Stock Pitch Guidelines Template

Valuation and Discounted Cash Flow (DCF) Analysis Case Study: Jazz Pharmaceuticals [JAZZ] Investment Recommendation and Stock Pitch Guidelines In this document, we’ll lay out guidelines for making an investment recommendation / stock pitch for Jazz Pharmaceuticals [JAZZ] and explain how you might use the results of the valuation and DCF to argue that the company is overvalued, undervalued, or valued appropriately. NOTES AND DISCLAIMERS: Please do not construe this as “investment advice.” We are NOT recommending that you invest in any of the companies discussed here. This is a tutorial about how to research and pitch companies that you think are interesting, and how to use what you’ve learned in this modeling course to support your arguments. Table of Contents:    

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What You Will Learn Why Stock Pitches Are Important What You Need for a Stock Pitch How to Structure a Stock Pitch o Recommendation o Company Background o Investment Thesis o Catalysts – Tips and Healthcare-Specific Examples o Valuation o Risk Factors and How to Mitigate Them The Top 3 Most Common Mistakes in Stock Pitches and How to Avoid Them

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What You Will Learn: 

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Why stock pitches and case studies are so important in hedge funds / asset management, equity research, and even in fields like investment banking, private equity, and corporate finance. What kind of information and analysis you need to properly pitch a stock, plus the 6-point structure that you can apply to ANY type of investment pitch – even outside of equities, in fields like fixed income or commodities. How to structure a stock pitch, including the 6 key points that you always need to mention, how to research each of the 6 points, and the top 3 stock pitch mistakes to avoid.

Why Are Stock Pitches Important? 

They’re Critical in Interviews – Even outside of public markets roles, you must be able to pitch ideas for investments, clients, potential buyers/sellers, and so on, for interviews across the buy-side and sellside and sometimes even at normal companies outside the finance industry.

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They Level the Playing Field – If you don’t have a 4.0 GPA from Harvard or top A-Levels and an Oxbridge degree, presenting an exceptionally well-thought out stock pitch is a great way to set yourself apart and get firms to hire you over the “Ivy League crowd.” And if you are in that “crowd,” you also need a great stock pitch to set yourself apart from your competition.

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They ARE What You Do on the Job – You’ll make these pitches all the time when presenting ideas to the investment committee or others at your firm and attempting to “sell” them on your ideas. Even in sellside roles such as investment banking, you’ll have to write CIMs and other documents that pitch companies to investors, and to do that you need to understand how investors think about companies.

Return to Top. What Do You Need for a Stock Pitch? http://breakingintowallstreet.com

You need a combination of industry research, company research, and valuation insight. Just like what we covered in the first valuation lesson, it comes down to narrative + numbers. In this case study, we’ve mostly focused on the valuation and running the numbers for JAZZ because it’s boring to show you the results of Google searches about the pharmaceutical industry, or correspondences with industry professionals on LinkedIn. However, all of those are important and you would need to do (more of) them in an “on the job” pitch (interview / case study pitches are more time-pressured). Here are the 5 major document categories we need in this pitch for Jazz Pharmaceuticals: 1. Company Research – Read their filings, investor presentations, and equity research. What we’ve done so far in this case study is a good start. You could always consult more sources, but in a time-pressured case study this is about the best you can do. 2. Industry Research – Read industry reports issued by IDC, the Big 4 accounting firms, and any industry-specific journals you can find. Look at recent M&A and financing activity, read any recent articles about the industry in The Wall Street Journal or Financial Times, and leave no stone unturned as you figure out the key drivers. For JAZZ, we might consult BioCentury, World Pharma News, and Fierce Pharma. 3. Company Documents – Their most recent annual report (the 10-K for US-based companies) and any interim reports (10-Qs in the US), recent investor presentations (see the Investor Relations section of their site), earnings call transcripts, and potentially even equity research (but be careful – see the section below on mistakes to avoid). 4. Channel Checks and “Experts” – The idea here is to talk to people in real life and to contact suppliers, partners, and even employees of other companies in the same market and probe them for information on overall trends and the company’s prospects. For example, for Jazz Pharmaceuticals we should reach out to a few employees at their biggest customers via LinkedIn, speak with any hospitals / medical http://breakingintowallstreet.com

groups / insurance firms that pay for their products, and reach out to key suppliers and channel partners. 5. Valuation – In the context of a stock pitch, the purpose of a valuation is to say, “Even with conservative assumptions, this company is still substantially undervalued, so its stock price may rise in the future” (if you’re making a LONG recommendation) or to say, “Even with aggressive assumptions, this company is still substantially overvalued, so its stock price may fall in the future” (if you’re making a SHORT recommendation). The DCF model is the most important methodology for traditional branded bio-tech / pharmaceutical companies because it lets you project “far in the future” scenarios more easily, so that’s what we focus on here. However, we also look at precedent transactions or public comps in this case study to cover both intrinsic and relative valuation. How can you tell when you already have enough research? Ask yourself whether or not you have specific answers to the following questions: 

Are you recommending for or against investing in this company, and what are the 3 main qualitative and quantitative reasons why?

