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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Discover a one-of-a-kind blueprint to equity analyst success from an industry leader In Survival Kit for an Equity Analyst: The Essentials You Must Know, veteran analyst Shin Horie delivers a must-read, practical guide on the analysis of companies and industries. The book offers a guide to conducting industry-level analysis from a global perspective, with a particular emphasis on adjustments necessary for covering companies in emerging markets. Readers will also get: * A robust background on the basic process flow of company analysis and valuation * Guidelines for examining earnings drivers in major industries * Tips on the qualitative profiling of companies and how to dig deeper to find nuance that financial statements don't express Perfect for early-career equity analysts themselves, as well as corporate managers who seek to understand how their organisations will be scrutinized and examined by finance professionals, Survival Kit for an Equity Analyst offers readers an insightful narrative on the necessary ingredients for success in this demanding field.
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Veröffentlichungsjahr: 2021
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Table of Contents
Cover
Title Page
Copyright
Dedication
Preface: Why I Wanted to Write This Book
Introduction: How to Approach Company Analysis
Structure of this Book
List of Acronyms
Part I: Lessons from the Past: My Story as an Analyst
Part II: Laying the Groundwork
Chapter 1: Understand the ‘Character’ of the Industry
Six Basic Steps for Forecasting Industry Growth
TAM Growth Rate
Ten Additional Angles for Testing Forecasts
Chapter 2: Assess the Earnings Drivers in Different Industries
Hyper Growth – Internet, Fintech, Biotechnology
Secular Growth – Software, Medical Technology
Cyclical – Capital Goods, Transport, Energy, Commodities, Chemicals, Autos
Cyclical Growth – Semiconductor, Electronic Components, Technology Hardware, Clean Energy
Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services
Interest Rate Sensitive – REITs, Property Developers, Banks, Insurance
Regulated – Utilities, Telecoms
Chapter 3: Identify the ‘Personality’ of the Company
Product and Service
Origin and History
Management Profile
Ownership Structure
Value Chain
Competitive Moat
Track Record of Strategic Decisions
Corporate Culture by Country
Earnings Guidance Track Record
Controversy Record
Management Quality – A Framework
Part III: Analyse and Apply the Findings
Chapter 4: Put Findings into the Earnings Model
Segmental Revenue Forecast
Income Statement Forecast
Balance Sheet Forecast
Cash Flow Forecast
How to Put Cyclicality into Long‐term Earnings Forecasts
Quarterly Forecasts can be Helpful
A Birdseye View is Helpful
Financial and Property Sectors are Unique
Chapter 5: Summarize All Thoughts
A Suggested Method for Creating a Practical Scorecard
Chapter 6: Find the Appropriate Valuation Framework
Hyper Growth – Internet, Biotechnology
Secular Growth – Software, Medical Technology
Cyclical – Capital Goods, Transport, Energy, Commodities, Chemicals, Autos
Cyclical Growth – Semiconductor, Technology Hardware, Clean Energy
Stable – Consumer Staples, Retail, Consumer Discretionary, Pharmaceutical, Media, Business Services
Interest Rate Sensitive – Banks, Emerging Market Banks, Insurance, Property, REITs
Regulated – Utilities, Telecoms
Conglomerates
Additional Considerations on Valuation
Chapter 7: Differentiation versus Street
Is the View Actually Different?
Where is the Difference?
What is Driving the Difference?
Value of an Undifferentiated Conclusion
Part IV: What to Research and How to Power the Analysis
Chapter 8: How to Generate Exciting Ideas
1: Burning Questions
2: Products to Solve Problems
3: Forgotten New Technologies
4: ‘Little Stories’
5: New Language
6: B2B and Orphan Stocks
7: The Second or Third Derivatives of Structural Changes
8: Local Trends
9: Inputs from the Real World
Chapter 9: How to Deal with Disruptors, Emerging Markets, ESG, and Downturns
How to Forecast and Value ‘Disruptors’
How Should Emerging Markets be Looked at?
