Tesla Motors, Inc. TSLA (XNAS)  Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Uncertainty Economic Moat Market Cap (Bil) Stewardship Industry Group USD225.40 03 april 2014 USD174.28 1.29 — 03 april 2014 High Narrow USD27.77 03 april 2014 — Auto Manufacturers Tesla Issues $1.6 Billion in Convertible Notes to Finance Gigafactory, Vehicle Production Investment Thesis Analyst Note Rodney Nelson, 27 February 2014 Tesla Motors announced a $1.6 billion convertible note offering to help the company finance the construction of its $4 billion-$5 billion battery production factory. It will invest $2 billion in the factory through 2020, with unidentified partners absorbing the Rodney Nelson, 02 January 2014 balance of the cost. The company will also use some of the proceeds to aid in development and production of its mass market Model E third-generation vehicle. Tesla Motors is at the forefront of the electric vehicle (EV) revolution, and while the While we continue to believe Tesla is without a competitive advantage, the successful company has enjoyed tremendous success with its first mass-market luxury vehicle, ramping of this factory would help ensure Tesla’s longevity in the auto industry. the Model S, the development of the EV market is only in the early innings. Tesla must overcome a number of hurdles in the near to intermediate term, including a wave of EV The gigafactory should significantly ease Tesla’s supply issues and costs, as the competition from the major automakers beginning in 2014, but we think the company is company believes the factory will produce enough battery power (roughly 35 building a solid foundation for long-term success. GWh/year) to meet management’s 2020 expected volume of 500,000 vehicles per year. If Tesla is to succeed in making an affordable electric car for the mass market, Tesla’s vehicles have evolved from a toy for the wealthy in the limited-edition Roadster this factory’s development and efficiency will be vital to that cause. to a practical, relatively affordable luxury vehicle in the Model S. The accolades the Model S has received have helped frame the Tesla brand as one of high quality and In our view, the construction and ramp-up timeline looks tight, yet feasible, relative to cutting-edge technology, a factor that could entice the average consumer to purchase the Model E’s projected launch date in 2017. The firm plans to have construction Tesla’s mass-market Model E, which will sell in the $30,000 range. However, that complete by FYE 2015, with production ramping in early 2017. Tesla’s proposed model remains several years off, and Tesla will first attempt to enter the fiercely pricing for the Model E is contingent on the gigafactory’s operation, and any setbacks competitive SUV market with its Model X crossover sometime in late 2014 or early could hinder either the launch or Tesla’s pricing structure. While Tesla continues to 2015. While auto demand is recovering and should aid the success of the Model X, the take the appropriate steps to making mass-market electric vehicles a reality, we think relative youth of Tesla will make any economic declines difficult to endure relative to its the market’s fervor for the shares has reached exceptional levels. Tesla has made competitors. The firm remains in a heavy investment phase between development of incredible progress as an auto developer, but it now faces new challenges as it enters the Model E, increasing production of the Model S and ramping up production of the the battery manufacturing industry. There has been speculation that this factory could Model X, and building out its Supercharger Network. Additionally, Tesla has yet to lead to new business opportunities, but we think those beliefs are premature. We prove that it can produce electric vehicles profitably, and the company will need to continue to believe Tesla shares are priced to perfection, and an investment in the continue to refine its technology and operations in order to efficiently build higher- shares at these levels assumes the company will maintain flawless execution moving volume models. forward. We think the Supercharger Network could be a disruptor for Tesla that could give its Bulls Say models a leg up on competing EVs. Tesla models will be able to use the network for free, and drivers can achieve a full charge in under an hour, much faster than standard chargers in parking garages or gas stations. However, we worry that the free-use model could become a significant cost burden as Tesla vehicles become more prevalent on the road, and the North American network is still at least two years from completion.  Tesla is attempting to expand EV infrastructure with its Supercharger Networks in North America and Europe, which could give its vehicles an edge over new EV competition. These networks could also ease consumers' anxiety about range limitations of electric vehicles.  The accolades Tesla has received for its Model S could build some staying power for the brand as the firm moves into the SUV and high-volume markets. © 2013 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Tesla Motors, Inc. TSLA (XNAS)  Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Uncertainty Economic Moat Market Cap (Bil) Stewardship Industry Group USD225.40 03 april 2014 USD174.28 1.29 — 03 april 2014 High Narrow USD27.77 03 april 2014 — Auto Manufacturers  Tesla has already made inroads in Europe and Asia with its Model S, which could expensive Model E. While annual revenues have skyrocketed north of $1 billion since give the firm a leg up on larger manufacturers as EVs become more prevalent the introduction of the Model S in late 2012, the firm has struggled with cost control and worldwide. has yet to prove that EV production is profitable, though selling, general, and administrative expenses appear to be stabilizing in the midteens as a percentage of Bears Say sales. The firm has ramped annual production of the Model S to more than 21,000, and the company anticipates production doubling in 2014. Currently, Tesla has production  The infrastructure for electric vehicles remains insufficient in most countries. capabilities of up to 500,000 vehicles at its Fremont, Calif., plant, though the firm will Furthermore, Tesla is making its Supercharger stations available for free use, which likely explore overseas production as new models are brought to market.Management we fear could become a significant cost burden. has targeted automotive gross margins of 25%, and the company is within striking  Early electric vehicle entries into the highvolume market, such as the Chevy Volt, have struggled to succeed, which could keep Tesla’s Model X from gaining traction.  