CFA Research Report Rubric
Business Description: Max points 5
Did team address the major components of the company’s business strategy? Was each operating segment covered? What does the business do? What is the growth of the business? Who their customers (end users) and what is their condition? Make sure you cover each business unit. Make sure you cover each region of business. Maybe: the major shareholders here.
This section of the report sets the baseline for the rest of the report. Make sure we study each business section and each geographical market in detail. Try to determine where and (if) growth is coming from.
We will use a levered beta for each business segment and ERP for each business region. We will determine weights.
Industry Overview and Competitive Positioning: Max points 15
What are the macro trends impacting the business? Discuss how the company is positioned globally and discuss the global environment for growth? What are the factors affecting the industry and how do they impact the target company? What is the overall market growth rate? Who are the company’s main competitors? How is this company different than their competitors? What is the power of suppliers? What is the power of the end-users? Does the company have any competitive advantage? Must show peer analysis. What are the industry drivers and industry structure? A very detailed discussion of the companies competitive positioning should be placed here (not in the investment summary). A strong discussion of industry factors and trends is needed here. Where does company fit? How fragmented is the industry? Locate both public and private competitors. What is the source of the company’s or industry’s value? What factors drive the industry? Really, understand how the business runs.
How does this company differential itself? How does that add value? Talk about the company’s peers. Where does company fit? Porter 5 forces and SWOT.
Investment Summary: Max points 20
This section must tie in to all others and must really support the buy or sell opinion. Why did we use what we used? Why does company trade at a discount or premium to the market multiples? It the market wrong. Will their historical multiple change? Why? We really need to have a “why” for each item. Never use a DCF and market multiple exit together. One or the other. This section, and the next two, has the highest maximum points on the rubric. Great detail is needed on these three sections. The team must address and justify its buy (outperform or overweight), hold (neutral), or sell (underperform or underweight). Somewhere in this paper I would like to define our view of what a buy, sell, or hold means. Detail! Did we address and forecast changes in gross profit margin, operating profit margin, interest expense, tax rate, dividend policy, share buyback policy, capital expenditures, research and development spending, management changes, and mergers and acquisition possibilities? Is this a good company? Is this a good stock? Differentiate between these two positions. This could be a good spot to mention risks. Don’t just list the risks; try to quantify the probability and the impact of occurrence. Use and incorporate managements language from their earnings calls. What is management’s guidance for revenue and EPS; does our estimate deviate from management? Why? Fewer inputs are better, no black box. What are the key drivers?
Valuation: Max points 20
According to Aswath Damodaran the big three in valuation is 1) capacity to generate cash flows 2) expected growth rate of these cash flows and 3) uncertainty of these cash flows. Must model long-term organic growth given recent business trends. What are the weights of each valuation method; how did the team determine the weights. Must have a relative value valuation, a discounted cash flow valuation, and a PE multiple valuations. If applicable, team could use a sum of the parts valuation or an under value asset valuation. Must have multiple pricing models to improve the target price and valuation. Must show intrinsic value in our one-year price target to justify our buy, sell, hold. Show multiple methodologies! Discuss WACC. What is the consensus estimates? How does our estimate relate? Do we value company with a higher P/E multiply than the street? Why? When using a DCF model do not have a terminal growth rate greater than the risk free rate. Some companies may grow at a faster rate long run than the risk-free rate but it is infrequent. Lower the risk rate during the terminal growth period. Betas tend to run towards 1 in the long run. Also think about changing the debt weightings during the terminal period to a more traditional waiting. When working with beta we can use historical information, but it might be better to use some other forward-looking beta estimate. We could use a sector average or we could look at each business segment and assign a beta to each segment and use a weighted average. What are the company’s historical PE multiples. Compare the historical PEs to the S&P and to the sector. Doesn’t typically price at a PE multiple premium or discount? Where does it stand now? Describe how you determine the weights when using several valuation methods. For relative valuation I would like to see current PE, forward PE, price-to-book, enterprise value to EBITDA, and enterprise value to sales compared to the target companies competitors and peers. We should consider using the median value instead of the average or show both. We should consider throwing out outliers, but discussing our rationale. Intuitively, firms with higher growth rates, less risk, and greater cash flow potential should trade at higher multiples. Does our company justify a higher or lower multiple than the averages? In the simplest discounted cash flow model for equity which is stable growth dividend discount model, the value of equity is: Po = D1/k – g . Dividing both sides by net income (E) we obtain the discounted cash flow equation specifying the PE ratio for the stable growth firm. The key determinants of the P/E ratio are the expected growth rate in earnings per share, the cost of equity, and the payout ratio. All things remaining equal, we would expect higher growth, lower risk, and higher payout ratio firms to trade at higher multiples of earnings and firms without these characteristics.
