The closing price of the previous trading day.
Market Cap ($mil)
The total equity market value of the company, expressed in millions of
dollars. It equals shares outstanding times the stock price. It is updated
Morningstar Style Box
The equity Style Box is a nine-square grid that classifies securities by
size along the vertical axis and by value and growth characteristics along the
horizontal axis. Different investment styles often have different levels of
risk and lead to differences in returns. Therefore, it is crucial that
investors understand style and have a tool to measure their style exposure.
The Equity Style Box is a great diversification tool. If you are looking for
stocks and want to be sure they cover a wide spectrum of the market, a quick
glance at the style box will indicate whether the stocks have small or large
market capitalizations, and whether they are more value-oriented or
Morningstar calculates this figure in-house on a monthly basis.
For the Pros
The Morningstar Style Box captures three of the major considerations in equity
investing: size, security valuation and security growth. Value and growth are
measured separately because they are distinct concepts. A stock's value
orientation reflects the price that investors are willing to pay for some
combination of the stock's anticipated per-share earnings, book value,
revenues, cash flow, and dividends. A high price relative to these measures
indicates that a stock's value orientation is weak, but it does not necessarily
mean that the stock is growth-oriented. Instead, a stock's growth orientation
is independent of its price and reflects the growth rates of fundamental
variables such as earnings, book value, revenues, and cash flow. When neither
value nor growth is dominant, stocks are classified as "core."
Stock Size Score: Vertical Axis
Rather than using a fixed number of "large cap" or "small cap" stocks,
Morningstar uses a flexible system that isn't adversely affected by overall
movements in the market. World equity markets are first divided into seven
The stocks in each style zone are further subdivided into size groups.
Giant-cap stocks are defined as those that account for the top 40% of the
capitalization of each style zone; large-cap stocks represent the next 30%;
mid-cap stocks represent the next 20%; small-cap stocks represent the next 7%
and micro-cap stocks represent the smallest 3%. For value-growth scoring,
giant-cap stocks are included with the large-cap group for that style zone, and
micro-caps are scored against the small-cap group for that style zone.
Stock Style Score:Horizontal Axis
The scores for a stock's value and growth characteristics determine its
horizontal placement. There are five value factors and five growth factors,
which are listed below.
Value Score Components and Weights
Price/Projected Earnings 50.0%
Price/Cash Flow 12.5%
Dividend Yield 12.5%
Growth Score Components and Weights
Long-term Projected Earnings Growth 50.0%
Book Value Growth 12.5%
Sales Growth 12.5%
Cash Flow Growth 12.5%
Historical Earnings Growth 12.5%
The five value and five growth characteristics for each individual stock are compared to those of other stocks within the same scoring group (groups based on style zone and size, e.g. Europe large-caps). Stocks are then assigned Overall Value and Overall Growth scores based on the ten factors. If either growth or value is dominant, the stock is classified accordingly. If the scores for value and growth are similar in strength, the stock is classified as "core."
The thresholds between value, core, and growth stocks vary to some degree over time, as the distribution of stock styles changes in each style zone. However, on average, the three stock styles each account for approximately one-third of the total capitalization in each scoring group.
The company's primary area of business.
This field provides an easy way to search for stocks within a certain area of
business. When making comparisons among stocks, it can be helpful to compare
companies within the same area of business. Morningstar also provides
percentile rankings within the company's industry for data such as net margin,
revenue growth, earnings growth, and total return.
The information is gathered from the description-of business section of the
company's 10-K form. The company is then coded using the North American
Industrial Classification System. More information about the NAICS is available
by calling 1-800-553-6847 to purchase a technical manual, visiting the Internet
site at www.census.gov/naics, or calling an industry classification expert at
Companies engaged in the design and marketing of computer operating systems
Examples include Microsoft, Oracle, and Siebel Systems.
Manufacturers of computer equipment, communication equipment, semiconductors,
Examples include IBM, Cisco Systems, and Intel.
Companies that own and operate broadcast networks and those that create content
or provide it to other media companies.
Examples include AOL Time Warner, Walt Disney, and The Washington Post.
