best approach to use when launching
coverage on a new sector, and is particularly effective when launching
coverage on two or more stocks simultaneously. If your industry does not
lend itself to at least a quarterly report, consider a periodic overview, focusing
on one or two major issues.
• Mindless monthlies (quarterlies) are just that--mindless. Repackaging your

First Call notes or short reports with a few statistics offers no added value to
anyone, nor does simply regurgitating a handful of government statistics.
Make these reports into full-blown industry reports or don’t make them at all.
Valuation/Price Targets
In general the Street has gotten lazy in doing its valuation work and setting price
targets. Most research today simply asserts a valuation such as “this stock should sell
at a 10% premium to its peers,” or “this stock should sell at a 20x P/E.” While these
statements may in fact be true based on your analysis, it is inadequate to simply make
an assertion without the analytical backup. There are several good approaches to
valuation analysis such as:
• Build a table of comparable stocks, highlighting the valuation technique(s)

you think are most appropriate such as P/E, P/E-to-growth, cash
flow/share, enterprise value, etc.
• Present a graphical history of how the stock has traded using such
approaches as P/E bands, relative P/E bands, etc.
• Use a generally accepted mathematical approach such as the formula for

target P/E based on a company’s growth rate versus that for the S&P.
This is one of my favorites since it is rarely used and is always
provocative.
• Devise your own proprietary approach. I once worked with an analyst that
had a very convincing analysis that the price of Deere, Case, and other
farm equipment producers closely followed the price of corn.
In any event, do something thoughtful that will help the sales force believe in your story
and help clients look at the world through your eyes. Most important, do it for yourself--
sometimes you will be surprised how far from reality your targets are when put under a
microscope.
20
Setting target prices, however, also needs a time horizon to make them effective. This
will derive from a combination of your own style--are you a deep value or earnings
momentum analyst by nature--and the predictability of the stock and its earnings. Time
horizons for technology stocks should probably never be more than six months unless
you are a masochist, while looking out 12-18 months is common for packaged goods.
Consider the following:
• Carefully look at the predictability of your industry sector and the inherent
volatility of the stocks. Keep your time horizons in line with both. Never
project price targets beyond your ability to forecast.
• Evaluate the impact of outside events on your sector and your ability to
predict them. For example, interest rates and consumer debt play a major
role in the earnings performance of consumer finance companies. While
you can track this data using government reports, how comfortable are
you that you can predict interest rates at various parts of the business
cycle? Would it make more sense to have a 12-18 month horizon early in
the business cycle, cutting to only six months when the cycle is getting
long in the tooth and worries about interest rate hikes are mounting?
• Is your sector inherently cyclical or stable growth? How good are you at
calling turning points in the automobile cycle and are your models
adequate to measure the huge impact of modest changes in revenue on
operating income when an auto producer is hovering around break even?
We all have our favorite valuation techniques, but it is crucial to give clients something
they can use and to evolve our techniques as client requirements change. The
following data is from a survey of 23 of the 30 largest commission producing accounts
in the U.S. and should be used as the starting point for your decision as to what
valuation techniques you want to use.
• Demographics
◊ 67% Portfolio Managers

◊ 12% Directors of Research
◊ 21% Analysts
• Valuation Techniques Used (135 Responses)
◊ 90% Absolute; 10% Relative

◊ 48% P/E Related
◊ 33% Cash Flow/Enterprise Value Related
◊ 12% P/Book Related
◊ 10% Other
21
• Ranking of All Responses
P/E-To-Growth 20%
P/E 19
EV/EBITDA 12
P/B 11
EV 11
P/S 6
Rel P/E 6
EV/E-To-ROE 3
Rel EV/EBITDA 3
Free Cash Flow 3
P/CE 2
Rel P/B 1
EV/EBITDA-To-Growth 1
Yield 1
DCF 1
Total 100%
The above table clearly demonstrates that a one-size-fits-all approach to valuations and
targets is not appropriate. It also clearly points out that relative valuation techniques
are no longer the norm, and if we want to improve our impact on most accounts, we
should focus on absolute techniques. This is not to say that we should abandon
relative P/E and other similar techniques, but that we should know the client and tailor
our discussion to meet its needs.
The ABCs of Supervisory Analyst Approval

Writing research to meet U.S. regulatory requirements is very simple--there are only a
handful of rules that we have to adhere to, and by so doing, your research will be
produced with virtually no time lag. The rules are as follows:
1) You must be careful to not make promises or guarantees.
Bad: “...the stock will trade up to 120...”

“...sales will increase by 15% this year...”
“...margins will improve when the new plant opens...”
Good: “...in our opinion, the stock could trade up to 120...”

