Researching stocks with Equity Research Reports from Morningstar

Morningstar is a leading global independent equity research provider. We believe that a company’s intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth, or fair value estimate. There are 4 key components that drive the Morningstar rating: our assessment of the firm’s economic moat, our estimate of the stock’s fair value, our uncertainty around that fair value estimate and the current market price. This process ultimately culminates in our single-point star rating. Underlying this rating is a fundamentally focused methodology and a robust, standardized set of procedures and core valuation tools used by Morningstar's equity analysts, including our Capital Allocation rating.

Our equity analyst report includes all of Morningstar’s proprietary ratings and analyses to help investors evaluate a stock’s worth in order to make the best investment decisions to meet their financial goals.

There are 9 sections to our report. Here’s what investors can expect to read in each section:

Business Strategy and Outlook

This section highlights the analyst’s summary and analysis of the firm’s strategy. It identifies how the firm makes profits and communicates if its strategy is appropriate and feasible given its position in the industry.  

Bulls Say and Bears Say

The analyst highlights 3 key reasons that would boost or dampen the base case assumptions.

Economic Moat

The Morningstar Economic Moat rating describes the competitive dynamics of the firm’s given industry, as well as the company’s competitive positioning within the industry. This section highlights the sources of competitive advantage that exist, if any. We have identified 5 sources of economic moats: intangible assets, switching costs, network effect, cost advantage and efficient scale.

Fair Value and Profit Drivers

This section examines the Fair Value Estimate and rationale behind the analyst’s valuation of the company.  

Risk and Uncertainty

In this part of the report, the company’s Uncertainty Rating is discussed. Examined are potential risks to the business, as well as the confidence our analysts have in predicting the future cash flows. This section highlights key upside and downside risks to our forecast. 

Capital Allocation

This section provides the analysis behind our Capital Allocation, or Stewardship, rating. It examines the firm’s balance sheet, investments and shareholder distributions on behalf of shareholders.

Analyst Note

The analyst provides insights and analysis of recent events and earning releases that may impact the near-term or long-term outlook of the firm.

Analyst Note Archive

This section contains the last 6 months of Analyst Notes for quick reference.  

Financials

The last page of the report provides various financial metrics, including the trailing 12 months, year-to-date and 10 years of history. In addition, the report provides analyst historical and forecast data.

How often are reports published?

For each company covered by Morningstar analysts, Morningstar publishes quarterly notes, semi-annual models and annual reports. Morningstar analysts consistently monitor the companies and will publish notes whenever meaningful events arise, such as quarterly earnings, new product launches, mergers and acquisitions or a change in leadership.

How can investors better understand Morningstar’s equity ratings?

There are 4 key components that drive the Morningstar rating: our assessment of the firm's economic moat, our estimate of the stock's fair value, our uncertainty around that fair value estimate and the current market price. Let’s dive a little deeper into each of these components:

Economic Moat

The Morningstar Economic Moat rating plays a vital role in our qualitative assessment of a firm’s long-term investment potential and the calculation of our fair value estimate. An economic moat is a structural feature that allows a firm to sustain excess profits over a long period of time. We define economic profits as returns on invested capital (ROIC) over and above our estimate of a firm’s cost of capital or weighted average cost of capital (WACC). Without a moat, profits are more susceptible to competition. We have identified 5 sources of economic moats: intangible assets, switching costs, network effect, cost advantage and efficient scale.

Analysts assign one of 3 Economic Moat ratings: none, narrow or wide. Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide-moat companies are those in which we have very high confidence that excess returns will remain for 10 years, with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward the firm’s cost of capital more quickly than companies with moats.

When considering a company’s moat, we also assess whether there is a substantial threat of value destruction, stemming from Environmental, Social and Governance (ESG) risks, industry disruption, financial health or other idiosyncratic issues. A risk is considered potentially value destructive if its occurrence would eliminate a firm’s economic profit on a cumulative or mid-cycle basis. If we deem the probability of occurrence sufficiently high, we would not characterize the company as possessing an economic moat.

Fair Value Estimate

This is a Morningstar analyst’s estimate of the intrinsic value of what a stock is worth, calculated by determining how much we would pay today for all the streams of excess cash generated by the company in the future. We arrive at this value by forecasting a company’s future financial performance using a detailed discounted cash-flow model. By combining our analyst inputs with the moat rating, our models fade a firm’s ROIC and earnings growth rate from the end of an analyst’s explicit forecast horizon until the perpetuity period.

Uncertainty Rating

The Uncertainty Rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating represents the analyst’s ability to bound the estimated value of the shares in a company around the Fair Value Estimate. It’s based on the characteristics of the business underlying the stock, including operating and financial leverage, sales sensitivity to the overall economy, product concentration, pricing power, exposure to material ESG risks and other company-specific factors.

The rating is expressed as low, medium, high, very high or extreme. Each uncertainty rating has a corresponding set of price/fair value ratios that are used to assign star ratings as shown in the graph in the back of the report under the Research Methodology for Valuing Companies section.

Market Price

This covers the current market prices of a stock.

Once Morningstar analysts determine the fair value estimate of a stock, we compare it daily with the stock’s current market price while adjusting for the uncertainty rating. The star rating is re-calculated at the market close on every day the market is open. Morningstar uses a 5-star rating system. Since our star ratings are guideposts to a broad audience, individuals must consider their own specific investment goals, risk tolerance, tax situation, time horizon, income needs and complete investment portfolio, among other factors.

5 stars
Morningstar believes appreciation beyond a fair risk-adjusted return is highly likely over a multi-year time frame. The current market price represents an excessively pessimistic outlook, limiting downside risk and maximizing upside potential.

4 stars
Morningstar believes appreciation beyond a fair risk-adjusted return is likely.

3 stars
Morningstar believes that investors are likely to receive a fair risk-adjusted return, approximately the cost of equity.

2 stars 
Morningstar believes investors are likely to receive a less than fair risk-adjusted return and should consider directing capital elsewhere.

1 star
Indicates a high probability of undesirable risk-adjusted returns from the current market price over a multi-year time frame, based on our analysis. Scenario analysis by our analysts indicates that the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Morningstar’s proprietary methodology is built using fundamental analysis and focuses on a company’s sustainable competitive advantages — economic moats — to estimate a company’s intrinsic value, or fair value estimate. The research reports and ratings are meant to empower investors to make better investment decisions.