Companies that provide communication services using fixed-line networks or
those that provide wireless access and services.
Examples include SBC Communications, AT&T, and Alltel.
Includes biotechnology, pharmaceuticals, research services, HMOs, home
health, hospitals, medical equipment and supplies, and assisted living
Examples include Abbott Laboratories, Merck, and Cardinal Health.
Includes retail stores, personal services, home builders, home supply, travel
and entertainment companies, and educational providers.
Examples include Wal-Mart, Home Depot, and Expedia.
Includes advertising, printing, publishing, business support, consultants,
employment, engineering and construction, security services, waste management,
distributors, and transportation companies.
Examples include Manpower, R. H. Donnelley, and Southwest Airlines.
Includes banks, finance companies, money management firms, savings and loans,
securities brokers, and insurance companies.
Examples include Citigroup, Washington Mutual, and Fannie Mae.
Companies that manufacture or provide food, beverages, household and personal
products, apparel, shoes, textiles, autos and auto parts, consumer electronics,
luxury goods, packaging, and tobacco.
Examples include PepsiCo, Ford Motor Co., and Kraft Foods.
Includes aerospace and defense firms, and companies that provide or manufacture
chemicals, machinery, building materials, and commodities.
Examples include Boeing, DuPont, and Alcoa.
Companies that produce or refine oil and gas, oilfield services and equipment
companies, and pipeline operators.
Examples include Exxon Mobil, Schlumberger, and BP Amoco.
Electric, gas, and water utilities.
Examples include Duke Energy, Exelon, and El Paso.
Morningstar divides most stocks into eight type designations-High Yield,
Distressed, Hard Asset, Cyclical, Slow Growth, Classic Growth, Aggressive
Growth, and Speculative Growth-each of which defines a broad category of
investment characteristics. Stocks are assigned to a type based on objective
financial criteria, so stocks of the same type have similar economic
fundamentals. Every stock has individual idiosyncrasies, but in general, when
evaluating investments, many of the same concerns and evaluation methods will
apply across the stocks in one type.
BenefitMorningstar Stock Grades
Stock Types offer an easy way to narrow down the stock universe to those best
filling specific investment needs. Stock Types also help you quickly determine
the diversification level of portfolios. For instance, you might discover that
most of your holdings are categorized as Speculative Growth. If you want to
lessen the portfolio's risk, you could invest in other types of stocks.
Calculated in-house using Morningstar's proprietary algorithm. See the
definitions for individual Stock Types for further details.
Anheuser-Busch (BUD) has a Morningstar Stock Type of Classic Growth, because it
has positive earnings, and does not meet the criteria for the High-Yield,
Distressed, or Slow Growth types.
For the Pros
You may notice that some stocks in our database do not have Stock Types. This
is only because they do not meet the criteria needed to fit into any of the
Stock Type categories. A listing of N/A (Not Applicable) under Stock Type is no
reflection on the performance or underlying value of the stock itself.
Companies that are having serious operating problems. This could mean declining
cash flow, negative earnings, high debt, or some combination of these. Such "
turnaround" stocks tend to be highly risky, but also harbor some intriguing
Companies whose main business revolves around the ownership or exploitation of
hard assets like real estate, metals, timber, etc. Such companies typically
sport a low correlation with the overall stock market, and have traditionally
been where investors look for inflation hedges.
Companies whose core business can be expected to fluctuate in line with the
overall economy. In a booming economy such companies will look excellent; in a
recession, their growth stalls and they might even lose money.
What to Expect As a Company Matures
In the May issue of the Morningstar StockInvestor, senior staff writer
Haywood Kelly had a few things to say about the aging process of a company,
based on Morningstar Stock Types. Here's the basic outline of the article:
Baby Steps: Speculative Growth
Don't expect consistency from speculative growth companies. At best their
profits are spotty. At worst they lose money. In fact, many companies never
make it beyond speculative growth, going instead to bankruptcy court. That's
why they're speculative. But current profitability isn't what interests us
about speculative-growth companies. It's future profits. Hopefully, a
speculative-growth company will eventually blossom into a world-class company.
