For Portfolio Managers and Institutional Investors
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Morningstar Methodology
  • Morningstar applies a consistent research methodology that relies on in-depth company and industry insight and proprietary valuation models. Instead of prognosticating short-term price movements or momentum, Morningstar analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both.

  • Morningstar Equity Research Methodology for Analysing Companies
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  • Valuation Principles: An innovative and structured approach
    The drivers of Morningstar’s valuation model are revenue growth, profit margins, and capital investment. The principles behind Morningstar’s valuation model are:
    Each stock has a fair value.
    What drives the fair value is how much capital a company invests, and what return it earns on that capital.
    Free cash flow, not reported earnings, is what counts.
    A company only creates wealth if its returns on capital exceed its cost of capital.
    If a company can’t earn its cost of capital, growth destroys value instead of creating it.
    Competitive advantages disappear (are competed away) over time. It’s often dangerous to assume that the future will be better than the past.
    Every valuation model includes:
    10-year historical financials
    5-year forecasted financials (including balance sheet, income, and cash flow statements, and specialised models for financial companies)
  • Analyst-driven data points: Authoritative and indispensable tools

    Morningstar Equity Research uses a fundamental approach that not only assesses company balance sheets and fair values but also focuses on long-term factors, such as competitive advantage in the marketplace, corporate governance policies, and accounting clarity. Our perspectives on a particular stock don't mimic simply what everyone else is saying about it-which is why some of Wall Street's largest firms provide Morningstar equity research to their clients.

    Tools and methodologies include:

          Morningstar Rating for Stocks

    Identifies stocks trading at a discount or premium to our estimate of their fair values. Generally speaking, stocks trading at large discounts to our analysts' fair value estimates will receive higher (4- or 5-) star ratings, and stocks trading at large premiums to their fair value estimates will receive lower (1- or 2-) star ratings. Stocks that are trading very close to our analysts' fair value estimates will usually get 3-star ratings.

          Consider Buying and Consider Selling prices

    "Consider buying" is the price below which investors should consider purchasing a stock and is equivalent to the price at which it would earn a 5-star rating. "Consider selling" is the price above which investors should consider selling their shares and is equivalent to the price at which it would earn a 1-star rating.


    To generate the Morningstar Uncertainty Rating, analysts consider factors such as sales predictability, operating leverage, and financial leverage. Analysts weigh these factors for each stock along with its fair value estimate and then assign it an uncertainty level: Low, Medium, High, Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value is required before a stock can earn 5 stars, and the greater the premium to fair value will be before a stock earns a 1-star rating.

          Fair Value Estimate

    The key drivers of the fair value estimate are revenue growth, returns on capital, and the sustainability of the firm's competitive advantage.

          Economic Moat Rating

    Expresses a company's competitive advantage. Companies with wide economic moats generate consistently high returns on capital and high free cash flow for an extended period.

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