Investment Banking: The Main Sections of a Research Report - dummies

Investment Banking: The Main Sections of a Research Report

By Matt Krantz, Robert R. Johnson

Investors are busy people. They don’t have the time to read through an investment banking research report that buries the findings and disguises the analysts’ decisions. Research reports are designed to be highly functional and percolate to the top the information that’s most important so investors can find it quickly.

Again, there’s no standard or required format for research reports to follow. But most of the time, they contain a number of key elements, including the following:

  • Recommendation: Analysts don’t hide how they feel about stocks. Right at the top of most research reports is the recommendation, typically a phrase that tells investors what the analysts think about buying the investment. Most analysts use one of the following terms: “strong buy,” “buy,” “hold,” “sell,” or “strong sell.”

    Many beginning investors tend to place too much emphasis on the recommendation. Sure, it’s easy to just see if the analyst rates the stock a “strong buy” and then run out and buy it. But savvy investors know that most of the value of the research report is in the analysis of the company and the industry, and they don’t blindly follow the recommendation.

  • Price target: If you visit a research analyst’s office, you may expect to find a crystal ball. Most analysts make a bold prediction of where they think the stock could be trading in the future, usually 12 months from the time of the report. The price target is usually derived using different techniques, including discount cash-flow analysis.

  • Key statistics: Buy-side analysts use research reports to save them time. Many investors are looking for quick, at-a-glance information to help them get a feel for a company’s future. The key statistics portion of a research report typically gives investors a summary of all the numerical data points that matter, ranging from the stock price to financial ratios such as price-to-earnings ratios.

    In this area of the report, you’ll also find the analyst’s forecast of the company’s future earnings, a key part of creating a price target.

  • Highlights/summary: Research reports can get lengthy, sometimes spanning ten pages or even more if it contains in-depth information about the industry. The highlights or summary area attempts to boil all this information down to the bare essentials.

  • Investment opinion: In the investment opinion area, the analyst gets some room to expound a bit on the rationale behind the recommendation. If the stock is a strong buy, the analyst makes a case for that recommendation in the investment opinion section.

  • Business summary: Believe it or not, some investors just know companies by the trading symbol. In this part of the report, analysts usually show investors that the investment is backed by a company that generates profits and earnings. The business is summarized in this portion of the report so investors can understand the key drivers of the company.

  • Ratio analysis and financials: One of the best ways for investors to really dig into a company to see if it’s a good investment is by using ratio analysis. Dozens of critical financial ratios help investors assess the value and trajectory of a company. But you can save yourself some trouble, too, because most analysts calculate many of the key ratios for you in this section.

  • Industry outlook: One of the influences on the profitability of a company is the industry that it’s in. Stocks in the grocery-store industry typically keep a small portion of revenue as profit, while technology companies that make software tend to keep a higher percentage of their revenue. This part of the research report explains the industry and goes into what bearing that line of business has for the company.