The Awkward Age: Aggressive Growth
Aggressive Growth companies show a bit more maturity than their
speculative-growth counterparts: They post rapid growth in profits, not just in
sales-a sign of more staying power. At this point, it's time to make some
Prime of Life: Classic Growth
Now we come to firms in their prime-firms with little left to prove. The best
classic growers have blossomed into money machines, churning out steady growth,
high returns on capital, positive free cash flows, and rising dividends. The
catch is, their growth is nowhere near that of the aggressive-growth group.
Senior Citizens: Slow Growth and High Yield
These are the companies whose growth is a fading memory. Having run out of
attractive investment opportunities, most of them pay out the bulk of their
earnings in dividends-expect high payout ratios-rather than plow the profits
back into their business.
Aging Process Conclusion
While there may be an aging process for companies, there's not one for stocks.
An investor like Warren Buffet has focused on finding great stocks in and
around the classic-growth category-companies like Coca-Cola ((KO)) and American
Express ((AXP)). Peter Lynch was more eclectic, investing in everything from
speculative growth (Dunkin' Donuts, Pep Boys ((PBY))) to slow growth (Chrysler
((C))). Most of us would want a smattering of companies from across the
spectrum. By putting each company in context, paying special attention to how
it measures up against others in its age bracket, we can do just that. It's one
kind of age discrimination that makes eminent sense.
The Morningstar stock-grading system is a quantitative scoring system that consists of three grades: Growth, Profitability, and Financial Health. They're meant to be a quick way to get a handle on a company's fundamentals.
All grades are based on relative rankings. For example, a company that receives an "A" in growth is a company that ranks near the top of our universe in terms of growth. We award 10% of the universe As, 20% Bs, 40% Cs, 20% Ds, and 10% Fs.
The grades are based solely on the numbers reported by the company in its SEC filings. Due to accounting conventions, however, these grades may or may not reflect the underlying economic reality, and investors should view the grades as a starting point for analysis rather than a definitive judgment on the company. No Morningstar analyst makes a subjective call as to what grade a company should get.
All information used to calculate the grades comes from Morningstar's internal equities database.
The growth grade is based on the trend in revenue per share using data from the past five years. For the purpose of calculating revenue per share we use the past five years' revenue figures and corresponding year-end fully diluted shares outstanding; if year-end fully diluted shares outstanding is not available, we calculate this figure by dividing the company's reported net income applicable to common shareholders by the reported fully diluted earnings per share. A company must have a minimum of four consecutive years of positive and non-zero revenue, including the latest fiscal year, to qualify for a grade.
In calculating the revenue per share growth rate, we calculate the slope of the regression line of historical revenue per share. We then divide the slope of the regression line by the arithmetic average of historical revenue per share figures. The result of the regression is a normalized historical increase or decrease in the rate of growth for sales per share. We then calculate a z-score by subtracting the universe mean revenue growth from the company's revenue growth, and dividing by the standard deviation of the universe's growth rates.
Stocks are sorted based on the z-score of their revenue per share growth rate calculated above, from the most negative z-score to the most positive z-score. Stocks are then ranked based on their z-score from 1 to the total number of qualified stocks. We assign grades based on this ranking.
The profitability grade is based on return on shareholders' equity (ROE) using data from the past five years. Companies with less than four years of consecutive ROE figures, including the ROE figure for the latest fiscal year, are excluded from the calculations. For the remaining universe of stocks the profitability grade is based on the following three components:
(1) The historical growth rate of ROE Financial Health Grade
(2) The average level of historical ROE
(3) The level of ROE in the latest fiscal year
Instead of using accounting-based
ratios to formulate a measure to reflect the financial health of a firm, we use structural or contingent claim models. Structural
models take advantage of both market information and accounting financial information. The firm's equity in such models is viewed
as a call option on the value of the firm's assets. If the value of the assets is not sufficient to cover the firm's liabilities
(the strike price), default is expected to occur, and the call option expires worthless and the firm is turned over to its
creditors. To estimate a distance to default, the value of the firm's liabilities is obtained from the firm's latest balance sheet
and incorporated into the model. We then rank the calculated distance to default and award 10% of the universe A's, 20% B's,
40% C's, 20% D's, and 10% F's.
