Investment Banking Series: Equity Story

Investment Banking Series

Post 6 Equity Story

1. What is it anyway?

Equity Story is, in its essence, the reasoning why the particular stock should be bought by investors. It emphasizes the strong side of the company and places the stock in either the value or the growth category. In a nutshell, the value stock is expected to have little price appreciation, but pay out relatively high dividend, whereas the growth stock is expected to have a high appreciation potential, but not necessarily pay much dividend. How a stock is classified depends on several factors, such as where in the industry life cycle it is, what the macro conditions are, what industry it belongs to, or sometimes even if it has a hot buzzword in its description.

For instance, a power generation company would usually be classified as a value stock: there is very little growth potential, but the cash flows are steady and not as much correlated with the economic conditions. An Internet portal or a biotech company are at the other end of the spectrum. They may grow very rapidly, but will hardly have enough cash to pay high dividends. Not that they have to - as long as they keep growing, investors will be happy. Now a good example of a buzzword stock until 2008 was China. Every company listed in Hong Kong had absolutely crazy multiples and was heavily oversubscribed.

2. How they do it

The equity story is a good example of "art rather than science" concept. There is no predefined format you can simply put data into. It has a lot in common with advertisement - you have to be creative. The description below is therefore, just an example and not a fixed structure.

An equity story would often start with positioning the company: assigning it to the appropriate sector, stating what its current ranking in the industry is, and what strengths it has as compared to the competitors. It then proceeds to the macro conditions to support the case for the company's positive prospects. It may be the new technological paradigm, the stage of the economic cycle, the demographic trend that expands the customer base, or any other positive development to promote the image of a company with excellent potential. Next, some company data summarized in graphs and tables to support the idea of macro trend boosting company performance is provided. This may be the number of new accounts for a bank, the number of new users for an Internet company, the number of shipments for a logistics company, and so forth. Depending on the type of the offering, there may be a page that will summarize the appealing points for certain investor groups, for example High Net Worth Individuals or Institutional Investors. Finally, a summary page with the bullet points highlighting the "Why XYZ Inc.?" follows, that ideally should provide the catch phrases for Sales to work with.

3. Lessons

Creating an equity story is basically connecting the understanding of the company and of the investor base together, and putting all the information into a story that focuses on the matching pieces. The keyword here is "understanding". Different investor groups have diverging interests, which also have the unpleasant habit of changing over time. So it is important to follow the trends. In most companies, Sales department regularly conducts some kind of investor survey to monitor the changing sentiment, so getting your hands onto it will help a great deal. Also, more general sources like local financial publications may provide some insight. In Japan, Nikkei Veritas, formerly Nikkei Kinyu Shimbun, can be of help. And of course, Financial Times and Wall Street Journal are very useful wherever you work.


Links to other posts in the investment banking series:
Post 1: Series Introduction
Post 2: Deal from Sourcing to Completion
Post 3: Pitch Books
Post 4: Valuation, Part 1
Post 5: Valuation, Part 2
Post 7: Roadshows