Research Reports

EXAMPLE 1-10 Research Reports

The following two passages are closely based on the valuation discussions of actual

companies in two short research notes (for Passage A, a two-page report dated March

2002; for B, a single-page report issued July 2001). The company names used in the

passages, however, are fictional.

(A) At a recent multiple of 6.5, our earnings per share multiple for 2002, the shares

were at a discount to our projection of 14 percent growth for the period . . . MXI

has two operating segments . . . In valuing the segments separately, employing

relative acquisition multiples and peer mean values, we found fair value to be

above recent market value. In addition, the shares trade at a discount to book

value (0.76). Based on the value indicated by these two valuation metrics, we

view the shares as worth holding. However, in light of a weaker economy over the

near term, dampening demand for MXI’s services, our enthusiasm is tempered.

33Cornell (2001) is one example, and comments in the financial press have appeared from time to time.

28 Equity Asset Valuation

[Elsewhere in the report, MXI receives the firm’s highest numerical quantitative

outlook evaluation.]

(B) Although TXI outperformed the overall stock market by 20 percent since the

start of the year, it definitely looks undervalued as shown by its low multiples

. . . [the values of the P/E and another multiple are stated ]. According to our

dividend discount model valuation, we get to a valuation of ¤3.08 implying an

upside potential of 36.8 percent based on current prices. The market outperform

recommendation is reiterated. [In a parenthetical expression, the current dividend,

assumed dividend growth rates, and their time horizons are given. The analyst also

briefly explains and calculates the discount rate. Elsewhere in the report the current

price of TXI is given as ¤2.25.]

Although some of the concepts mentioned in the two passages may not yet be

familiar, we can begin to assess the above two reporting efforts.

Passage A communicates the analysis awkwardly. The meaning of ‘‘the shares were

at a discount to our projection of 14 percent growth for the period’’ is not completely

clear. Presumably the analyst is projecting the earnings growth rate for 2002 and stating

that the P/E is low in relation to that

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