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Standard & Poor’s Equity Research Methodology

BOTTOM-UP COMPANY ANALYSIS
Products
Company Fundamental Analysis1 Company Valuation Analysis Review and Services

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 Retail
MACRO AND ECONOMIC
Advisor Insight
ANALYSIS Review public Conversations with Prepare 3-Year Review financial Assess: Finalize Earnings Analyst uses multiple criteria for valuing Establish Intrinsic Value Supervisory Custom Newsletters
Decide STARS recommendation
information company manage- Preliminary assumptions Model a company, including: ■ Target Price over 12 months (refer to inside panel for details on S&P’s analyst review Equity Liaison Desk
When conducting bottom-up ment for detailed Earnings Model with company as ■ Management team ■ Intrinsic Value Analysis ■ Analyst assigns a Risk Ranking for regulatory
information appropriate for com- 5 STARS Ranking System) Industry Surveys
company analysis, analysts are ■ 10K’s ■ Competitive ■ Determine earnings ■ Relative Valuation Assessment (High/Medium/Low) of and compliance
expected to incorporate Macro ■ EPS Growth Rate pany guidance (e.g. quality ■ Incorporate risk assessment rating Market Insight
■ 10Q’s environment ■ Sum of the Parts projected share volatility and risk of into overall STARS ranking (For purposes
and Economic Analysis. ■ Establish relationships earnings comparisons) MarketScope
■ Annual Reports ■ Earnings Prospects ■ Suppliers ■ Evaluate corporate capital loss
with new companies ■ Risk Assessment – Analyst incorporates a more details on Standard & Poor’s
■ Balance sheet governance Model Portfolios
■ Conference ■ Buyers “risk premium” to derive a valuation Risk Ranking Assessment, call
■ Most meetings with and cash flows ■ Project Standard 1-800-523-4534.) NetAdvantage
Investment Policy Calls ■ Substitutes
companies done via & Poor’s Core
Committee (IPC) ■ Barriers to entry Pocket Guides
phone; some in-person Earnings, S&P’s
meetings ■ Regulatory ■ Company value Portfolio Advisor
■ Meets weekly and is more accurate, Criteria / Definition
responsible for determining ■ Obtain a better environment proprietary repre- ● P/E trading history Sector Scorecard
understanding of: sentation of the Intrinsic Value Analysis ● High/low in cycle Stock Guides
Standard & Poor’s analytical
● Trends true performance ■ Determine security’s “intrinsic value” based on discounted ● Current P/E level justification Stock Reports
views on investment trends of a firm’s ongoing
● Leverage/margins “free” cash flow (DCF) analysis. Estimates of future “free” cash ■ Valuation vs. appropriate index The Outlook
■ Mission: operations flows are discounted back to current dollars, including variables
● Efficiency programs Standard & Poor’s Core Earnings Calculation
Ensure Standard & Poor’s like risk assessment and capital structure Sum of the Parts
● Costs - current, Institutional
views are reached through a changes Included Excluded ■ Present value of shares vs. current share price ■ Determining “fair value” of a stock by determining private
deliberative, consistent process ■ Employee stock option grant expense ■ Goodwill impairment charges ■ 10-15 year projection market values for a firm’s individual units Compustat Data
that involves input from a ■ Restructuring charges from ongoing ■ Gains/losses from asset sales ■ Defined parameters around DCF to make it more reasonable ■ No clear comparison and/or conglomerate Equity Insights
diverse group of Standard & (e.g. interest rate inputs) ■ Break divisions up as stand-alone business units Industry Surveys
operations ■ Pension gains
Poor’s senior analytic personnel ■ Write-downs of depreciable or ■ Litigation or insurance settlements ■ Calculate a relative value for each division Institutional Equity Reports
amortizable operating assets and proceeds Relative Valuation ■ Arrive at a blended valuation
■ Analysis includes: ■ Assessing a security’s relative value by comparing appropriate
IPC Notes
■ Pension costs ■ Reversal of prior-year changes
financial ratios across peer groups Monthly Investment Review
● Interest rate forecasts ■ Purchased research and and provisions Risk Assessment
development expenses ■ Comparison with industry group ■ Technicals
Sector Watch
● Market performance forecasts ● Price/Earnings (P/E)
■ Merger/acquisition related expenses ■ Insider buying US Financial Notes
■ Unrealized gains/losses from ● Efficiency
● Economic, political and related ■ Beta
developments of interest to hedging activities ● Margins
investment community
● Consensus concerning effect
of such developments on S&P’s
view of financial markets, Ongoing Analytical Review
including recommended
percentage asset allocation Ongoing Analytical Review
among stocks, bonds and cash Step 11 Repeat Steps 1, 2, 3, 7, 8, 9 ■ Continuous committee-based evaluation of STARS recommendation ■ Constant updates for covered companies from primary sources. Goal: 7-8 updates per year
● Quarterly updates published and distributed ● Material events ● Changes in recommendations ● Stock Report updates ● MarketScope updates ● First Call notes
Sector Strategy
and Guidance Step 1 Step 2 Step 3 Step 7 Step 8 Step 9
■ Chief Investment Strategist
provides guidance on past and
current sector trends and
forecasts top and bottom
performing sectors.
Company Coverage Criteria
■ Group Sector Heads meet
regularly with Global and
Regional Research Directors to
incorporate input from equity Core STARS Coverage Criteria Additional Coverage Criteria Deletions to Equity Coverage Number of Companies Covered Per Analyst
1 Standard & Poor’s analysts’ access to information will
analysts from all sectors to ■ All S&P 500 Index 2 ■ S&P Composite 1500 Index constituent ■ Negative corporate actions ■ 20-25 companies always be subject to applicable legal requirements concerning
formulate a collective bottom-up
investment strategy. This ■ 300 of the S&P MidCap 400 Index ■ Significant trading volume (bankruptcy, mergers and acquisitions) fair disclosure.
2 Excluding Standard & Poor’s parent, the McGraw-Hill
bottom-up input, in the context ■ 200 of the S&P SmallCap 600 Index ■ Market capitalization ■ Dropped from S&P Composite 1500 Index Companies.
of past and current sector
■ Key non-U.S. stocks ■ Corporate actions (mergers/acquisitions, spin-offs) ■ Stock price < $5/share
trends and macro-economic The equity research reports and recommendations provided by
projections, support S&P’s ■ Emerging growth companies ■ Lack of investor interest Standard & Poor’s Equity Research are performed separately from
any other analytic activity of Standard & Poor’s. Standard & Poor’s
holistic sector weight strategy Equity Research has no access to non-public information received
and recommendations. by other units of Standard & Poor’s. Standard & Poor’s does not
trade on its own account.