How to Think about ESG Issues
How to Cope with Economic Downturns
Chapter 10: Using Soft Skills to Power the Analysis
How to Build a Relationship with Companies
How to Leverage the Team
How to Communicate Ideas Effectively
What Types of Training Should New Analysts Ask for?
Time Management
Part V: Recap and Closing Thoughts
About the Author
Acknowledgements
Index
End User License Agreement
List of Tables
Chapter 2
Table 2.1 Earnings drivers in different industries
List of Illustrations
Chapter 1
Figure 1.1 Steps to forecast industry growthSOURCE: Goldman Sachs Global Inv...
Chapter 3
Figure 3.1 Sample management scorecard
Chapter 4
Figure 4.1 Framework for building company earnings modelsSOURCE: Goldman Sac...
Chapter 5
Figure 5.1 Sample company scorecard: industry characteristics.
Figure 5.2 Sample company scorecard: peer comparison.Note:
***
Chapter 6
Figure 6.1 Key factors that can influence company valuationSOURCE: Goldman S...
Figure 6.2 Company earnings multiples are influenced by multi-layered factor...
Figure 6.3 Sample valuation framework by sector
Guide
Cover
Table of Contents
Begin Reading
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Survival Kit for an Equity Analyst
The Essentials You Must Know
Shin Horie
This edition first published 2021Copyright © 2022 by John Wiley & Sons, Ltd.
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Disclaimer: The views stated herein do not necessarily reflect the views of Goldman Sachs.
Library of Congress Cataloging‐in‐Publication Data
Names: Horie, Shin, author.Title: Survival kit for an equity analyst : the essentials you must know / Shin Horie.Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2022.Identifiers: LCCN 2021031903 (print) | LCCN 2021031904 (ebook) | ISBN 9781119822448 (cloth) | ISBN 9781119822455 (adobe pdf) | ISBN 9781119822462 (epub)Subjects: LCSH: Corporations—Valuation. | Business enterprises—Valuation. | Corporations—Finance. | Business enterprises—Finance. | Investment analysis.Classification: LCC HG4028.V3 H67 2022 (print) | LCC HG4028.V3 (ebook) | DDC 658.15—dc23
LC record available at https://lccn.loc.gov/2021031903LC ebook record available at https://lccn.loc.gov/2021031904
Cover Design: Wiley
Cover Image: © Tarchyshnik/Getty
To Makiko, Waka and Hana
Preface: Why I Wanted to Write This Book
What do equity analysts do? When I was asked to explain what I do by my parents, who are not familiar with the financial industry, I told them: ‘We try to predict the future of a company.’ Simply put, that's what equity analysts do and, in my view, should be doing.
Talking about the past and the present is relatively straightforward. Talking about the future is more uncomfortable as no one likes uncertainty or being seen to be wrong in front of other people, which is why there is significant value in a quality attempt at predicting the future of a company. To do this, analysts need to understand many things that require a lot of research and investigation. This book provides equity analysts with a number of helpful hints and tools to help them navigate the complex research process, particularly when they are early in their careers.
This is a book for company analysis, not a financial theory book, nor a business school textbook. It aims to be a practical guide on how to survive and thrive during the first few years as an equity research analyst. So, when I refer to ‘we’ or ‘you’ I am referring to new equity analysts. The book contains details of how to discover, analyse, forecast, and evaluate public companies. It has four unique features:
First, it specifically focuses on company analysis and valuation and does not directly talk about stock investment, although the ultimate aim of our analysis is that the analysis is used for investment decisions. This focus is because we often make the mistake of talking about stock price movement before we fully understand the underlying company value and thus get confused between the two.
Second, this book does not go into the theoretical definitions of accounting and financial analysis. This is because there are many textbooks available on this subject and most readers have already studied them extensively. Instead, I offer some suggestions and advice on how to implement such metrics in the real world of company analysis.
Third, a number of specific industries are discussed because characteristics, growth prospects, and valuation methodologies vary substantially by industry. Readers can then apply the content directly to the industries they need to analyse.
Fourth, by leveraging my background and experience, I tried to make the content as globally applicable as possible. As such, many parts of this book would also be relevant for emerging market analysts.
