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? Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Tata Reports 2Q Results
by Anil Daka Stock Analyst Analysts covering this company do not own its stock. Pricing data through January 21, 2009. Rating updated as of January 21, 2009. Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Stock 20.0 Price 14.0
8.0 6.0 5.0 4.0 05
06
07
08
09
Analyst Note Nov. 03, 2008
Tightening credit conditions hit Tata Motors’ second-quarter performance, as the Indian auto major saw six years of growth come to a grinding halt. Revenue of $1.62 billion was down 2% year over year, and net profit tumbled 39% to $79 million. Jaguar Land Rover also reported a 12% dip in sales, to 85,499 units. During the quarter, the firm raised $900 million in a rights issue to fund the purchase of Jaguar Land Rover. Tata also announced a new location to manufacture its ultra-low-cost subcompact vehicle, Tata Nano, ending months of dispute with local farmers at the original plant site in Singur. The firm will use its captive financing arm to greater effect in the coming months as external sources of credit decrease. While the credit squeeze for customers will be an obvious head wind in the coming months, we think lower fuel and steel prices will allow Tata greater room to manage its profitability. The current crisis does not change our long-term view of the company, and we are maintaining our fair value estimate.
Thesis Aug. 04, 2008
High manufacturing costs are forcing Tata Motors to raise selling prices, but price increases coupled with rising auto financing rates can dry up demand. This comes at a time when Tata has to focus on running the newly acquired Jaguar Land Rover profitably and work toward a successful launch of the much-talked-about low-cost car, the Tata Nano. While the current business environment is challenging, we believe strong business fundamentals and an exciting product lineup will carry the company through. Strong local demand helped Tata Motors increase revenue at a 25% compound annual rate over the past five years. Operating margins averaged an impressive 9.7% during this period. However, increasing manufacturing costs and rising interest rates will put the brakes on this growth and shrink margins. Furthermore, international players like
Daimler, Volvo, International Trucks, and Nissan are expected to enter the local commercial vehicle market, where Tata enjoys 60% share. Tata is launching a slew of new products in hopes of containing the effects of competition, but we believe it will lose market share in the commercial vehicle segment in the long run. Turning around Jaguar Land Rover might be the toughest challenge Tata Motors has ever faced. These two iconic brands bled money through the years Ford owned them and turned cash flow positive only in 2007. High research costs and capital expenditures will require significant cash outlays, while reduced demand for sport-utility vehicles, stringent pollution norms, and quality issues weaken the demand for products. However, with the launch of Jaguar XF this year and Land Rover’s focus on reducing emissions, we are optimistic about the future of Jaguar Land Rover. Tata Nano faces production problems because of continued local opposition at the plant site. We are also wary about the firm’s potential to make profits at the sticker price of $2,500. In addition, the firm has indicated that it will only manufacture the Nano components and that assembly will be done by local entrepreneurs. We are skeptical about the resultant quality of the product. However, the massive market potential for such a low-cost product should keep Tata Motors running. Tata Motors is also working on innovative eco-friendly technologies like using compressed air to run automobiles. It is also developing an electric car. We believe such a focus prepares it better for future challenges.
Valuation
We believe Tata Motors is worth $11 per share. We explicitly forecast industry volume and Tata Motors’ market share for each operating sector to derive a growth estimate. We think a host of new offerings including Tata Nano will help the top line grow at 12.6% over the next five years. Over the long run, higher raw-material costs, increasing competition, and higher capital expenditures will compress operating margins to around 5%. We
Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Close Competitors
Currency(Mil)
Market Cap
TTM Sales
Oper Income
Net Income
Tata Motors, Ltd.
USD
1,635
8,102
526
315
Toyota Motor Corporation
USD
116,404
249,777
19,295
15,187
Honda Motor Company
USD
42,950
105,559
8,344
5,253
Ford Motor Company
USD
4,993
161,201
-3,180
-11,507
Government spending on infrastructure continues to be on an upswing, and Tata Motors will be the biggest beneficiary. The Jaguar XF has received enthusiastic response, as did the XK last year. We think this marks a turning point for Jaguar Land Rover.
Morningstar data as of January 21, 2009.
performed a discounted cash-flow analysis to estimate the fair value of Jaguar Land Rover as a stand-alone entity. We assume that the proposed equity offering from Tata Motors will dilute equity by a maximum of 42%. Over the next few years, we think the firm will see substantially higher capital expenditures as it expands production capacity and launch new models. Our projected cash flows are discounted at our estimate of the firm’s cost of capital of 12.7%.
Bears Say
Every major automobile player in the world is set to enter the Indian automobile market. Tata Motors will probably lose share as competition heats up. As India continues to grow, high inflation and high interest rates can stifle auto demand. Ford invested billions of dollars in Jaguar Land Rover and never realized a profit in 18 years. It is difficult to predict if Tata will have better luck in getting these lines to turn a profit.
Risk
The auto industry is characterized by cyclicality of demand, and Tata Motors’ revenue will mirror that. A substantial portion of the firm’s revenue is linked with the success of future product offerings like the Nano, the Jaguar XF, and the expected replacement for Jaguar XJ. Further, steel and energy constitute a big part of manufacturing costs, and fluctuations in these prices make profitability estimates uncertain. With the acquisition of Jaguar Land Rover, the firm will derive more than 66% of its revenue overseas, subjecting it to significant currency risk.
Bulls Say
At eight cars per thousand people, India’s car penetration is among the lowest in the world. Tata Motors is in the right place at the right time to take advantage of this low level of car ownership. In the Nano, Tata has a product that could change the face of the Indian automobile industry.
