Quantitative Equity Reports Overview
The quantitative report on equities consists of data, statistics and quantitative equity ratings on equity securities. Morningstar, Inc.’s quantitative equity ratings are forward looking and are generated by a statistical model that is based on Morningstar Inc.’s analyst-driven equity ratings and quantitative statistics. Given the nature of the quantitative report and the quantitative ratings, there is no one analyst in which a given report is attributed to; however, Mr. Lee Davidson, Head of Quantitative Research for Morningstar, Inc., is responsible for overseeing the methodology that supports the quantitative equity ratings used in this report. As an employee of Morningstar, Inc., Mr. Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Securities Trading Policy in carrying out his responsibilities.
Quantitative Equity Ratings
Morningstar’s quantitative equity ratings consist of: (i) Quantitative Fair Value Estimate, (ii) Quantitative Star Rating, (iii) Quantitative Uncertainty, (iv) Quantitative Economic Moat, and (v) Quantitative Financial Health (collectively the “Quantitative Ratings).
The Quantitative Ratings are calculated daily and derived from the analyst- driven ratings of a company’s peers as determined by statistical algorithms. Morningstar, Inc. (“Morningstar”, “we”, “our”) calculates Quantitative Ratings for companies whether or not it already provides analyst ratings and qualitative coverage. In some cases, the Quantitative Ratings may differ from the analyst ratings because a company’s analyst-driven ratings can significantly differ from other companies in its peer group.
i. Quantitative Fair Value Estimate: Intended to represent Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. Morningstar calculates the Quantitative Fair Value Estimate using a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies. Please go to https://global.morningstar.com/ equitydisclosures for information about Fair Value Estimate Morningstar’s equity analysts assign to companies.
ii. Quantitative Economic Moat: Intended to describe the strength of a firm’s competitive position. It is calculated using an algorithm designed to predict the Economic Moat rating a Morningstar analyst would assign to the stock. The rating is expressed as Narrow, Wide, or None.
Narrow – assigned when the probability of a stock receiving a “Wide Moat” rating by an analyst is greater than 70% but less than 99%.
Wide – assigned when the probability of a stock receiving a “Wide Moat” rating by an analyst is greater than 99%.
None – assigned when the probability of an analyst receiving a “Wide Moat” rating by an analyst is less than 70%.
iii. Quantitative Star Rating: Intended to be the summary rating based on the combination of our Quantitative Fair Value Estimate, current market price, Quantitative Uncertainty Rating, and momentum. The rating is expressed as One-Star, Two-Star, Three-Star, Four-Star, and Five-Star.
One-Star – the stock is overvalued with a reasonable margin of safety. Log (Quant FVE/Price) < -1*Quantitative Uncertainty
Micro-Caps: Log (Quant FVE/Price) < -1.5*Quantitative Uncertainty
Two-Star - the stock is somewhat overvalued.
Log (Quant FVE/Price) between (-1*Quantitative Uncertainty, -0.5*Quantitative
Uncertainty)
Micro-Caps: Log (Quant FVE/Price) between (-1.5*Quantitative Uncertainty, -
0.75*Quantitative Uncertainty)
Three-Star – the stock is approximately fairly valued.
Log (Quant FVE/Price) between (-0.5*Quantitative Uncertainty, 0.5*Quantitative Uncertainty)
Micro-Caps: Log (Quant FVE/Price) between (-0.75*Quantitative Uncertainty, 0.75*Quantitative Uncertainty)
Four-Star – the stock is somewhat undervalued.
Log (Quant FVE/Price) between (0.5*Quantitative Uncertainty, 1*Quantitative
Uncertainty)
Micro-Caps: Log (Quant FVE/Price) between (0.75*Quantitative Uncertainty,
1.5*Quantitative Uncertainty)
Five-Star – the stock is undervalued with a reasonable margin of safety.
Log (Quant FVE/Price) > 1*Quantitative Uncertainty
Micro-Caps: Log (Quant FVE/Price) > 1.5*Quantitative Uncertainty
After the initial calculation for the star rating, there is a final filtering step based on the momentum of the company. We rank the companies based on their 12-1 month momentum, then restrict those below the 30th percentile to a maximum of 3 stars.
iv. Quantitative Uncertainty: Intended to represent Morningstar’s level of uncertainty about the accuracy of the Quantitative Fair Value Estimate. Generally, the lower the Quantitative Uncertainty, the narrower the potential range of outcomes for that particular company. The rating is expressed as Low, Medium, High, Very High, and Extreme.
Low – the interquartile range for possible fair values is less than 10%
Medium – the interquartile range for possible fair values is less than 15% but greater than 10%
High – the interquartile range for possible fair values is less than 35% but greater than 15%
Very High – the interquartile range for possible fair values is less than 80% but greater than 35%
Extreme – the interquartile range for possible fair values is greater than 80%
v. Quantitative Financial Health: Intended to reflect the probability that a firm will face financial distress in the near future. The calculation uses a predictive model designed to anticipate when a company may default on its financial obligations. The rating is expressed as Weak, Moderate, and Strong.
Weak –assignedwhenQuantitativeFinancialHealth<0.2
Moderate –assignedwhenQuantitativeFinancialHealthisbetween0.2 and 0.7
Strong –assignedwhenQuantitativeFinancialHealth>0.7
Other Definitions
i. Last Close – Price of the stock as of the close of the market of the last trading day before date of the report.
ii. QuantitativeValuation–Usingthebelowterms,intendedtodenotethe relationship between the security’s Last Price and Morningstar’s quantitative fair value estimate for that security.
Undervalued – Last Price is below Morningstar’s quantitative fair value estimate.
Farily Valued – Last Price is in line with Morningstar’s quantitative fair value estimate.
Overvalued – Last Price is above Morningstar’s quantitative fair value estimate.
This Report has not been made available to the issuer of the security prior to publication.
Risk Warning
Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future performance. A security investment return and an investor’s principal value will fluctuate so that, when redeemed, an investor’s shares may be worth more or less than their original cost. A security’s current investment performance may be lower or higher than the investment performance noted within the report.
The quantitative equity ratings are not statements of fact. Morningstar does not guarantee the completeness or accuracy of the assumptions or models used in determining the quantitative equity ratings. In addition, there is the risk that the price target will not be met due to such things as unforeseen changes in demand for the company’s products, changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, and tax rate. For