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How much money could you make if it increased or decreased to the share price that you think it’s actually worth?

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What are 2-3 key events or potential events (“catalysts” – see the action below) over the next 6-12 months that could cause its stock price to change?

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What are the top 2-3 risks to your recommendation, what’s the approximate numerical impact of each risk, and how could you mitigate each risk?

If you CANNOT come up with good answers to those questions, keep working until you can. What to AVOID When Gathering Information:

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Over-Reliance on Equity Research – Yes, get industry data from equity research and use it to find out more about the market, but DO NOT form your own investment thesis based on sell-side research. These reports tend to be overly optimistic and fail to consider the risk factors in many cases. Also, you’ll very, very, very rarely encounter financial projections that are significantly different from the “consensus.”

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Online-Only Research – You might be able to get away with this, but do you want to take the chance in a competitive interview process? Candidates who perform the best talk to real people in the market and do the channel checks described above.

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Only One Source – Just as you would diversify your portfolio to reduce risk, you also need to diversify your sources or you’ll risk using biased, incomplete information.

Return to Top. How Do You Structure a Stock Pitch? Here’s the 6-point structure we recommend using: 1. Recommendation – Long or short, and what do you think the company/asset is really worth? “Neutral” recommendations are not recommended because you need a pricing imperfection to make money. 2. Company Background – What are its products, how much revenue/EBITDA does it have, what is its market cap, and what are its current valuation multiples? 3. Investment Thesis – The stock is priced imperfectly because of these 2-3 key factors. The market has not factored them in because…. But you believe they’ve been overlooked, and that there’s a chance to gain significantly by longing/shorting this stock. Or, on the flipside, the market has incorrectly factored in certain things that do not matter that much.

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4. Catalysts – And certain key events in the next 6-12 months will cause the market to “realize” this pricing imperfection, resulting in a correction and the potential to make money. Key events might be new product launches, acquisitions, earnings announcements, competitors’ tactics changing, divestitures, positive clinical trial data, and financing activities such as share repurchases or issuing debt / equity. 5. Valuation – For a long recommendation, you need to show that there’s a good chance that the stock is undervalued in some way (e.g., right now it’s trading at $25, but there’s a reasonable chance it’s worth $35$40) by showing your public comps, precedent transactions, and DCF analyses; for a short recommendation, you do the opposite and show why the stock is overvalued. 6. Risk Factors and How to Mitigate Them – What are the main reasons why you might be wrong? And yes, everyone is wrong sometimes. You have to lay out the top 2-3 market and companyspecific reasons why your investment thesis might be wrong, and then explain what you can do to hedge against these risks… even if you’re wrong, could you at least limit your losses? In many cases, the risk factors will be directly related to the catalysts you cited above. Return to Top. Recommendation The goal of every single stock or investment pitch is to convince the other person that your idea has an asymmetric risk profile. In other words, by investing, they have a 75% chance of gaining 15% and only a 25% chance of losing 15%... or whatever the actual numbers are. The “expected value” must be positive for the pitch to be convincing. The trick is that you don’t want to be super-specific because that will just lead to questions you cannot answer, such as, “So how do you know there’s exactly a 75% chance of gaining 15%?” You can be (relatively) specific with the potential to gain or lose a certain percentage since that should come from your valuation, but you don’t want to list exact probabilities – it’s better to leave it as “a significant chance” or “a greater than 50% chance” or something like that. http://breakingintowallstreet.com

You should structure the initial recommendation like this: 1. Long or short, current share price, percentage by which it’s overvalued or undervalued, and the top 2-3 reasons why the stock price will change in the next 6-12 months. 2. 2-3 potential catalysts that will result in the stock price changing in the next 6-12 months (see the section below on catalysts). 3. 2-3 investment risks (company-specific and/or market-specific) and how you might mitigate those risks through other investments, protective options, etc. Return to Top. Company Background This is the easiest section of the entire stock pitch because you just list key financial stats about the company (revenue, EBITDA, market cap, and current multiples), a quick overview of what it does, and its key business segments. Don’t just copy in the descriptions from the company’s filings or annual reports – you need to summarize the most important points, while leaving out the corporate-speak. Return to Top. Investment Thesis Here’s your template for this section: “Currently, the market thinks of this company in X way, and as a result it trades at approximately $Y per share. However, I think the stock is priced imperfectly because of reasons W and Z. The market hasn’t priced in these factors yet because of reasons A, B, and C. As a result, I am making a [LONG/SHORT] recommendation on the company, with a targeted price range of [$D – $F] in the next 6-12 months. These reasons are significant because [Explain how each of them directly ties into the company’s implied valuation, ideally showing sensitivity tables