Financial Overview
Growth: Tata Motors saw explosive growth in the past because of a booming local economy and government spending on infrastructure. However, we believe tightening interest rates and intense competition will moderate the growth to about 12.5% over the next five years. Profitability: Tata Motors will see reduced profitability because of increasing raw-material costs and intense local competition. A shift in the product mix toward low-margin products like the Nano will exacerbate this problem. Jaguar Land Rover has a spotty record of profitability, and its inclusion in Tata Motors could severely dent operating margins. However, we believe the firm is capable of maintaining enough margins to increase economic value for shareholders. Financial Health: We are concerned that Tata Motors
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
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Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
increased its debt/equity ratio to 1.12 in the first quarter of fiscal 2009 compared with 0.48 for fiscal 2008. However, we believe it will generate enough cash to service debt.
Company Overview
Profile: Tata Motors is India’s largest automobile manufacturer, with revenue of $ 7.3 billion. It designs, manufactures and finances commercial vehicles and cars. It is a part of the $60 billion Tata Group that is in turn owned by charitable trusts. It has a technical and manufacturing collaboration with Fiat of Italy. In June 2008, Tata Motors acquired Jaguar Land Rover from Ford for $2.3 billion. Strategy: Tata Motors hopes to leverage its strong industry position, wide manufacturing footprint, and brand recognition to offer high-quality, low-cost products. The firm hopes to expand its international presence through acquisitions and collaborations. Management: At the helm of Tata Motors is Ratan Tata, chairman of the board. He is widely credited as being the visionary behind the $2,500 car and is considered India’s most powerful businessman. Ravi Kant is CEO and managing director of Tata Motors and has been with the firm since 2000. The 10-member board has four independent directors, but we doubt their effectiveness, given their minority. We think executive compensation is reasonable, but we would like to see it more closely tied to the operational metrics of the firm.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
ß
Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Analyst Notes Nov. 03, 2008
Tata Reports 2Q Results
Tightening credit conditions hit Tata Motors’ second-quarter performance, as the Indian auto major saw six years of growth come to a grinding halt. Revenue of $1.62 billion was down 2% year over year, and net profit tumbled 39% to $79 million. Jaguar Land Rover also reported a 12% dip in sales, to 85,499 units. During the quarter, the firm raised $900 million in a rights issue to fund the purchase of Jaguar Land Rover. Tata also announced a new location to manufacture its ultra-low-cost subcompact vehicle, Tata Nano, ending months of dispute
with local farmers at the original plant site in Singur. The firm will use its captive financing arm to greater effect in the coming months as external sources of credit decrease. While the credit squeeze for customers will be an obvious head wind in the coming months, we think lower fuel and steel prices will allow Tata greater room to manage its profitability. The current crisis does not change our long-term view of the company, and we are maintaining our fair value estimate.
Disclaimers & Disclosures No Morningstar employees are officers or directors of this company. Morningstar Inc. does not own more than 1% of the shares of this company. Analysts covering this company do not own its stock. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
ß
Morningstar ® Stock Data Sheet
Pricing data thru Jan. 21, 2009
Tata Motors, Ltd. TTM
Sales Mil
Mkt Cap Mil
Industry
Sector
$8,102
$1,635
Auto Makers
Consumer Goods
Fair Value
Uncertainty
Economic Moat
Stewardship Grade
Tata Motors is India’s largest automobile manufacturer, with revenue of $ 7.3 billion. It designs, manufactures and finances commercial vehicles and cars. It is a part of the $60 billion Tata Group that is in turn owned by charitable trusts. It has a technical and manufacturing collaboration with Fiat of Italy. In June 2008, Tata Motors acquired Jaguar Land Rover from Ford for $2.3 billion.
Morningstar Rating
Last Price
$4.24
QQQQQ
$11.00
12.18 8.65
Rating updated as of Jan. 21, 2009
High 14.53 9.25
21.99 13.93
Fiscal year-end: March
None 22.11 15.26
20.05 3.50
C
5.41 4.00
Annual Price High Low Recent Splits
Price Volatility 14.0
6.0
Bombay House 24 Homi Mody Street Mumbai, II 400-001 Phone: 9122 56568484 Website: http://www.tatamotors.com 1999
1 Yr
3 Yr
5 Yr
10 Yr
10.2 -10.4 -21.1 15.6 15.2 -75.5 -43.0 .
22.6 8.0 0.8 . 20.6 -32.3 -21.6 .
. . . . . . . .
. . . . . . . .
Grade: D
Current
5 Yr Avg
Ind
Mkt
Return on Equity % Return on Assets % Fixed Asset Turns Inventory Turns Revenue/Employee $K
14.4 4.4 4.5 8.4 222.8
Gross Margin % Operating Margin % Net Margin % Free Cash Flow/Rev % R&D/Rev %
21.2 6.5 3.9 . 2.7
Revenue % Operating Income % Earnings/Share % Dividends % Book Value/Share % Stock Total Return % +/- Industry +/- Market Profitability Analysis
21.9 -3.4 23.7 7.6 -0.6 9.4 6.0 3.1 6.4 8.2 9.8 12.7 208.8 * 745.3 1010.7 29.6 7.4 5.0 . 0.0
20.0 5.3 -0.7 4.3 .
34.8 17.8 9.9 0.1 11.5
Financial Position Grade:
03-07 $Mil
03-08 $Mil
Cash Inventories Receivables Current Assets
176 780 1105 2621
284 856 1307 3104
Fixed Assets Intangibles Total Assets
1464 235 6235
2483 251 9204
Payables Short-Term Debt Current Liabilities Long-Term Debt Total Liabilities
1046 895 2779 926 4133
1372 1720 4586 1465 6581
Total Equity
2102
2624
Valuation Analysis Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales PEG Ratio
2000
2001
2002
2003
10 Year High/Low $ 22.11 - 3.50
1.0
Bear-Market Rank 0 (10=worst)
5 Yr Avg
Ind
Mkt
5.8 11.0 2.4 . 8.3 0.8 0.2 1.1
16.4 . 21.6 . . 3.5 0.8 .
