Estimating Stocks' Fair Values a Complex Process

Morningstar analysts take into account multiple factors in determining a company's intrinsic worth

Adam Zoll 2 May, 2012 | 11:06AM

Question: On Morningstar's individual stock pages, I see your analysts' fair value estimate for a stock, along with Consider Buying and Consider Selling prices. How do Morningstar analysts arrive at these numbers? Also, how do they relate to Morningstar's star ratings for stocks?

Answer: To determine a stock's fair value, Morningstar analysts examine factors such as estimated future cash flow, competitive positioning, and even the degree of certainty the analyst has in making his or her evaluation. Analysts from Morningstar's 125-person equity and credit research team use a standardized methodology to take them through this process for the more than 1,800 companies they cover worldwide.

Analysts typically are assigned to track the companies within specific sectors and revise their fair value estimates whenever information becomes available that affects their outlook for a stock. For example, a new product launch, a merger or acquisition, or a major competitor abandoning a market all could cause an analyst to revise a company's fair value estimate up or down.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.

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