Introduction: How to Approach Company Analysis
When asked to analyse and value a company, the best starting point is not to start by punching its financial statements into a spreadsheet. In order to understand a company in a deeper manner, we need to: start with an in‐depth analysis of the industry it belongs to; look at it in a global context; and learn about its competitors. We need to come up with our own 5–10‐year outlook for the industry. During this process, in addition to investigating various data, we also need to speak with a number of industry experts, including the company's suppliers and customers, or even regulators or scientists in some cases. Then we take a detailed look into the company itself, more specifically regarding its history, management, shareholders, culture, and competitive moat – i.e. the ‘personality’ of a company.
When learning about the company, we need to undertake extensive interviews with senior management and the heads of its major businesses. Factory and store visits, or evaluating mines and project sites first hand, are also critical parts in the overall process. Once all the ingredients are ready, we can combine our insights with the earnings forecasts. These forecasts are not just a linear extension of past growth rates and margins. Having foresight of non‐linear structural change is the real value addition of company analysis. Only then do we put a value on the company. At this stage, we need to leverage the market price on top of fundamental financial data. There are many different types of valuation methodologies depending on the nature of the business. The process is more of an art than a science and we need to be flexible and creative to aim at being roughly right rather than precisely wrong. At the end of this process we gauge if our view is different to the market consensus or not. If we have a differentiated view, we need to identify and articulate where and why we are different.
Structure of this Book
PART I
: My Story
PART II
: Laying the Groundwork
Chapter 1
introduces six basic steps to forecast industry TAM growth and then 10 additional considerations to help identify the ‘character’ of an industry.
Chapter 2
provides useful guidelines on the ‘earnings drivers’ in different industries.
Chapter 3
assists in identifying the ‘personality’ of a company.
PART III
: Analyse and Apply the Findings
Chapter 4
discusses how to combine all the accumulated knowledge and insights to produce financial forecasts.
Chapter 5
explains how a scorecard can be used to summarize and digest what has been learnt and forecast.
Chapter 6
aims to provide a framework for analysts to value companies in different sectors based on the fundamentals.
Chapter 7
provides structure on how to think about differentiated views versus the street.
PART IV
: What to Research and How to Power the Analysis
Chapter 8
provides suggestions on how to generate exciting new research ideas.
Chapter 9
addresses some specific issues such as Disruptors, Emerging Markets, Environmental, Social, and Governance, and Downturns.
Chapter 10
suggests a number of soft skills that can be used to power the analysis.
PART V
: Recap and Closing Thoughts
If the whole book has been read, a new analyst will have a detailed overview of the company research process. But what I am really hoping, as an author, is that analysts keep this book on their desks and refer to specific sections when they run into issues during their own researching process, and that they find something useful within the book to help navigate these issues.
I purposely avoided the use of specific company names and industry data throughout the book because what I want to discuss is the process of doing research as opposed to my directional view on specific industries or companies. However, all the examples used in the book are actual cases I have encountered.
Although this book is written mainly for equity analysts researching public companies, I would be delighted if private equity investors and managers in corporate strategy also find some parts of the book useful.
Before we get into the methodologies of company analysis, I would like to start with my own experience as an equity research analyst, which contains a number of real‐life examples of the issues that are discussed in later chapters. However, if you need practical advice immediately, you can go straight to Chapter 1 and visit my story later.
