Guidelines for Investment Research Challenge Research Paper

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GuidelinesforInvestmentResearchChallengeResearchPaper

August25,2008

GeneralGuidelines:

ThetemplatefortheInvestmentResearchChallengeresearchpapercanbefoundat

TheNewYorkSocietyofSecuritiesAnalysts(NYSSA)originallydevelopedtheInvestmentResearchChallengesixyearsago. Forveryhelpfulinformationonthecompetition,pleasesee

Scrolldowntothebottomofthepagetothesectioncalled2007-2008IRCAudioRecordings. NYSSAprovidestrainingsessionsfortheirstudentparticipantsintheIRC;audiorecordingsoftheirtrainingsessionsareavailableontheirwebsite. TheseareanexcellentresourceforallparticipantsintheIRC.

GuidelinesfortheCFAVirginiaInvestmentResearchChallenge:

Thebodyofyourpaperislimitedto8-10pages. Additionalexhibits,includingyourfinancialspreadsheets,maybeattached.Thereisnopagelimitforexhibits.

PleaseuseTimesNewRoman14ptBoldforyoursectionheadings,andTimesNewRoman10point(notbold)forthetext. Besuretonumberyourpages.

Donotputthenameofyourschoolonthepaper. Thegraderswillnotknowtheidentityoftheschoolswhentheyevaluatethepapers. Eachteamwillbeassignedaletter(TeamA,TeamB,etc.)whichshouldappearatthetopofeachpageofthepaper.

Notethattherearesevensectionheadingswhichmustbeincludedinyourpaper: InvestmentSummary,Valuation,BusinessDescription,IndustryOverviewandCompetitivePositioning,FinancialAnalysis,InvestmentRisks,andOther.

Thebulletpointsincludedbelowaretogiveguidanceforwhatshouldbeincludedineachsection. Youshouldusetheseasastartingpointtoframeyouranalysis. Youdonothavetodiscusseachbulletpointindetail;choosewhatismostpertinenttoyourcompany. Youdonothavetolimityouranalysistothebulleteditems;includeotherideasthatunderlieyourreasoningandprojections.

Useyourcreativitytoevaluatewhatcouldhappentothecompanyoverthecoming12-18monthsandwhatinvestorswouldbewillingtopayforthatperformance. DonotjustregurgitateeitherwhatWallStreetanalystsaresayingorwhatthecompanytellsyou. Thebestopportunitiestomakemoneyininvestingcomefromseeingpossibilitiesbeforeotherinvestorsseethem.

InvestmentSummary(20points):

• Beginwithapersuasivesummarystatementofyourinvestmentrecommendation(buy,sell,hold),majorreasons/catalystsforthatrecommendation,andprojected12-18monthvaluation,includingprojectedupsideordownsidefromcurrentprice.
• Giveabriefexplanationofeachofyourmajorcatalystsandthelikelihoodofitoccurring.Detailsforthecatalystsshouldbedevelopedinothersectionsofthepaper. Alsoincludesignificantriskfactorsthatcouldpreventyourcatalystsfrombeingrealized.

Valuation(20points):

• Indicateyour12-18monthpricetarget,andexplainhowyouarrivedatthatvalue.
• Determinethevaluationmetricsthataremostusefulforvaluingyourcompany. Possibilitiesincludeprice/earnings,price/book,price/sales,price/cashflow,EV/EBITDA(enterprisevalue/earningsbeforeinterest,depreciation,andamortization),price/netassetvalue,price/replacementcost,etc. Explainwhyyouchosethemetricsyouused.
• Discusshowyourcompanyhastradedinitsownhistoryontheappropriatevaluationmeasures. Consideringyourprojectionsoffuturegrowthandriskfactors,isyourcompanylikelytotradeatthehigherorlowerendofitshistoricalvaluationoverthenextyear? Willittradeoutsidehistoricalranges?
• Compareyourcompanytoitspeergroupontheappropriatevaluationmeasures,includingbothtrailing12months(TTM)andforwardlookingmetrics. Whatfactorshavecausedyourcompanytotradeinlinewith,oratapremiumordiscount,toitspeers? Isthevaluationrelationshipbetweenyourcompanyanditspeerslikelytoremainthesameoverthenextyear,orisyourcompanydoingsomethingwhichwillcauseittoberevaluedeitherhigherorlowerversusthegroup? Includeacomparisontableofyourcompanyversusitspeerseitherinthetextorintheappendixtothepaper.
• Includeadiscountedcashflowanalysis.
• Whataretheriskstoyourpricetarget?