For relative valuation can we look at the companies PEG ratio versus its peers or sector? The key to relative valuation is finding comparable firms and adjusting for differences between the firms on growth, risk, and cash flows.
I would love to come up with a regression analysis with a macro-variable. Multivariate regression model (etc. P/E should be x based on ROE, P/B,) for relative valuation.
Smoothed or normalized earnings to account for cyclicality.
Are there unutilized or underutilized assets? Add values because they do not show up in DCF. Underfunded pension liability? Option values? If our intrinsic valuation is significantly off the market price, we really need to have a justification. Monty-Carlo simulation on macro factors. Always site references. Dividends, share repurchase, acquisitions, cap-ex, R&D, debt pay down, what are they doing with cash? How does that effect price and value? Is this good or bad?
Calculate ROC EBIT (1-t)/ BV of debt + BV of equity – cash. What is ROC – WACC? Is it positive? That is the company’s competitive advantage. Where do these excess returns come from? Adjust ROC and BV for research and development costs; capitalize R&D. Did the company have write-offs? Write-offs will improve ROC; it will be overstated. Take write-offs out. Goodwill may understate ROC; try to adjust. Make sure leases are in book value of debt.
Was the last year’s EBIT a one-time event? Can we normalize EBIT?
Does the company take on good projects? This is the key to success with their future reinvestments. In 1/3 of all companies, ROC is less than WACC. 1/3 ROC = WACC and 1/3 ROC > WACC. Do not be overwhelmed if ROC = < WACC. Remember, ROC is an accounting number. Is the accounting is misleading?
DCF. Capital expenditures, acquisitions adjusted research and development and changes in working capital are cash outflows. Depreciation and amortization are cash inflows.
Capex depreciation analogy, calories consumed vs. calories burned off.
Cost of debt. Try to create a synthetic rating using interest coverage ratio and NYU page. Then apply appropriate spread. Always use market values for equity and debt.
Financial Analysis: Max points 20
Be consistent. What do financial ratios mean for the business? How do they compare to the competitors? (Without comparing to competitors ratios are meaningless) Compare ratios to companies past; is there a trend? Looking for what the future holds. Ratio analysis must be compared to peers and the company’s trend. What is the financial model and scenario analysis? Monte Carlo simulation? Make sure to model of future financing needs. Really, need to put it all together here. Peers? Did were spend enough time segments?
Investment Risks: Max points 15
The team should highlight all risks including risks other than economic, such as political, operational, and execution. Interest rate risk, leverage risk, integration risk, and risk of management change are crucial to this section. Also, cover inflation risk such as the company’s input costs and if the company would be able to cover this cost by raising prices. Explain each risk the industry faces and how it effects company. How serious is this risk (high, med, low). Try to get something in each section of the rubric that is not in the standard 10-k filing.
Credit, liquidity, strategic, operational risks.
A failure to integrate acquisitions successfully. Pricing pressure from large customers. Rising interest rates. Macro – headwinds. Unfavorable regulatory policies. Unfunded pension liabilities – pension fund spending.
Corporate Governance: Max points 5
Describe and highlight the board structure in executive compensation. Try to do an analysis on how “good” the company’s corporate governance actually is. Discuss structure, independence and compensation of the board. Try to include an external metric on risk. Are they better or worse than peers are? Does this help or hurt valuation? ESG. Any major changes here? How does change impact valuation?
Try to have all members provide some answers. Be very prepared to talk about the company’s competitors. Stay on time! Example: we mentioned that MTB had a good corporate governance policy. They asked, “Is it better than their peer group?” They then asked, “How does that add valve to stock?”
What company acquisitions were good and bad? Were they accretive or dilutive? Were estimated synergies accomplished?
What is the company’s dividend policy? Do you see this changing going forward? How about buy backs?
What are the company’s competitors how is their performance?
How does the currency exchange rate impact the company? How would a change in the exchange rate impact the company? Is currency exchange listed in the risk section?
Is management confident?
Does the company allocate capital correctly?
What is the company’s competitive advantage?
How much money does the company have in other countries?