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What is Equity Research?

Equity research is the part of the investment bank that conducts research on stocks using publicly available information and provides insights and analysis on equities for clients on the buy-side. Additionally, the equity research division will help the companies that they cover market their securities. Clients will subscribe to these insights for a fee every year, but the real money is made in the corresponding capital markets business when shares are issued and traded (although the trading revenue is falling off).

Research coverage is separated by sector and the equity research analyst will provide industry updates and primers on a regular basis to keep clients informed and attached to the investment bank. For companies in their sector coverage universe, valuation reports are issued with discussions on the company’s recent and forecasted performance.

Clients (both the buy-side and the company covered) expect updates after quarterly earnings reports and the buy-side looks for views on earnings forecasts before they come out. After earnings are released, equity research analysts/associates will call in and speak with company management in a public conference call where results are discussed and guidance is provided for the future.

Often, corporates will only give sizeable equity capital markets business to an investment bank if they cover the company in their research department (including leading the IPO), for optimal dissemination of information. The equity research department will also host investor conferences for sectors where company management will be invited to speak to a variety of buy-side clients of the investment bank to market the merits of investing in their equity.

Although equity research is the most widely known and cited, banks will also have teams for credit research (for corporate debt), macroeconomics research (for S&T clients), quantitative strategies research (including options strategies) and a thought leadership/think tank division (less so for Canadian banks, but most of the larger global investment banks will offer this).

Research is the best place to pick up financial modeling skills due to the requirement of maintaining models and adjusting for scenarios whenever there is a corporate action (whereas in investment banking, work is only done if the bank is involved in the deal). Bankers will often lift models from research, although they will also sometimes complain that research is a cost centre.

Getting into Equity Research

Generally, equity research prefers candidates with previous valuation experience (investment banking or valuations at a Big 4). Afterwards, all capital markets front office experience will be desired, usually supplemented by a CFA or CPA (CFA is preferred). Commercial bankers and accountants will also be looked at if there is relevant industry experience. Knowledge of FactSet, Bloomberg and any other major datastreaming platform will also be helpful.

Certain industries will look for specialized knowledge in particular. Mining research will covet mining engineers, oil and gas will favor petroleum engineers, healthcare research will favor doctors and pharmacology PhDs and so on.

Some equity research analysts may look to hire equity research associates right out of MBA school, but fresh B.Com hires are increasingly rare. Increasingly, associates at smaller shops move up to Big 5 banks and Big 5 banks have a good track record of “promoting” mid-office staff if they have been performing and have been getting the relevant designations.

Applicants are expected to have strong accounting and modelling experience, which they may be forced to demonstrate in modelling test (usually this involves projecting cash flows and valuing a company, although the model tends to be extremely rudimentary). Some research analysts will require a 3-5 page writing sample which will usually incorporate a stock pitch.

Equity Research Compensation and Exit Opportunities

Equity research professionals are compensated somewhere between investment banking salary and corporate banking salary. Base salaries are the same across capital markets with $70-90,000 base for entry level associates, bonuses are ~50% of base salaries. Base salaries typically increase by ~$10,000 per year, and promotion comes after 3-7 years.

Exit opportunities for equity research professionals are excellent, and it is one of the reasons why equity research jobs are so coveted. As they are considered to be strong financial modelers and highly analytical, equity research professionals can lateral easily into investment banking and corporate banking. Switching into buy-side firms is also quite common, and many analysts/associates end up in asset management and hedge funds.

What You Do in Equity Research

Financial Modelling

Associates will build models for every company in the coverage universe which include full operating models translating into valuation. As public information is disseminated, model assumptions must be updated. Bull, bear and base scenarios must be run to offer a valuation range. Depending on the brokerage, these models can range from very organized to quite messy, so that may be a consideration in choosing where to work.

Management Communications

Research is in constant correspondence with company management for modelling inputs and overall guidance. The analyst or senior associates will dial-in to industry conferences and earnings calls and discuss results and ask for clarification.

Junior associates spend the whole day reading primers and industry news, writing primers and random projects the analyst staffs them on (I have an idea, look up historical price earnings of 300 companies over the last trough and come up with some conclusion), and hashing out thoughts in daily morning email blasts to clients (prices of relevant commodities, any moves in the peer universe, thoughts, Donald Trump). These email blasts will be edited heavily in the beginning by the senior associate (or analyst if the team is lean), but eventually the the associate figures it out or gets fired (we have seen this after a few erroneous email blasts).

Industry Coverage

Associates maintain databases for industry relevant metrics, create industry primers for clients and keep up to date with any developments. Sometimes, associates may assist buy-side clients with their models. Good analysts are also cherished for their thought leadership, so being able to predict a trend before it happens is rewarded.

Equity Research Reports and Publications

The equity research analyst is expected to be an authority in their industry. They publish various reports over the year, with industry updates and ideas as well as quarterly earnings updates for their models and analysis. Unless the stock is restricted (the investment bank is working on a deal with the company), there will be a price target for the company.

Initiating Coverage Reports

When an investment bank initiates coverage on a company, they build an operating model of the company and figure out what valuation methodology is appropriate in setting a price target for the stock.

When clients and internal parties want to get up to speed on the company, the initiating coverage report is a comprehensive but concise document that summarizes all of the key points in the company’s filings (Annual Information Form, 10K/Annual Reports/Company Presentations/Management Calls) and provides an overview of the broader industry as well as the segment they operate in.