“...we estimate that sales will increase by 15% this year...”
“...margins should improve when the new plant opens...”
22
It’s just that easy. Adding “in our opinion” or “we estimate that” will take care of
most offending promises. In many cases, simply using the word “should” instead
of the word “will” will also fix the problem.
2) Forecasts and estimates must be clearly indicated as such.
This is really simple. All you have to do in tables and charts is append the letter
“E” to all forecasts and estimates. In most cases, this will simply be the heading
of a table or the labeling of a chart such as 2004E.
3) There should be no claims as to your stock picking performance.
It is virtually impossible to meet all the New York Stock Exchange requirements
to make performance claims, so avoid them at all costs. It is OK, however, to
specify a stock’s performance from an arbitrary outside event or date.
Bad: “...the stock is up 20% since we recommended it...”

“...the stocks on our recommended list outperformed the market...”
Good: “...the stock is up 20% since the first of the year...”

“...the stock is up 15% since the sector bottomed late last year...”
“...the stocks in our universe have outperformed the market...”
4) The price of any stock must be included in a report where there is an

investment opinion.
Since many statements could be deemed to influence an investor’s opinion even

if we do not have a rating on the stock, the easy way out is to provide the price
the first time any stock is mentioned in a report.
Good: America Online ($52 1/4)

Better: America Online (AOL--$52 1/4)
Best: America Online (AOL--Buy--$52 1/4)
An alternative is to list all the stocks and their prices at the end of the report,
although this is not as helpful for clients who seem to prefer seeing the price
while they are reading about the stock.
5) You must not use inflammatory language or make exaggerated claims.
You cannot say things like “...this is the best story I have ever seen...” or “...this
stock will set new standards for performance...” You must be particularly careful
not to use language that encourages speculation by saying things like “...this
stock is unattractive on fundamentals but is interesting as a speculation based
on takeover potential...”
23
6) You must not create or pass on rumors.
You may comment on rumors that have already been publicly discussed in the
media or on the tape with a view to providing additional information, confirming it
or refuting it based on company information or your independent analysis, but
you must not fan the flames.
7) All data in tables and charts must state its source.
Another really simple requirement..all you need to say is the following:
Source: RBCo estimates and company reports

Source: Department of Commerce
or whatever is appropriate as the source of the data.
Client Calls and Client Votes

It is extremely difficult for the firm to get a substantial number of client votes until we
have approximately 150 mid-, large-, and mega-cap stocks under coverage. This is not
to say that we shouldn’t focus on accounts where we can make a difference, but a
broad-based client calling program would not generally be a good use of our time at the
moment. We will develop with sales a very focused target list of accounts, however,
where we can make a difference and your counterparts in these accounts should be
contacted at least once per month.
While our expectations for votes will remain modest until our coverage list is
rebalanced, the information that you get from the clients can be invaluable:
• You will develop a handful of relationships that you can use to bounce ideas
off of and to fine-tune your analysis before you take it public through the
sales force.
• By talking with clients regularly, you will always find new ways to think about
issues, find holes in your research, and tap many unexplored areas where
you can make an impact by beating your competitors to the punch.
• By speaking with your best clients--friendliest--first, you can fine tune your
pitch and have more and more impact as your client list grows.
• You will be able to learn what your competitors are thinking and oftentimes
can get early warning on changes in thinking about a stock or sector before
there is general awareness, thereby, giving you some lead time to reexamine
your analysis and have additional conversations with the company.
24
Dealing With The Press

The press is your friend if you use it correctly.
Find out who your counterpart is at the WSJ, Dow Jones, Reuters, Bloomberg, and
CNBC at a minimum. Get their telephone number, FAX number, and eMail address,
and use them.
Call/FAX/eMail them every time you have an important message on a visible stock.
The priority is First Call, sales/trading, Dow Jones, Reuters, Bloomberg, CNBC, client
calls, WSJ, or other print media. While this may seem somewhat backwards at first,
individual client calls are the least leveraged while First Call and sales/trading are the
most leveraged and most focused. Dow Jones, Reuters, Bloomberg, and CNBC have
terrific impact, but we lose the proprietary impact on targeted clients if we go there
before First call and sales/trading..
Help the press do their job and you will be amazed how much they will help you do
yours. They are a tremendous source--particularly the print media--for what is going on
in companies and will regularly ask for your views on what it means if a company is
thinking about doing an acquisition, adding a product line, and so forth, oftentimes well
before anything is announced publicly.
In dealing with the press, you must think in sound bites--you only get one chance to be
included in an article or interviewed on CNBC. Your First Call bullets are the best place
to start, but jazz it up if necessary. With a proper sound bite, your quotes will both be in
the first and last paragraphs of a written piece by the WSJ or Business Week or will be
the lead in a news story over Dow Jones or Reuters.
If you are asked a controversial question, and you feel flustered, tell them you are busy,
ask for their deadline, and tell them you will be back to them in plenty of time to make it,
take a breather to collect your thoughts and ALWAYS call back.
Find your counterparts in the trade press and ALWAYS be helpful--this is critical to
building brand name recognition for yourself as well as the firm and is a crucial part of
building the franchise.
Put the press on your mailing list--both financial and trade press. You will be surprised
how often a piece of your research will turn into the basis of a feature story, particularly
in the trade press.
Analyst/Sales Vote
Every six months we will ask sales to formally evaluate our performance in several key
areas (see attached sample forms). While the results will not be used directly to
25
determine bonuses, they will be used to help focus our attention on areas where we
need improvement as an organization, and more importantly, as individual analysts.
We will also ask the analysts to formally evaluate the sales force on the same schedule
so that they can also become more effective in working with research.
The details of the votes will be kept strictly confidential, and only summary information
on their own performance will be available to individual analysts and salespersons.
26
Sample Research Vote (By Sales)
Date______________________________________
Analyst’s Name______________________________
Industry Knowledge _______
Company Knowledge _______
Idea Generation _______
Timely Documentation _______
Sense of Urgency _______
AM/PM Comments--Quantity _______
AM/PM Comments--Quality _______
Portfolio Mgr. Impact _______
Scoring: 1 = Poor, 3 = Average, 5 = Excellent
Salesperson’s Name______________________________
27
Sample Sales Vote (By Research)
Date________________________________________
Salesperson____________________________________
Understands My Industry ______
Understands My Companies ______
Willingness to Work with New Ideas/Concepts ______
Makes Timely Calls with Important Information ______
Sets Up Appropriate Client Contacts:
List of Contacts/Phone Numbers ______
Client Visits ______
Company Management Visits ______
Provides Useful Feedback from Clients ______
1 = Poor, 3 = Average, 5 = Excellent
Analyst________________________________
28
Business Plan
Every analyst (and junior analysts getting ready to launch coverage) will be asked to
provide an updated business plan every six months. While the plan will not be used
directly in figuring compensation, it should become a critical part of each analyst’s
thought process about how he wants to run his business and how he wants to be
measured.
The plan will focus on coverage, votes, production, client contacts, working with
corporate finance, retail commissions, and press contacts. A spreadsheet will be
provided to assist in generating the plan and results will be formally reviewed during
performance reviews to measure each analyst’s progress against the goals that he
sets.
29