List of Acronyms
1P
First‐party relationship
3P
Third‐party relationship
ABS
Acrylonitrile Butadiene Styrene
ADR
American Depository Receipt
AI
Artificial Intelligence
AP
Accounts Payable
AR
Accounts Receivable
ARPU
Average Revenue per User
B2B
Business‐to‐Business
CAC
Customer Acquisition Cost
CAGR
Compound Annual Growth Rate
CAMEL
Capital, Asset Quality, Management, Earnings, and Liquidity
CEO
Chief Executive Officer
CFO
Chief Financial Officer
CMO
Contract Manufacturing Organization
CMOS
Complementary Metal‐Oxide Semiconductor
CNC
Computer Numerical Control
COGS
Cost of Goods Sold
CPU
Central Processing Unit
CROCI
Cash Return on Capital Invested
DACF
Debt Adjusted Cash Flow
DCF
Discounted Cash Flow
DDM
Dividend Discount Model
DeFi
De‐Centralized Finance
DM
Developed Markets
DRAM
Dynamic Random Access Memory
EBIT
Earnings Before Interest and Taxes
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization
EM
Emerging Markets
EPS
Earnings per Share
ESG
Environmental, Social, and Governance
ESOP
Employee Share Ownership Plan
EU
European Union
EV
Enterprise Value
EV/EBITDA
Enterprise Value/EBITDA
FCF
Free Cash Flow
Fintech
Financial Technology
GAAP
Generally Accepted Accounting Principles
GCI
Gross Cash Invested
GDP
Gross Domestic Product
GMV
Gross Merchandise Value
GPU
Graphics Processing Unit
GTV
Gross Transaction Value
IaaS
Infrastructure as a Service
IAS
International Accounting Standards
IPO
Initial Public Offering
ITPC
International Trade Partners Conference
KOLs
Key Opinion Leaders
LCD
Liquid Crystal Display
LiDAR
Light Detection and Ranging
LNG
Liquefied Natural Gas
LTV
Life Time Value
M&A
Mergers and Acquisitions
MAU
Monthly Active Users
MLCC
Multilayer Ceramic Capacitors
NAV
Net Asset Value
NFT
Non‐Fungible Token
OLED
Organic Light‐Emitting Diode
P&C
Property and Casualty
P/B
Price to Book
P/E
Price to Earnings
P/PPOP
Price to Pre‐Provision Operating Profit
PaaS
Platform as a Service
PEG
Price Earnings to Growth
PET
Polyethylene Terephthalate
PVC
Polyvinyl Chloride
R&D
Research and Development
REIT
Real Estate Investment Trust
REITs
Real Estate Investment Trusts
ROE
Return on Equity
ROIC
Return on Invested Capital
SaaS
Software as a Service
SEMI
Semiconductor Equipment and Materials International
SiC
Silicon Carbide
SKU
Stock Keeping Unit
SNS
Social Network Service
SOTP
Sum of the Parts
SPE
Semiconductor Production Equipment
SVOD
Subscription Video on Demand
TAM
Total Addressable Market
VR
Virtual Reality
WACC
Weighted Average Cost of Capital
Part ILessons from the Past: My Story as an Analyst
I plan to draw on my 33-year career as an equity analyst to offer anecdotes that illustrate why the intellectual challenge of equity analysis never gets stale, and why starting with some basic tools is so valuable. Repeatedly throughout my career I have moved into a different research environment that required me to look at a new landscape; whether this was being assigned to cover the capital goods industry in Japan in the 1980s or serving as the first Japanese analyst covering China H-share companies in the 1990s, the essentials were the same. What were the core characteristics of the industries and the sources of structural change? Who were the players and what was the distinguishing ‘personality’ of each? What were its earnings drivers and how were those changing against the industry backdrop? Finally, where did that mean the numbers were going and what were investors missing?
From Fish Cakes to Computer Numerical Control (1988–1995)
Anyone who has ever eaten a California roll at their local sushi place is familiar with surimi. But you have probably never given a thought to where the white, flaky ‘imitation crab’ meat comes from. I hadn't either until one day in 1988 when I was given my first assignment as a new equity analyst at Nomura Research Institute to analyse one of the top Japanese fishery companies. The pelagic fishery industry had been one of the major industries in Japan in the early twentieth century, and most companies made significant profits from it. After the 1960s, given the international pressure to ban whale fishing, fishery companies had to seek other sources of profit. Surimi, the fish cake, was a promising next pillar of profit growth.
