Guidelines for Investment Research Challenge Research Paper



Guidelines for Investment Research Challenge Research Paper

August 25, 2008

General Guidelines:

The template for the Investment Research Challenge research paper can be found at . To sign in, use GIRCuser as the user name and CherryP!e as the password.

The New York Society of Securities Analysts (NYSSA) originally developed the Investment Research Challenge six years ago. For very helpful information on the competition, please see

. Scroll down to the bottom of the page to the section called 2007-2008 IRC Audio Recordings. NYSSA provides training sessions for their student participants in the IRC; audio recordings of their training sessions are available on their website. These are an excellent resource for all participants in the IRC.

Guidelines for the CFA Virginia Investment Research Challenge:

The body of your paper is limited to 8-10 pages. Additional exhibits, including your financial spreadsheets, may be attached. There is no page limit for exhibits.

Please use Times New Roman 14 pt Bold for your section headings, and Times New Roman 10 point (not bold) for the text. Be sure to number your pages.

Do not put the name of your school on the paper. The graders will not know the identity of the schools when they evaluate the papers. Each team will be assigned a letter (Team A, Team B, etc.) which should appear at the top of each page of the paper.

Note that there are seven section headings which must be included in your paper: Investment Summary, Valuation, Business Description, Industry Overview and Competitive Positioning, Financial Analysis, Investment Risks, and Other.

The bullet points included below are to give guidance for what should be included in each section. You should use these as a starting point to frame your analysis. You do not have to discuss each bullet point in detail; choose what is most pertinent to your company. You do not have to limit your analysis to the bulleted items; include other ideas that underlie your reasoning and projections.

Use your creativity to evaluate what could happen to the company over the coming 12-18 months and what investors would be willing to pay for that performance. Do not just regurgitate either what Wall Street analysts are saying or what the company tells you. The best opportunities to make money in investing come from seeing possibilities before other investors see them.

Investment Summary (20 points):

• Begin with a persuasive summary statement of your investment recommendation (buy, sell, hold), major reasons/catalysts for that recommendation, and projected 12-18 month valuation, including projected upside or downside from current price.

• Give a brief explanation of each of your major catalysts and the likelihood of it occurring. Details for the catalysts should be developed in other sections of the paper. Also include significant risk factors that could prevent your catalysts from being realized.

Valuation (20 points):

• Indicate your 12-18 month price target, and explain how you arrived at that value.

• Determine the valuation metrics that are most useful for valuing your company. Possibilities include price/earnings, price/book, price/sales, price/cash flow, EV/EBITDA (enterprise value/earnings before interest, depreciation, and amortization), price/net asset value, price/replacement cost, etc. Explain why you chose the metrics you used.

• Discuss how your company has traded in its own history on the appropriate valuation measures. Considering your projections of future growth and risk factors, is your company likely to trade at the higher or lower end of its historical valuation over the next year? Will it trade outside historical ranges?

• Compare your company to its peer group on the appropriate valuation measures, including both trailing 12 months (TTM) and forward looking metrics. What factors have caused your company to trade in line with, or at a premium or discount, to its peers? Is the valuation relationship between your company and its peers likely to remain the same over the next year, or is your company doing something which will cause it to be revalued either higher or lower versus the group? Include a comparison table of your company versus its peers either in the text or in the appendix to the paper.

• Include a discounted cash flow analysis.

• What are the risks to your price target?

Business Description (5 points):

• Identify location of headquarters, geographic dispersion of revenues and earnings, number of employees.

• What does the company do? Describe major operating segments and contribution to revenues and earnings.

• Describe anything that gives the company a competitive advantage, such as technology, patents, market niche, etc.

• Indicate the major types of customers and any concentrations.

Industry Overview and Competitive Positioning (15 points):

• Describe the overall size and growth trends of the industry and any barriers to entry.

• Describe the market share of the company and its major competitors. How has the company’s market share and competitive positioning changed over time? What advantages/disadvantages does the company have versus its peers?

• Identify major drivers of the industry, such as technological innovation, economic cycles, interest rates, or commodity prices.

• Are there particular opportunities/challenges for the industry at this time? Consider availability of labor, pricing cycles, backlogs/pipelines, raw material pricing and availability, distribution, etc.

Financial Analysis (20 points):

• Analyze 5 years of historical statements to see trends in the income statement, balance sheet, and cash flow. Include ratio analysis for asset turnover, profitability, leverage, interest coverage, return on assets, and return on equity. Prepare 3-5 years of projections for the income statement, balance sheet, and cash flow.

• Using these trends and your projections, discuss your expectations for revenues, margins, earnings growth, balance sheet management, and cash flow. Explain the drivers behind your expectations. Consider items such as new product introductions, market share, store growth, research & development spending and results, technological spending and efficiencies, cyclicality, capital expenditures, leverage and interest expense. Does the company grow organically, from acquisitions, or both?

• What actions could the company take to improve any of the metrics discussed above? Examples include asset sales or acquisitions, operational changes, adding or reducing leverage, refinancing debt, share buybacks or dividend increases. Are there other issues which will impact the financial results of the company, such as pension obligations, environmental expenditures/liabilities, litigation, proposed regulations? Are there accounting issues/changes that are significant?

• Why will future results be the same as or different from the past?

Investment Risks (15 points):

• Evaluate the biggest risks facing the company. Examples include, but are not limited to, product quality and development, product obsolescence, pricing, expenses, availability of skilled/unskilled labor, competition, market share, cyclicality, leverage, interest rates, economic cycles, and computer systems and data management. These impact the valuation multiples for your company.

• Are there merger integration issues? Is the company likely to acquire or be acquired?

• How significant are these risks to your investment thesis? Is the company taking action to mitigate the risks? What is the probability that the company will be able to perform in line with your projections?

Other Headings Relative to Company (5 points):

• Include any significant issue that has not been addressed elsewhere. Some possibilities are management, the types of holders (value versus momentum investors, hedge funds, etc.), institutional ownership concentrations, insider holdings, short positions, etc. Has there been or is there likely to be management turnover? If so, what is the anticipated impact?

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