-17.7 . 2.3 5.2 0.1 1.1 0.2 .
12.4 11.0 8.9 14.5 3.1 3.0 1.6 1.2
Trading Volume Million
2004
2005
2006
2007
2008
YTD
Stock Performance
. . . . 4267
24.1 21.1 19.8 1.6 5198
44.5 30.9 17.7 1.4 7821
-5.8 -9.3 1.7 2.0 7268
-75.7 -37.2 -25.1 7.9 1715
-4.7 6.2 -26.6 8.3 1635
Total Return % +/- Market +/- Industry Dividend Yield % Market Cap $Mil
2008
TTM
Financials
8983 21.2 583 6.5
8102 21.2 526 6.5
Revenue $Mil Gross Margin % Oper Income $Mil Operating Margin %
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
1999
2000
2001
2002
2003
2004
2005
2006
2007
. . . .
. . . .
. . . .
. . . .
. . . .
6548 64.2 308 4.7
4422 20.9 419 9.5
5446 21.3 454 8.3
7354 20.5 586 8.0
.
.
.
.
.
193
295
340
402
349
315
Net Income $Mil
. . . .
. . . .
. . . .
. . . .
. . . .
0.55 0.00 363 2.40
0.78 0.00 388 3.46
0.88 0.23 399 4.78
1.01 0.29 407 6.02
0.88 0.37 407 5.60
0.79 0.33 407 5.60
Earnings Per Share $ Dividends $ Shares Mil Book Value Per Share $
. . .
. . .
. . .
. . .
. . .
599 -57 541
508 -172 336
128 -234 -106
388 -535 -147
873 -1024 -151
873 -1024 -151
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
TTM
Profitability
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
7.8 23.8 2.9 2.65 3.0
9.7 28.3 6.7 1.45 2.8
8.3 21.9 6.2 1.33 2.5
7.7 21.0 5.5 1.40 3.0
4.4 14.4 3.9 1.14 3.5
4.4 14.4 3.9 1.14 3.5
Return on Assets % Return on Equity % Net Margin % Asset Turnover Financial Leverage
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
03-08
Financial Health
. . . .
. . . .
. . . .
. . . .
. . . .
-413 243 841 0.29
63 587 1292 0.45
206 610 1818 0.34
-157 926 2102 0.44
-1483 1465 2624 0.56
-1483 1465 2624 0.44
Working Capital $Mil Long-Term Debt $Mil Total Equity $Mil Debt/Equity
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
TTM
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
20.5 1.0 0.6 5.0 6.8
17.4 0.9 1.0 4.2 15.8
21.8 1.3 1.2 4.3 65.8
16.4 1.0 0.9 3.1 17.3
6.1 0.4 0.2 0.8 2.5
5.8 0.5 0.2 0.8 2.4
Quarterly Results Current
52 week High/Low $ 20.05 - 3.50
3.0
1.0 0.6
Growth Rates Compound Annual Grade: B
Monthly High/Low Rel Strength to S&P 500
Revenue $Mil
Most Recent Period Prior Year Period
Oper Cash Flow $Mil Cap Spending $Mil Free Cash Flow $Mil
Valuation
Price/Earnings P/E vs. Market Price/Sales Price/Book Price/Cash Flow
Industry Peers by Market Cap Jun 07
Sep 07
Dec 07
Mar 08
. . . . 1907.8 1896.9 1858.1 1824.2
Rev Growth %
Jun 07
Sep 07
Dec 07
Mar 08
Most Recent Period Prior Year Period
. -96.8
. -96.8
. -97.0
. -96.9
Earnings Per Share $
Jun 07
Sep 07
Dec 07
Mar 08
Most Recent Period Prior Year Period
. 0.26
. 0.26
. 0.25
. 0.23
Rev $Mil
P/E
ROE%
Tata Motors, Ltd. 1635 8102 Toyota Motor Corpora 116404 249777 Honda Motor Company 42950 105559
Mkt Cap $Mil
5.8 5.9 6.3
14.4 12.9 13.3
Major Fund Holders % of shares
Nuveen Tradewinds Global All-Cap A ING Value Choice A Nuveen Tradewinds Value Opportunities I
0.13 0.11 0.10
*3Yr Avg data is displayed in place of 5Yr Avg
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. To order reprints or get permission to use this information, call 312-696-6100.
®
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Morningstar’s Approach to Rating Stocks
Our Key Investing Concepts Economic Moat Discounted Cash Flow Discount Rate Fair Value Uncertainty Margin of Safety Consider Buying/Consider Selling Stewardship Grades
At Morningstar, we evaluate stocks as pieces of a business, not as pieces of paper. We think that purchasing shares of superior businesses at discounts to their intrinsic value and allowing them to compound their value over long periods of time is the surest way to create wealth in the stock market.
just on movement in the share price. If we think a stock’s fair value is $50, and the shares decline to $40 without much change in the value of the business, the star rating will go up. Our estimate of what the business is worth hasn’t changed, but the shares are more attractive as an investment at $40 than they were at $50.
We rate stocks 1 through 5 stars, with 5 the best and 1 the worst. Our star rating is based on our analyst’s estimate of how much a company’s business is worth per share. Our analysts arrive at this "fair value estimate" by forecasting how much excess cash--or "free cash flow"--the firm will generate in the future, and then adjusting the total for timing and risk. Cash generated next year is worth more than cash generated several years down the road, and cash from a stable and consistently profitable business is worth more than cash from a cyclical or unsteady business.