Equity Research HANDBOOK

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Equity Research HANDBOOK

Uploaded by

Copyright:

Available Formats

http://equity-research.

Clients will pay us if we make them money or if we

The Ten Commandments

• Develop proprietary opinions based on primary research. Regularly check

• Be provocative. Playing it safe turns into a loser’s game over time. It

• Follow and publish regularly on at least 12-15 institutional-quality stocks

• Launch coverage on at least one new stock per quarter, pruning

• Maintain an above-average stock picking performance. According to a

• Cooperate with corporate finance. Every idea generated by corporate

Greenwich Survey Findings

◊ Detailed industry reports

◊ Bottoms-up research with strong financial analysis

Institutional Commissions Per Analyst ($ millions)

Ryan Beck 0.4

Market Cap Targets

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Ryan Beck Research Coverage

So, where does this leave us as to the number of calls?

Focus List 1x2= 2

Always start your call as follows:

1) The company I'm going to discuss is:

We are changing our 20__ and 20__estimates from ______ to ______,

3) Our price target for the stock is ______.

4) The principal reasons for these changes are:

6) As a result of these changes, I now appear to be in line with consensus...

As a result of these changes I now appear to be at odds with the consensus of

By providing a handout and a discussion format that is user-friendly, you will be

◊ There should be a minimum amount of numbers.

Basic Reports/Major Updates

• If a PM decides to read a report, he will on average read only the first

• Research reports should generally fall into three categories:

◊ 1-3 pages--distribute only on First Call

• New coverage should be launched with a report that is detailed enough to

• Launching coverage on a new industry or a new sector within a current

• Regular updates should be published as events unfold, but no less

• In general, comments from the morning meeting must be documented,

• All earnings and/or ratings changes must be detailed in a report that

• We will need to produce a monthly report that highlights our coverage.

Research Report Structure

Who's The Audience?

• Will I get a portfolio manager's attention with the first page?

• Have I supplied adequate added value for an analyst?

Reports do have two very different audiences--portfolio managers and analysts. A

• The industry sector should be prominently displayed on the cover.

• If the stock is small- or mid-cap or international, there should be a very

• The investment-related story must be prominently summarized in two to

• A summary earnings forecast should be on the cover. It should include a

• The investment thesis and analytical foundation for our investment

• The investment opinion section should address the following:

◊ It should state your recommendation and outline the most important

◊ It should have a "what if things go wrong" section.

◊ It should summarize your valuation assumptions and present a target

◊ It should address the major assumptions in your revenue and earnings

• The analyst's name, email address, and telephone number should be

Among the other basic questions are the following:

• How well does it do in its basic business? Is it growing slower or faster

• What is its competitive position? Is it gaining or losing share? Is its

• What are the company's near-term and long-term goals--product,

• Is the company planning to diversify its business? Has it done it before

• Is it expanding geographically? Are its international operations growing

• In a regulated industry, what is happening in Washington and at the

• What is the range of forecasts by product line for sales, margins,

• Are R&D expenses increasing or falling rapidly? Is there a substantial

• What can be learned from the company's customers, suppliers, or

We are changing our 20 and 20estimates from to ,