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S&P Research Methodology Essay

983 words - 4 pages

Standard & Poor’s Equity Research Methodology
BOTTOM-UP COMPANY ANALYSIS
Company Fundamental Analysis1 MACRO AND ECONOMIC ANALYSIS
When conducting bottom-up company analysis, analysts are expected to incorporate Macro and Economic Analysis.

Company Valuation Analysis
Step 5
Assess:
■ Management team ■ Competitive environment ■ Suppliers ■ Buyers ■ Substitutes ■ Barriers to entry ■ Regulatory environment

Review
Step 9
Decide STARS recommendation
(refer to inside panel for details on S&P’s 5 STARS Ranking System) ■ Incorporate risk assessment rating into overall STARS ranking (For more details on Standard & Poor’s Risk Ranking Assessment, call 1-800-523-4534.)

Products and ...view middle of the document...

Estimates of future “free” cash flows are discounted back to current dollars, including variables like risk assessment and capital structure ■ Present value of shares vs. current share price ■ 10-15 year projection ■ Defined parameters around DCF to make it more reasonable (e.g. interest rate inputs)

■ Company value ● P/E trading history ● High/low in cycle ● Current P/E level justification ■ Valuation vs. appropriate index

Standard & Poor’s Core Earnings Calculation Included
■ Employee stock option grant expense ■ Restructuring charges from ongoing operations ■ Write-downs of depreciable or amortizable operating assets ■ Pension costs ■ Purchased research and development expenses ■ Merger/acquisition related expenses ■ Unrealized gains/losses from hedging activities

Sum of the Parts
■ Determining “fair value” of a stock by determining private market values for a firm’s individual units ■ No clear comparison and/or conglomerate ■ Break divisions up as stand-alone business units ■ Calculate a relative value for each division ■ Arrive at a blended valuation

Excluded
■ ■ ■ ■ Goodwill impairment charges Gains/losses from asset sales Pension gains Litigation or insurance settlements and proceeds ■ Reversal of prior-year changes and provisions

Institutional
Compustat Data Equity Insights Industry Surveys Institutional Equity Reports IPC Notes Monthly Investment Review Sector Watch US Financial Notes

Relative Valuation
■ Assessing a security’s relative value by comparing appropriate financial ratios across peer groups ■ Comparison with industry group ● Price/Earnings (P/E) ● Efficiency ● Margins

Interest rate forecasts Market performance forecasts Economic, political and related developments of interest to investment community Consensus concerning effect of such developments on S&P’s view of financial markets, including recommended percentage asset allocation among stocks, bonds and cash

Risk Assessment
■ Technicals ■ Insider buying ■ Beta

Ongoing Analytical Review
Step 11 Step 1
Repeat Steps 1, 2, 3, 7, 8, 9
■ Continuous...

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