Because we focus on the long-term value of businesses, rather than short-term movements in stock prices, at times we may appear out of step with the overall stock market. When stocks are high, relatively few will receive our highest rating of 5 stars. But when the market tumbles, many more will likely garner 5 stars. Although you might expect to see more 5-star stocks as the market rises, we find assets more attractive when they’re cheap.
Stocks trading at meaningful discounts to our fair value estimates will receive high star ratings. For high-quality businesses, we require a smaller discount than for mediocre ones, for a simple reason: We have more confidence in our cash-flow forecasts for strong companies, and thus in our value estimates. If a stock’s market price is significantly above our fair value estimate, it will receive a low star rating, no matter how wonderful we think the business is. Even the best company is a bad deal if an investor overpays for its shares. Our fair value estimates don’t change very often, but market prices do. So, a stock may gain or lose stars based Morningstar Research Methodology for Valuing Companies
We calculate our star ratings nightly after the markets close, and issue them the following business day, which is why the rating date on our reports will always be the previous business day. We update the text of our reports as new information becomes available, usually about once or twice per quarter. That is why you’ll see two dates on every Morningstar stock report. Of course, we monitor market events and all of our stocks every business day, so our ratings always reflect our analyst’s current opinion.
Economic Moat
This is our assessment of a firm’s ability to earn returns consistently above its cost of capital in the future, usually by virtue of some competitive advantage. Competition tends to drive down such economic profits, but companies
Economic Moat Rating
Company Valuation
Fair Value Estimate
Analyst conducts company and industry research:
The depth of the firm’s competitive advantage is rated:
Management interviews Conference calls Trade-show visits Competitor, supplier, distributor, and customer interviews
None Narrow Wide
Analyst considers company financial statements and competitive position to forecast future cash flows.
DCF model leads to the firm’s Fair Value Estimate, which anchors the rating framework.
Competitive Analysis
Uncertainty Assessment
An uncertainty assessment establishes the margin of safety required for the stock rating.
QQQQQ Q QQ QQQ QQQQ QQQQQ
The current stock price relative to fair value, adjusted for uncertainty, determines the rating.
Assumptions are input into a discounted cash-flow model.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
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Morningstar’s Approach to Rating Stocks (continued)
that can earn them for an extended time by creating a competitive advantage possess an economic moat. We see these companies as superior investments. We’re big fans of companies that are low-cost producers, create high switching costs for their customers, or have strong brands or long-lasting patents, because all of these characteristics allow companies to protect their competitive position. For example, Tiffany is far more profitable than a run-of-the-mill jewelry chain because it has a strong brand that creates a moat around its business, allowing it to charge more than competitors.
Uncertainty
To generate the Morningstar Uncertainty Rating, analysts consider factors such as sales predictability, operating leverage, and financial leverage. Analysts then classify their ability to bound the fair value estimate for the stock into one of several uncertainty levels: Low, Medium, High, Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value required before a stock can earn 5 stars, and the greater the premium to fair value before a stock earns a 1-star rating.
Margin of Safety Discounted Cash Flow
This is a method for valuing companies that involves projecting the amount of cash a business will generate in the future, subtracting the amount of cash that the company will need to reinvest in its business, and using the result to calculate the worth of the firm. We use this technique to value nearly all of the companies we cover.
This is the discount to fair value we would require before recommending a stock. We think it’s always prudent to buy stocks for less than they’re worth.The margin of safety is like an insurance policy that protects investors from bad news or overly optimistic fair value estimates. We require larger margins of safety for less predictable stocks, and smaller margins of safety for more predictable stocks.
Consider Buying/Consider Selling Discount Rate
We use this number to adjust the value of our forecasted cash flows for the risk that they may not materialize. For a profitable company in a steady line of business, we’ll use a lower discount rate, also known as "cost of capital," than for a firm in a cyclical business with fierce competition, since there’s less risk clouding the firm’s future.
The consider buying price is the price at which a stock would be rated 5 stars, and thus the point at which we would consider the stock an extremely attractive purchase. Conversely, consider selling is the price at which a stock would have a 1 star rating, at which point we’d consider the stock overvalued, with low expected returns relative to its risk.
Stewardship Grades Fair Value
This is the output of our discounted cash-flow valuation models, and is our per-share estimate of a company’s intrinsic worth. We adjust our fair values for off-balance sheet liabilities or assets that a firm might have--for example, we deduct from a company’s fair value if it has issued a lot of stock options or has an under-funded pension plan. Our fair value estimate differs from a "target price" in two ways. First, it’s an estimate of what the business is worth, whereas a price target typically reflects what other investors may pay for the stock. Second, it’s a long-term estimate, whereas price targets generally focus on the next two to 12 months.
We evaluate the commitment to shareholders demonstrated by each firm’s board and management team by assessing transparency, shareholder friendliness, incentives, and ownership. We aim to identify firms that provide investors with insufficient or potentially misleading financial information, seek to limit the power of minority shareholders, allow management to abuse its position, or which have management incentives that are not aligned with the interests of long-term shareholders. The grades are assigned on an absolute scale--not relative to peers--and can be interpreted as follows: A means "Excellent," B means "Good," C means "Fair," D means "Poor," and F means "Very Poor."