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or any other output from your analysis – your reasons must be specific to be effective]. Even if only one of these reasons ends up making an impact, there’s still significant upside potential in the stock price because [And then point to other analysis linking just one of these factors to the implied share price].” Return to Top. Catalysts It’s difficult to give a “template” for this section because each company and industry is different – but here are a few examples of what you might say in this part: 1. “Catalysts in the next 6-12 months include… [Summarize them briefly in the beginning].” 2. “Catalyst #1 is significant because the company could win an additional XX patients from it over the next 10 years, which would result in additional future cash flows of $Y, boosting its share price by $Z if the other assumptions remain the same.” 3. “Catalyst #2 is significant because the market has not yet priced in the true upside from the company being able to increase prices on Drug X by YY% in the future, which will be a major source of revenue growth for the company going forward. If it announces a price increase in-line with historical levels and gets no “pushback” from governments or insurance firms, in its earnings call XX months from now it will announce results that could lead to a market correction.” 4. “Catalyst #3 is significant because the market expects generics for Drug X to enter the market in YY years, but based on our research it will actually be more like ZZ years – resulting in $XX in additional cash flows for the company and an intrinsic per share value that’s higher by $WW.” Return to Top. Valuation

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This section mostly contains the output from your public comps, precedent transactions, and DCF analysis for the company in question. In this case, we have all three of these analyses as part of this case study. In addition to pasting in your output, however, you need to justify your assumptions and show a company’s valuation across different ranges of assumptions to illustrate that you’ve thought about a wide range of possible outcomes. If, for example, you’ve only considered the case where the company grows revenue by 10% per year in your DCF, you’re going to have a very difficult time explaining how you know that will be the exact growth rate. It’s better to look at a range of possible growth rates, highlight the ones that seem more likely, but at the same time also show that you’ve thought about the downside cases as well. With public comps and precedent transactions, you’re not defending your assumptions so much as explaining why your selection criteria was correct and how these companies and M&A deals apply directly to the company you’re pitching (or perhaps why one set is applicable but another set is less applicable). With Jazz Pharmaceuticals, for example, if we had modified the set of public comps and added in health insurance companies or hospitals, or even branded pharmaceutical companies, it would be very difficult to justify because the business models are too different. The “football field” chart we created is the ideal vehicle for showing the results of these methodologies. Return to Top. Risk Factors and How to Mitigate Them This is the most commonly overlooked or misinterpreted section of any stock pitch. Yes, the most obvious risk for a long/short recommendation is that the stock price moves in the opposite direction… but what causes that to happen?

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To determine that, you have to go back to your investment thesis and catalysts and link the risk factors directly to those points. The key here is specificity. Whenever possible, you need to tie each risk factor to a specific dollar impact on the company’s implied share price and indicate how you might protect against it, or at least reduce your potential losses. Here is the structure we recommend: 1. The Top 2-3 Risk Factors – For JAZZ, for example, key risk factors would be lower-than-expected Xyrem price increases, a less-effectivethan-expected outreach campaign to win new patients, and Xyrem generics entering the market earlier than expected. You would then attempt to estimate the implied per share impact from each of these (even a wide range is better than nothing at all). 2. How to Mitigate the Risks – For long/short equity stock pitches, you mitigate the risks mostly via protective options (e.g., put options for long recommendations and call options for short recommendations) and by longing or shorting other companies’ stocks that may move in the opposite direction from the company you’re analyzing. 3. And Even in the Worst Case… – Let’s say that you’re really, really wrong. How much are the company’s net assets worth if it goes bankrupt? Does it have any assets or divisions that it could sell off in the case of extreme financial distress? For short recommendations, how will you limit your losses if you’re completely wrong and the company’s stock price skyrockets? Does your valuation indicate that even in the worst case, there’s a low probability of the company’s share price falling below a certain number or rising above a certain number? Return to Top. The Top 3 Most Common Mistakes in Your Stock Pitch Structure and How to Avoid Them

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Here are the 3 most common mistakes we’ve seen with clients and students of our courses who are researching and valuing companies (or other assets) for use in their own pitches: 1. Inability to Support Assumptions – Why are you assuming higher revenue growth or margins in a certain year? What research or channel checks support that assumption? Why do you think the company will grow at a higher-than-expected or lower-than-expected rate? If the interviewer gets into a detailed discussion and you can’t back up each number in your analysis, you’ll be in trouble. 2. Poor or Non-Existent Catalysts – If your catalysts are beyond the 612 month range, that’s too far into the future for most hedge funds and asset management firms (remember, they report performance to their LPs frequently). Also, if you list catalysts but you’re vague about the specific price per share impact, or your catalysts are not companyspecific (e.g., “The economy will rebound due to new monetary policy!”) you’re also making a mistake. 3. Poor or Non-Existent Risk Factors and Mitigants – The most common mistake is to leave these risk factors out altogether, or to give risk factors that are too vague (e.g., “Emerging markets growth will be slower than expected” – yes, but what dollar amount of potential losses does that translate into for you?). Failing to give mitigants that are properly matched to the risk factors is another common mistake in this section. Return to Top.

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