When I was assigned to research the company, my supervisor told me to collect 50 name cards from the company before I started to write the report. It was not easy to come up with reasons to meet that many people in one company, hence I had to study thoroughly the company's products, its organizational structure, production, marketing, research and development (R&D), and financials. I read many books regarding corporate management and studied its competitors. By the time I had collected 30 name cards, I found that the relatively new innovation of the ‘Surimi Ship’ was the source of its future growth, and I was fascinated by the concept. Surimi is made out of cod fish, but the fish does not keep its freshness for long so the company decided to set up a surimi production factory on board, processing the cod fish while the ship was returning from the trip. Although it was a significant capital expenditure burden for the company, the differentiated technology gave it a sustainable, profitable business. To study the technology and its patents, I needed to visit the National Diet Library and the Ministry of Agriculture, Forestry and Fisheries several times in addition to company interviews (the internet did not exist then!). I felt I did almost everything an outsider could do to study the company. The only thing I thought I missed was to actually board the surimi ship, which the company politely declined when I asked.
Although profitability of the surimi business could be influenced by fluctuations in price, I had a strong conviction that the company had a structural competitive moat in its profitable surimi business. Hence, my confidence level in my earnings growth forecasts for the company was very high. I am still thankful to my supervisor who pushed me and allowed me to go as deep as possible to learn about one company for my first assignment as an equity analyst. As I was so junior at that time, I had less expertise in translating this extensive knowledge of the fishery company into a smart investment idea. As my first encounter with a company as an equity analyst, I learnt many invaluable lessons. Spending so much time researching one company gave me a real sense of how a large corporation operates in the real world, such as how various organisational functions work, how the chief executive officer's (CEO) strategy is cascaded down, how financial budgets are determined, the motivations of employees, and whether conflicts of interest exist between divisions, and different layers of leadership. As analysts become more senior and become busier, they tend to see a company as a stock or a financial instrument (an important perspective for investors), but it is helpful for analysts to remind themselves of the human elements behind the financial figures. Even now, more than 30 years later, when I think about the potential behaviour or decision-making process of a large company, what I learnt from this initial company analysis provides me with a benchmark of my thoughts.
After the fishery industry, I was assigned to cover the capital goods industry. I absolutely loved the sector and visited companies that manufacture products such as bearings, fire engines, tractors, industrial pumps, heat exchangers, knitting machines, and automated diaper assembling equipment. Every company had its own history and a strong sense of pride in its product. As such, when I showed my sincerity and eagerness to learn about their business, they were very generous with their time. I learned new things every day and even started to like the smell of machine oil. I still remember the factory head of a major bicycle parts company commenting that they supplied some critical car parts to a top automotive company with only minimum profit. Although the company was the dominant player in the bicycle parts industry globally and very profitable, they kept the less profitable car parts business to keep up with ‘major league’ manufacturing technologies. The company is still the dominant player in their field today.
I sometimes made a terrible stock call. One day I found an interesting short article about ‘low-cost CNC’ in a machine tool industry magazine. Machine tools are used to curve metals into various shapes and are often called ‘mother machines’ because they produce core parts of other machines. There were many machine tool companies globally at that time, but the key component, CNC (computer numerical control: a dedicated computing unit and servo motors to control positioning of metal cutting tools), was largely supplied by one Japanese company. This CNC maker was highly profitable and had a disproportionate share of the industry profit pool while its customers, the machine tool makers, were suffering from low margins and significant earnings volatility. The magazine article talked about two start-up companies in California that had launched a substantially lower-priced CNC system operated by personal computers. I was very excited to read the article because those companies could totally reshape the machine tool industry structure through technology innovation.
My boss was generous enough to send me to the US West Coast to meet the founders of those private companies. Although I did not have an engineering background, I had studied CNC enough to hold a sensible conversation with them, and they took me seriously. The technology seemed to be legitimate and had a good track record of initial customer wins. The manufacturing facilities were modern and organized. I went back to Japan and cross checked what I had learnt with several industry engineers. Their feedback was generally favourable. So, with due diligence, I wrote a fairly pessimistic report regarding the future profitability of the dominant CNC company. I was completely wrong. The low-cost CNC stayed as a niche product and the dominant CNC company continued to grow their business very successfully and profitably. I learned a painful lesson. I was too excited about the initial idea of a dramatic shift in industry dynamics and did not pay enough attention to the multiple reasons why the incumbent had been so strong.