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
ß
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Tata Reports 2Q Results
by Anil Daka Stock Analyst Analysts covering this company do not own its stock. Pricing data through January 21, 2009. Rating updated as of January 21, 2009. Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Stock 20.0 Price 14.0
8.0 6.0 5.0 4.0 05
06
07
08
09
Analyst Note Nov. 03, 2008
Tightening credit conditions hit Tata Motors’ second-quarter performance, as the Indian auto major saw six years of growth come to a grinding halt. Revenue of $1.62 billion was down 2% year over year, and net profit tumbled 39% to $79 million. Jaguar Land Rover also reported a 12% dip in sales, to 85,499 units. During the quarter, the firm raised $900 million in a rights issue to fund the purchase of Jaguar Land Rover. Tata also announced a new location to manufacture its ultra-low-cost subcompact vehicle, Tata Nano, ending months of dispute with local farmers at the original plant site in Singur. The firm will use its captive financing arm to greater effect in the coming months as external sources of credit decrease. While the credit squeeze for customers will be an obvious head wind in the coming months, we think lower fuel and steel prices will allow Tata greater room to manage its profitability. The current crisis does not change our long-term view of the company, and we are maintaining our fair value estimate.
Thesis Aug. 04, 2008
High manufacturing costs are forcing Tata Motors to raise selling prices, but price increases coupled with rising auto financing rates can dry up demand. This comes at a time when Tata has to focus on running the newly acquired Jaguar Land Rover profitably and work toward a successful launch of the much-talked-about low-cost car, the Tata Nano. While the current business environment is challenging, we believe strong business fundamentals and an exciting product lineup will carry the company through. Strong local demand helped Tata Motors increase revenue at a 25% compound annual rate over the past five years. Operating margins averaged an impressive 9.7% during this period. However, increasing manufacturing costs and rising interest rates will put the brakes on this growth and shrink margins. Furthermore, international players like
Daimler, Volvo, International Trucks, and Nissan are expected to enter the local commercial vehicle market, where Tata enjoys 60% share. Tata is launching a slew of new products in hopes of containing the effects of competition, but we believe it will lose market share in the commercial vehicle segment in the long run. Turning around Jaguar Land Rover might be the toughest challenge Tata Motors has ever faced. These two iconic brands bled money through the years Ford owned them and turned cash flow positive only in 2007. High research costs and capital expenditures will require significant cash outlays, while reduced demand for sport-utility vehicles, stringent pollution norms, and quality issues weaken the demand for products. However, with the launch of Jaguar XF this year and Land Rover’s focus on reducing emissions, we are optimistic about the future of Jaguar Land Rover. Tata Nano faces production problems because of continued local opposition at the plant site. We are also wary about the firm’s potential to make profits at the sticker price of $2,500. In addition, the firm has indicated that it will only manufacture the Nano components and that assembly will be done by local entrepreneurs. We are skeptical about the resultant quality of the product. However, the massive market potential for such a low-cost product should keep Tata Motors running. Tata Motors is also working on innovative eco-friendly technologies like using compressed air to run automobiles. It is also developing an electric car. We believe such a focus prepares it better for future challenges.
Valuation
We believe Tata Motors is worth $11 per share. We explicitly forecast industry volume and Tata Motors’ market share for each operating sector to derive a growth estimate. We think a host of new offerings including Tata Nano will help the top line grow at 12.6% over the next five years. Over the long run, higher raw-material costs, increasing competition, and higher capital expenditures will compress operating margins to around 5%. We
Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Close Competitors
Currency(Mil)
Market Cap
TTM Sales
Oper Income
Net Income
Tata Motors, Ltd.
USD
1,635
8,102
526
315
Toyota Motor Corporation
USD
116,404
249,777
19,295
15,187
Honda Motor Company
USD
42,950
105,559
8,344
5,253
Ford Motor Company
USD
4,993
161,201
-3,180
-11,507
Government spending on infrastructure continues to be on an upswing, and Tata Motors will be the biggest beneficiary. The Jaguar XF has received enthusiastic response, as did the XK last year. We think this marks a turning point for Jaguar Land Rover.
Morningstar data as of January 21, 2009.
performed a discounted cash-flow analysis to estimate the fair value of Jaguar Land Rover as a stand-alone entity. We assume that the proposed equity offering from Tata Motors will dilute equity by a maximum of 42%. Over the next few years, we think the firm will see substantially higher capital expenditures as it expands production capacity and launch new models. Our projected cash flows are discounted at our estimate of the firm’s cost of capital of 12.7%.
Bears Say
Every major automobile player in the world is set to enter the Indian automobile market. Tata Motors will probably lose share as competition heats up. As India continues to grow, high inflation and high interest rates can stifle auto demand. Ford invested billions of dollars in Jaguar Land Rover and never realized a profit in 18 years. It is difficult to predict if Tata will have better luck in getting these lines to turn a profit.
Risk
The auto industry is characterized by cyclicality of demand, and Tata Motors’ revenue will mirror that. A substantial portion of the firm’s revenue is linked with the success of future product offerings like the Nano, the Jaguar XF, and the expected replacement for Jaguar XJ. Further, steel and energy constitute a big part of manufacturing costs, and fluctuations in these prices make profitability estimates uncertain. With the acquisition of Jaguar Land Rover, the firm will derive more than 66% of its revenue overseas, subjecting it to significant currency risk.
Bulls Say
At eight cars per thousand people, India’s car penetration is among the lowest in the world. Tata Motors is in the right place at the right time to take advantage of this low level of car ownership. In the Nano, Tata has a product that could change the face of the Indian automobile industry.