Usually, they will include the following components. We will use retailer H&M as an example:

  1. Executive Summary of the Company and a Price Target
  2. Industry Overview – What is the size of the fashion industry and what segment does H&M operate in? Within the subset of Fast Fashion  who are the competitors in the space (UNIQLO, Zara, Forever XXI) and what is the market size and relative market share? Where is demand growing and what are some opportunities and threats (Online Shopping)? Comparable valuation analysis may be conducted here.
  3. Company Overview – First the analyst will cover the history of the company and the changes in share price since listing. Then it will expand on the present: What does H&M do and where are their operations located? Which countries are they expanding in and what do retail metrics look like? H&M’s same store sales, sales per square foot, online initiatives and other relevant business information will be included here.
  4. Valuation Methodologies – H&M is a retail company, so it may look at valuation from a price/earnings, EV/EBITDAR, or other metric, which is checked against a discounted cash flow model.
  5. Price Target – The analyst looks at the next 12-24 months of operations and forecasts earnings based on assumptions from management guidance or their independent research. Given that earnings estimate, they assume a trading multiple one year forward and set a price target based on that. Future reports on the company will build on this model.

Earnings Reports

Equity research analysts will publish reports before and after quarterly earnings for the companies in their coverage universe.

Equity research is always expected to provide commentary after an earnings release, and as such equity research associates usually work their longest hours each quarter around earnings season for the industry as they need to summarize and offer thoughts on information that is suddenly made public in a short period of time (usually the day of earnings or the day after).

Pre-Earnings

The week before earnings kick off for the company – and earnings for each industry/sub-industry tend to come in within weeks of each other, the equity research team will make predictions on how the company did for adjusted revenue, EBITDA, EPS and other metrics important to that company.

Recall that equity research is on the public side – that is, they do not have access to material non-public information, so all information needs to be gathered from publicly available sources and conversations with management.

Before an earnings release with a video game company, the equity research analyst may look at retail traffic reports from market data and research firms such as NPD as an indicator of sales volumes. They may also look at sentiment on online forums and industry news to draw conclusions.

Flash Report Post Earnings

These are sometimes issued immediately after earnings are released by the company that equity research covers where the top and bottom line numbers (revenue and net income) are reported along with some positively worded explanatory factors on the company’s website or Marketwire.

Before the earnings call, the market may react immediately to missing or beating revenue, EBITDA, earnings per share (EPS) and operating variables unique to companies in that industry. Equity research analysts will offer preliminary thoughts and look to explain the beat/miss.

Usually the flash report will include a toll-free dial in for the earnings call with management so that buy side clients can listen in.

Post-Earnings Report

After the earnings call, management will provide new assumptions for the equity analysts’ models and there will be more clarity on what to expect. Depending on how far guidance deviates from previous expectations, analysts may move their price targets for the next 12 months.

Usually, the post-earnings report will have a comprehensive summary of what happened in the last quarter and why revenue and other line items beat or missed expectations as well as qualitative thoughts on the company from the analyst. The summary is usually a more concise version of the company provided Management Discussion and Analysis.

The report will sometimes contain a PDF version of the three financial statements, DCF valuation and comparable companies analysis over a few pages.

Industry Primers

When analysts have time, they will commission their associates to help them with writing comprehensive industry primers for the benefit of buy side clients who want to get a crash course on an industry.

We provide equity research style primers here on our website for all major industries in Canada, such as Consumer & Retail and Telecom & Media.

Market Updates

Equity research analysts will generally have weekly or monthly updates on their coverage universe that goes over any major news that affects the industry, a summary of how share prices have performed and any underlying commodities that affect operational metrics.

For example, a Forestry or Paper and Packaging analyst will send out an email blast that summarizes the moves of the coverage universe over the week (for example, West Fraser Timber, Interfor, and Domtar), how different forest products have priced (the price of Northern Bleached Softwood Kraft or NBSK per thousand board feet), developments in the industry – for instance, Trump wanting new trade policy with Canadian lumber producers and a comparables summary of all of the coverage universe’s trading multiples (Price Earnings, EV/EBITDA).

Conflicts of Interest

The goal of equity research is to communicate knowledge of a company behind a traded equity security to prospective investors. As investment banks who own equity research departments (with access to the best industry sources compared to a contributor on Seeking Alpha) work for the companies covered by research and receive fees for corporate finance advisory services and the underwriting of securities, it is in their best interests to have a favorable opinion of the stock (even if it does not affect the underlying corporate action, the relationship with the client can be compromised if the bank is critical of the stock).

As such, equity research reports should be seen as a good source of information with intelligent thought leadership (an equity research analyst may take on a view based on factors that are not widely thought about – and be right), but due to limitations to objectivity, the price targets and buy/hold/sell recommendations should be taken with a grain of salt. Sometimes, the best way to learn about a company is to read an Initiating Coverage report for the stock – ER analysts do a lot of compiling and simplifying of tedious regulatory documents and investor marketing publications and put together a concise overview of the company, the business and anything that would be pertinent to an investor.

Related Reading for Equity Research

Equity ResearchHow to Analyze REITS – Case Study: RioCan · Net Asset Value in Mining · Interview with: Equity Research Associate · Breaking into Investment Banking as a Big 4 Accountant in Audit · Walk Me Through a DCF ·

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