The Morningstar Rating for Stocks is calculated by comparing a stock's current market price with Morningstar's estimate of the stock's fair value. Our rating system also includes an uncertainty adjustment, so that it's more difficult for a company to earn a 5-star rating the more uncertain we are of our fair value estimate.
Under our system, 3-star stocks are those that should offer a "fair return," one that adequately compensates for the riskiness of the stock. Three-star stocks should offer investors a return that's roughly comparable to the stock's cost of equity. (The cost of equity is often called a "required return" because it represents the return an investor requires for taking on the risk of owning the stock.)
Five-star stocks, of course, should offer an investor a return that's well above the company's cost of equity. Conversely, low-rated stocks have significantly lower expected returns.
The Morningstar Rating for Stocks also includes a small buffer around the cutoff between each rating, to reduce the number of rating changes produced by random market "noise." If a $50 stock moves up and down by $0.25 each day over a few days, the buffer will prevent the star rating from changing each day based on this insignificant change.
Consider Buying is the price below which we think investors should consider
purchasing a stock, and is equivalent to the price at which it would earn a
5-star rating. Be sure to take your individual circumstances-including
diversification, risk tolerance, and tax considerations-into account before
making a final purchase decision.
Consider Selling is the price above which we think investors should consider
selling a stock, and is equivalent to the price at which it would earn a 1-star
rating. Again, be sure to take your individual circumstances into account
before making a final decision to sell a stock.
Fair Value Uncertainty
Fair Value Uncertainty is meant to give investors an idea of how tightly we feel we can bound our fair value estimate for any given company. To generate Morningstar Fair Value Uncertainty, analysts consider the following factors:
• Sales predictability
• Operating leverage
• Financial leverage
• A firm’s exposure to contingent events
Based on these factors, analysts classify 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.
Fair Value Estimate
The Morningstar analyst's estimate of what the stock is worth. Our fair value
estimate should be used in conjunction with our Economic Moat rating and our
Morningstar Risk rating.
The idea of an economic moat refers to how likely companies are to keep
competitors at bay for an extended period. One of the keys to finding superior
long-term investments is buying companies that will be able to stay one step
ahead of their competitors, and it's this characteristic--think of it as the
strength and sustainability of a firm's competitive advantage--that we're
trying to capture with the economic moat rating.
One of the first things we do when we're thinking about the size of a firm's
economic moat is look at the company's historical financial performance.
Companies that have generated returns on capital higher than their cost of
capital for many years running are usually have a moat, especially if their
returns on capital have been rising or are fairly stable.
Of course, the past is a highly imperfect predictor of the future, so we look
carefully at the source of a company's excess economic profits before assigning
a moat rating. For example, a competitive advantage created by a hot new
technology usually isn't very sustainable, because it won't be too long until
someone comes along and invents a better widget.
Here are some of the attributes that can give companies economic moats:
. Huge Market Share : When a firm enjoys economies of scale in areas like
manufacturing, sales, and marketing, it can be pretty tough for a competitor to
. Low-Cost Producer : The ability to produce products or services at a lower
cost than competitors is an advantage that's especially potent in commodity
. Patents, Copyrights, or Governmental Approvals and Licenses : Some companies
generate enormous profits when their products or markets are artificially
protected by the government.
. Unique Corporate Culture : Although you should be careful of placing too much
emphasis on this attribute, since it's such a "soft" method of determining
competitive advantage, there's no question it can make a difference.
. High Customer-Switching Costs : If you can make it tough for your customers
to use a competitor, it's usually easy to keep ratcheting prices up just a bit
year after year--which can lead to big profits.
. The Network Effect : This is a relatively rare, but potentially quite potent,
source of competitive advantage, and often accrues by the first mover in an
emerging technology. Since a network's value increases as more people use it,
the company that creates the network can create a massive economic moat.