Financial Overview
Growth: Tata Motors saw explosive growth in the past because of a booming local economy and government spending on infrastructure. However, we believe tightening interest rates and intense competition will moderate the growth to about 12.5% over the next five years. Profitability: Tata Motors will see reduced profitability because of increasing raw-material costs and intense local competition. A shift in the product mix toward low-margin products like the Nano will exacerbate this problem. Jaguar Land Rover has a spotty record of profitability, and its inclusion in Tata Motors could severely dent operating margins. However, we believe the firm is capable of maintaining enough margins to increase economic value for shareholders. Financial Health: We are concerned that Tata Motors
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
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Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
increased its debt/equity ratio to 1.12 in the first quarter of fiscal 2009 compared with 0.48 for fiscal 2008. However, we believe it will generate enough cash to service debt.
Company Overview
Profile: Tata Motors is India’s largest automobile manufacturer, with revenue of $ 7.3 billion. It designs, manufactures and finances commercial vehicles and cars. It is a part of the $60 billion Tata Group that is in turn owned by charitable trusts. It has a technical and manufacturing collaboration with Fiat of Italy. In June 2008, Tata Motors acquired Jaguar Land Rover from Ford for $2.3 billion. Strategy: Tata Motors hopes to leverage its strong industry position, wide manufacturing footprint, and brand recognition to offer high-quality, low-cost products. The firm hopes to expand its international presence through acquisitions and collaborations. Management: At the helm of Tata Motors is Ratan Tata, chairman of the board. He is widely credited as being the visionary behind the $2,500 car and is considered India’s most powerful businessman. Ravi Kant is CEO and managing director of Tata Motors and has been with the firm since 2000. The 10-member board has four independent directors, but we doubt their effectiveness, given their minority. We think executive compensation is reasonable, but we would like to see it more closely tied to the operational metrics of the firm.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
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Tata Motors, Ltd. TTM
[NYSE]
Morningstar Rating Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Grade Industry QQQQQ 4.24 11.00 5.50 22.00 High None C Auto Makers
Sector Consumer Goods
Per share prices in USD
Analyst Notes Nov. 03, 2008
Tata Reports 2Q Results
Tightening credit conditions hit Tata Motors’ second-quarter performance, as the Indian auto major saw six years of growth come to a grinding halt. Revenue of $1.62 billion was down 2% year over year, and net profit tumbled 39% to $79 million. Jaguar Land Rover also reported a 12% dip in sales, to 85,499 units. During the quarter, the firm raised $900 million in a rights issue to fund the purchase of Jaguar Land Rover. Tata also announced a new location to manufacture its ultra-low-cost subcompact vehicle, Tata Nano, ending months of dispute
with local farmers at the original plant site in Singur. The firm will use its captive financing arm to greater effect in the coming months as external sources of credit decrease. While the credit squeeze for customers will be an obvious head wind in the coming months, we think lower fuel and steel prices will allow Tata greater room to manage its profitability. The current crisis does not change our long-term view of the company, and we are maintaining our fair value estimate.
Disclaimers & Disclosures No Morningstar employees are officers or directors of this company. Morningstar Inc. does not own more than 1% of the shares of this company. Analysts covering this company do not own its stock. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
®
ß
Morningstar ® Stock Data Sheet
Pricing data thru Jan. 21, 2009
Tata Motors, Ltd. TTM
Sales Mil
Mkt Cap Mil
Industry
Sector
$8,102
$1,635
Auto Makers
Consumer Goods
Fair Value
Uncertainty
Economic Moat
Stewardship Grade
Tata Motors is India’s largest automobile manufacturer, with revenue of $ 7.3 billion. It designs, manufactures and finances commercial vehicles and cars. It is a part of the $60 billion Tata Group that is in turn owned by charitable trusts. It has a technical and manufacturing collaboration with Fiat of Italy. In June 2008, Tata Motors acquired Jaguar Land Rover from Ford for $2.3 billion.
Morningstar Rating
Last Price
$4.24
QQQQQ
$11.00
12.18 8.65
Rating updated as of Jan. 21, 2009
High 14.53 9.25
21.99 13.93
Fiscal year-end: March
None 22.11 15.26
20.05 3.50
C
5.41 4.00
Annual Price High Low Recent Splits
Price Volatility 14.0
6.0
Bombay House 24 Homi Mody Street Mumbai, II 400-001 Phone: 9122 56568484 Website: http://www.tatamotors.com 1999
1 Yr
3 Yr
5 Yr
10 Yr
10.2 -10.4 -21.1 15.6 15.2 -75.5 -43.0 .
22.6 8.0 0.8 . 20.6 -32.3 -21.6 .
. . . . . . . .
. . . . . . . .
Grade: D
Current
5 Yr Avg
Ind
Mkt
Return on Equity % Return on Assets % Fixed Asset Turns Inventory Turns Revenue/Employee $K
14.4 4.4 4.5 8.4 222.8
Gross Margin % Operating Margin % Net Margin % Free Cash Flow/Rev % R&D/Rev %
21.2 6.5 3.9 . 2.7
Revenue % Operating Income % Earnings/Share % Dividends % Book Value/Share % Stock Total Return % +/- Industry +/- Market Profitability Analysis
21.9 -3.4 23.7 7.6 -0.6 9.4 6.0 3.1 6.4 8.2 9.8 12.7 208.8 * 745.3 1010.7 29.6 7.4 5.0 . 0.0
20.0 5.3 -0.7 4.3 .
34.8 17.8 9.9 0.1 11.5
Financial Position Grade:
03-07 $Mil
03-08 $Mil
Cash Inventories Receivables Current Assets
176 780 1105 2621
284 856 1307 3104
Fixed Assets Intangibles Total Assets
1464 235 6235
2483 251 9204
Payables Short-Term Debt Current Liabilities Long-Term Debt Total Liabilities
1046 895 2779 926 4133
1372 1720 4586 1465 6581
Total Equity
2102
2624
Valuation Analysis Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales PEG Ratio
2000
2001
2002
2003
10 Year High/Low $ 22.11 - 3.50
1.0
Bear-Market Rank 0 (10=worst)
5 Yr Avg
Ind
Mkt
5.8 11.0 2.4 . 8.3 0.8 0.2 1.1
16.4 . 21.6 . . 3.5 0.8 .
