What Does Coverage Initiated Mean?
Coverage initiated occurs when a brokerage or analyst issues their first rating on a particular stock. These ratings initially were "buy," "sell," and "hold"; however, as time has progressed they have expanded to include others such as "strong sell," "strong buy," "underperform" and "outperform."
Coverage Initiated Explained
Coverage initiated often takes place after a company has recently gone public. Prior to this the company has not received any official analyst ratings although usually a lot of press has surrounded the company in its later growth phases and rounds of venture capital or private equity investments.
When coverage is initiated, the media usually provides notice to investors ahead of the event, including speculation about what the rating(s) could be. Many sell-side investment analysts concurrently publish an "initiating coverage" report, followed by periodic updates. Certain media sites like the Wall Street Journal’s Marketwatch and Bloomberg will aggregate these initial ratings into an average “analyst estimate.”
Unlike many regular analyst reports, coverage initiated reports don’t always coincide with a company’s earnings call.
Coverage Initiated and the Role of the Analyst
Many analysts working for sell-side firms work arduous hours. During the first few years of an analyst's career, they can expect to focus on gathering relevant data, updating comparison spreadsheets and financial models, and reading relevant news and industry publications – all building a solid fundamental understanding of a particular business, sector or industry. Some firms will require that analysts pass one more levels of the CFA exam in order to advance, along with their Series 7 and Series 63 licenses.
Coverage Initiated and Price Target
In general, an analyst will arrive at a specific price target in her report. An analyst derives this number using certain key drivers like sales. In a discounted cash flow (DCF) model, the analyst will start by projecting a company’s future free cash flows. From there they will discount them, using a required annual rate, to arrive at a present value estimate.
In turn, this present value estimate becomes the price target. If the value that the analyst arrives at through DCF analysis is higher than the company’s current share price, they will mark the security as underpriced and potentially issue a "buy" rating; if the present value estimate is lower than the market price, they could initiate coverage with a "sell" and mark the security as overpriced.