BusinessDescription(5points):

• Identifylocationofheadquarters,geographicdispersionofrevenuesandearnings,numberofemployees.
• Whatdoesthecompanydo? Describemajoroperatingsegmentsandcontributiontorevenuesandearnings.
• Describeanythingthatgivesthecompanyacompetitiveadvantage,suchastechnology,patents,marketniche,etc.
• Indicatethemajortypesofcustomersandanyconcentrations.

IndustryOverviewandCompetitivePositioning(15points):

• Describetheoverallsizeandgrowthtrendsoftheindustryandanybarrierstoentry.
• Describethemarketshareofthecompanyanditsmajorcompetitors. Howhasthecompany’smarketshareandcompetitivepositioningchangedovertime? Whatadvantages/disadvantages doesthecompanyhaveversusitspeers?
• Identifymajordriversoftheindustry,suchastechnologicalinnovation,economiccycles,interestrates,orcommodityprices.
• Arethereparticularopportunities/challengesfortheindustryatthistime? Consideravailabilityoflabor,pricingcycles,backlogs/pipelines,rawmaterialpricingandavailability,distribution,etc.

FinancialAnalysis (20points):

• Analyze5yearsofhistoricalstatementstoseetrendsintheincomestatement,balancesheet,andcashflow. Includeratioanalysisforassetturnover,profitability,leverage,interestcoverage,returnonassets,andreturnonequity. Prepare3-5yearsofprojectionsfortheincomestatement,balancesheet,andcashflow.
• Usingthesetrendsandyourprojections,discussyourexpectationsforrevenues,margins,earningsgrowth,balancesheetmanagement,andcashflow. Explainthedriversbehindyourexpectations.Consideritemssuchasnewproductintroductions,marketshare,storegrowth,researchdevelopmentspendingandresults,technologicalspendingandefficiencies,cyclicality,capitalexpenditures,leverageandinterestexpense. Doesthecompanygroworganically,fromacquisitions,orboth?
• Whatactionscouldthecompanytaketoimproveanyofthemetricsdiscussedabove? Examplesincludeassetsalesoracquisitions,operationalchanges,addingorreducingleverage,refinancingdebt,sharebuybacksordividendincreases. Arethereotherissueswhichwillimpactthefinancialresultsofthecompany,suchaspensionobligations,environmentalexpenditures/liabilities,litigation,proposedregulations? Arethereaccountingissues/changesthataresignificant?
• Whywillfutureresultsbethesameasordifferentfromthepast?

InvestmentRisks(15points):

• Evaluatethebiggestrisksfacingthecompany. Examplesinclude,butarenotlimitedto,productqualityanddevelopment,productobsolescence,pricing,expenses,availabilityofskilled/unskilledlabor,competition,marketshare,cyclicality,leverage,interestrates,economiccycles,andcomputersystemsanddatamanagement. Theseimpactthevaluationmultiplesforyourcompany.
• Aretheremergerintegrationissues? Isthecompanylikelytoacquireorbeacquired?
• Howsignificantaretheseriskstoyourinvestmentthesis? Isthecompanytakingactiontomitigatetherisks? Whatistheprobabilitythatthecompanywillbeabletoperforminlinewithyourprojections?

OtherHeadingsRelativetoCompany(5points):

• Includeanysignificantissuethathasnotbeenaddressedelsewhere. Somepossibilitiesaremanagement,thetypesofholders(valueversusmomentuminvestors,hedgefunds,etc.),institutionalownershipconcentrations,insiderholdings,shortpositions,etc. Hastherebeenoristherelikelytobemanagementturnover? Ifso,whatistheanticipatedimpact?