-17.7 . 2.3 5.2 0.1 1.1 0.2 .
12.4 11.0 8.9 14.5 3.1 3.0 1.6 1.2
Trading Volume Million
2004
2005
2006
2007
2008
YTD
Stock Performance
. . . . 4267
24.1 21.1 19.8 1.6 5198
44.5 30.9 17.7 1.4 7821
-5.8 -9.3 1.7 2.0 7268
-75.7 -37.2 -25.1 7.9 1715
-4.7 6.2 -26.6 8.3 1635
Total Return % +/- Market +/- Industry Dividend Yield % Market Cap $Mil
2008
TTM
Financials
8983 21.2 583 6.5
8102 21.2 526 6.5
Revenue $Mil Gross Margin % Oper Income $Mil Operating Margin %
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
1999
2000
2001
2002
2003
2004
2005
2006
2007
. . . .
. . . .
. . . .
. . . .
. . . .
6548 64.2 308 4.7
4422 20.9 419 9.5
5446 21.3 454 8.3
7354 20.5 586 8.0
.
.
.
.
.
193
295
340
402
349
315
Net Income $Mil
. . . .
. . . .
. . . .
. . . .
. . . .
0.55 0.00 363 2.40
0.78 0.00 388 3.46
0.88 0.23 399 4.78
1.01 0.29 407 6.02
0.88 0.37 407 5.60
0.79 0.33 407 5.60
Earnings Per Share $ Dividends $ Shares Mil Book Value Per Share $
. . .
. . .
. . .
. . .
. . .
599 -57 541
508 -172 336
128 -234 -106
388 -535 -147
873 -1024 -151
873 -1024 -151
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
TTM
Profitability
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
7.8 23.8 2.9 2.65 3.0
9.7 28.3 6.7 1.45 2.8
8.3 21.9 6.2 1.33 2.5
7.7 21.0 5.5 1.40 3.0
4.4 14.4 3.9 1.14 3.5
4.4 14.4 3.9 1.14 3.5
Return on Assets % Return on Equity % Net Margin % Asset Turnover Financial Leverage
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
03-08
Financial Health
. . . .
. . . .
. . . .
. . . .
. . . .
-413 243 841 0.29
63 587 1292 0.45
206 610 1818 0.34
-157 926 2102 0.44
-1483 1465 2624 0.56
-1483 1465 2624 0.44
Working Capital $Mil Long-Term Debt $Mil Total Equity $Mil Debt/Equity
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
TTM
. . . . .
. . . . .
. . . . .
. . . . .
. . . . .
20.5 1.0 0.6 5.0 6.8
17.4 0.9 1.0 4.2 15.8
21.8 1.3 1.2 4.3 65.8
16.4 1.0 0.9 3.1 17.3
6.1 0.4 0.2 0.8 2.5
5.8 0.5 0.2 0.8 2.4
Quarterly Results Current
52 week High/Low $ 20.05 - 3.50
3.0
1.0 0.6
Growth Rates Compound Annual Grade: B
Monthly High/Low Rel Strength to S&P 500
Revenue $Mil
Most Recent Period Prior Year Period
Oper Cash Flow $Mil Cap Spending $Mil Free Cash Flow $Mil
Valuation
Price/Earnings P/E vs. Market Price/Sales Price/Book Price/Cash Flow
Industry Peers by Market Cap Jun 07
Sep 07
Dec 07
Mar 08
. . . . 1907.8 1896.9 1858.1 1824.2
Rev Growth %
Jun 07
Sep 07
Dec 07
Mar 08
Most Recent Period Prior Year Period
. -96.8
. -96.8
. -97.0
. -96.9
Earnings Per Share $
Jun 07
Sep 07
Dec 07
Mar 08
Most Recent Period Prior Year Period
. 0.26
. 0.26
. 0.25
. 0.23
Rev $Mil
P/E
ROE%
Tata Motors, Ltd. 1635 8102 Toyota Motor Corpora 116404 249777 Honda Motor Company 42950 105559
Mkt Cap $Mil
5.8 5.9 6.3
14.4 12.9 13.3
Major Fund Holders % of shares
Nuveen Tradewinds Global All-Cap A ING Value Choice A Nuveen Tradewinds Value Opportunities I
0.13 0.11 0.10
*3Yr Avg data is displayed in place of 5Yr Avg
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported.
The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. To order reprints or get permission to use this information, call 312-696-6100.
®
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Morningstar’s Approach to Rating Stocks
Our Key Investing Concepts Economic Moat Discounted Cash Flow Discount Rate Fair Value Uncertainty Margin of Safety Consider Buying/Consider Selling Stewardship Grades
At Morningstar, we evaluate stocks as pieces of a business, not as pieces of paper. We think that purchasing shares of superior businesses at discounts to their intrinsic value and allowing them to compound their value over long periods of time is the surest way to create wealth in the stock market.
just on movement in the share price. If we think a stock’s fair value is $50, and the shares decline to $40 without much change in the value of the business, the star rating will go up. Our estimate of what the business is worth hasn’t changed, but the shares are more attractive as an investment at $40 than they were at $50.
We rate stocks 1 through 5 stars, with 5 the best and 1 the worst. Our star rating is based on our analyst’s estimate of how much a company’s business is worth per share. Our analysts arrive at this "fair value estimate" by forecasting how much excess cash--or "free cash flow"--the firm will generate in the future, and then adjusting the total for timing and risk. Cash generated next year is worth more than cash generated several years down the road, and cash from a stable and consistently profitable business is worth more than cash from a cyclical or unsteady business.
Because we focus on the long-term value of businesses, rather than short-term movements in stock prices, at times we may appear out of step with the overall stock market. When stocks are high, relatively few will receive our highest rating of 5 stars. But when the market tumbles, many more will likely garner 5 stars. Although you might expect to see more 5-star stocks as the market rises, we find assets more attractive when they’re cheap.
Stocks trading at meaningful discounts to our fair value estimates will receive high star ratings. For high-quality businesses, we require a smaller discount than for mediocre ones, for a simple reason: We have more confidence in our cash-flow forecasts for strong companies, and thus in our value estimates. If a stock’s market price is significantly above our fair value estimate, it will receive a low star rating, no matter how wonderful we think the business is. Even the best company is a bad deal if an investor overpays for its shares. Our fair value estimates don’t change very often, but market prices do. So, a stock may gain or lose stars based Morningstar Research Methodology for Valuing Companies
We calculate our star ratings nightly after the markets close, and issue them the following business day, which is why the rating date on our reports will always be the previous business day. We update the text of our reports as new information becomes available, usually about once or twice per quarter. That is why you’ll see two dates on every Morningstar stock report. Of course, we monitor market events and all of our stocks every business day, so our ratings always reflect our analyst’s current opinion.
Economic Moat
This is our assessment of a firm’s ability to earn returns consistently above its cost of capital in the future, usually by virtue of some competitive advantage. Competition tends to drive down such economic profits, but companies
Economic Moat Rating
Company Valuation
Fair Value Estimate
Analyst conducts company and industry research:
The depth of the firm’s competitive advantage is rated:
Management interviews Conference calls Trade-show visits Competitor, supplier, distributor, and customer interviews
None Narrow Wide
Analyst considers company financial statements and competitive position to forecast future cash flows.
DCF model leads to the firm’s Fair Value Estimate, which anchors the rating framework.
Competitive Analysis
Uncertainty Assessment
An uncertainty assessment establishes the margin of safety required for the stock rating.
QQQQQ Q QQ QQQ QQQQ QQQQQ
The current stock price relative to fair value, adjusted for uncertainty, determines the rating.
Assumptions are input into a discounted cash-flow model.
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
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Morningstar’s Approach to Rating Stocks (continued)
that can earn them for an extended time by creating a competitive advantage possess an economic moat. We see these companies as superior investments. We’re big fans of companies that are low-cost producers, create high switching costs for their customers, or have strong brands or long-lasting patents, because all of these characteristics allow companies to protect their competitive position. For example, Tiffany is far more profitable than a run-of-the-mill jewelry chain because it has a strong brand that creates a moat around its business, allowing it to charge more than competitors.
Uncertainty
To generate the Morningstar Uncertainty Rating, analysts consider factors such as sales predictability, operating leverage, and financial leverage. Analysts then classify their ability to bound the fair value estimate for the stock into one of several uncertainty levels: Low, Medium, High, Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value required before a stock can earn 5 stars, and the greater the premium to fair value before a stock earns a 1-star rating.
Margin of Safety Discounted Cash Flow
This is a method for valuing companies that involves projecting the amount of cash a business will generate in the future, subtracting the amount of cash that the company will need to reinvest in its business, and using the result to calculate the worth of the firm. We use this technique to value nearly all of the companies we cover.
This is the discount to fair value we would require before recommending a stock. We think it’s always prudent to buy stocks for less than they’re worth.The margin of safety is like an insurance policy that protects investors from bad news or overly optimistic fair value estimates. We require larger margins of safety for less predictable stocks, and smaller margins of safety for more predictable stocks.
Consider Buying/Consider Selling Discount Rate
We use this number to adjust the value of our forecasted cash flows for the risk that they may not materialize. For a profitable company in a steady line of business, we’ll use a lower discount rate, also known as "cost of capital," than for a firm in a cyclical business with fierce competition, since there’s less risk clouding the firm’s future.
The consider buying price is the price at which a stock would be rated 5 stars, and thus the point at which we would consider the stock an extremely attractive purchase. Conversely, consider selling is the price at which a stock would have a 1 star rating, at which point we’d consider the stock overvalued, with low expected returns relative to its risk.
Stewardship Grades Fair Value
This is the output of our discounted cash-flow valuation models, and is our per-share estimate of a company’s intrinsic worth. We adjust our fair values for off-balance sheet liabilities or assets that a firm might have--for example, we deduct from a company’s fair value if it has issued a lot of stock options or has an under-funded pension plan. Our fair value estimate differs from a "target price" in two ways. First, it’s an estimate of what the business is worth, whereas a price target typically reflects what other investors may pay for the stock. Second, it’s a long-term estimate, whereas price targets generally focus on the next two to 12 months.
We evaluate the commitment to shareholders demonstrated by each firm’s board and management team by assessing transparency, shareholder friendliness, incentives, and ownership. We aim to identify firms that provide investors with insufficient or potentially misleading financial information, seek to limit the power of minority shareholders, allow management to abuse its position, or which have management incentives that are not aligned with the interests of long-term shareholders. The grades are assigned on an absolute scale--not relative to peers--and can be interpreted as follows: A means "Excellent," B means "Good," C means "Fair," D means "Poor," and F means "Very Poor."
© 2009 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. Certain financial data is proprietary to ComStock, a division of Interactive Data Corporation, and Multex.com, Inc. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or get permission to use this information, call 312-696-6100.
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