The firm has butted heads with franchised auto dealers and faces regulatory pressures from individual states that could cause an overhaul of Tesla’s bricks-andmortar sales network structure. Economic Moat 02 January 2014 Although Tesla has innovated the auto industry with the success of its Model S, we believe the firm is without a competitive advantage. It is incredibly difficult for an auto manufacturer to develop a competitive advantage, based on the dearth of switching costs and falling barriers to entry in the industry. While some manufacturers command some brand loyalty, we do not believe this would translate into any significant level of distance of achieving that rate consistently. Supply constraints and Tesla’s inexperience have hampered profitability, but further manufacturing experience and a deeper penetration of the EV into the general auto market should ease the pressure on Tesla’s negative operating and net margins. While the Model S and Model X have the potential to generate double-digit profit margins that are realized in a number of luxury and sport utility vehicles, the margin outlook for electric vehicles remains a relative unknown. As more electric vehicles enter the market from major manufacturers, suppliers will likely ramp parts production and ease Tesla’s constraints. Still, we believe the firm’s high-volume Model E (likely priced between $30,000 and $40,000 with first deliveries in the latter half of the decade) is unlikely to generate operating margins beyond the midsingle digits, a common rate for volume vehicles. Risk 02 January 2014 protection for the firm’s economic profits over the long term. While Tesla is not an ordinary auto manufacturer, we believe the firm remains without any significant competitive advantages in the auto manufacturing space. The firm has been able to generate success by marketing its Model S as a luxury vehicle, and the product has garnered enough accolades to justify the distinction. However, Tesla’s long-term feasibility depends on its ability to profitably manufacture a lineup of volume vehicles to help propagate the penetration of electric vehicles into a market and infrastructure that is designed for internal combustion engines. To this effect, Tesla’s Supercharger Network remains a relative wild card and could generate some level of consumer switching costs among electric car options should the network buildout prove to be successful. However, the project remains in the early innings, and significant capital outlays will be required to complete the balance of the proposed 225-station North American network by the end of 2015 in addition to a European network slated for completion by the end of 2014. Valuation 02 January 2014 Tesla’s growth story is contingent on the firm continuing to improve the cost of production of its electric vehicles in order to serve the broader market with its less- Tesla faces a number of considerable headwinds as it attempts to usher in the electric vehicle era. The firm has been locked in a regulatory debate with franchised car dealerships and individual states over whether Tesla should be allowed to sell its cars via factory-owned dealerships in those states, serving as a potential roadblock to growing sales. The company has also experienced some negative publicity following a series of fires resulting from Model S crashes, and further incidents such as these could necessitate a design change or potentially catastrophic product recalls. Tesla will also require significant capital outlays to both build out its North American Supercharger Network and to efficiently manufacture and deliver vehicles to international markets. The firm is also set to encounter significant competition both in the luxury and high-volume market, as several manufacturers will unveil electric vehicles in the coming years, including Cadillac’s ELR which enters production in 2014, though it is not a pure EV. The company has also faced supply issues as some parts that are paramount to the EV model can only be sourced from a small number of suppliers, and this could lead to production issues if the company cannot find alternative suppliers. The company also risks suffering from gaps in new product launches, as the Model X will likely lag the Model S launch by three to four years, while the Model E introduction could face a similar delay. These gaps could harm sales © 2013 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Tesla Motors, Inc. TSLA (XNAS)  Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Uncertainty Economic Moat Market Cap (Bil) Stewardship Industry Group USD225.40 03 april 2014 USD174.28 1.29 — 03 april 2014 High Narrow USD27.77 03 april 2014 — Auto Manufacturers momentum for Tesla, which will be imperative if the EV is to become a mainstay in the auto market. Management Rodney Nelson, 02 January 2014 Tesla is led by CEO Elon Musk, who was instrumental in co-founding the company in 2003. In addition to his exploits at Tesla, Musk is also the chairman of SolarCity and CEO of Space X, and he was also responsible for the rise of PayPal in the early 2000s. Musk has overseen the development of Tesla’s two production vehicles, the Tesla Roadster and the Model S. We anticipate Musk’s influence will continue to be pivotal in the long-term future of Tesla as he actively pursues the widespread adoption of electric vehicles. While we harbor some concern that his responsibilities at other firms could affect his ability to lead Tesla at some point, Musk remains heavily invested in the firm’s future with an ownership stake of just over 20%, and we believe his leadership is paramount to Tesla’s success. Daimler and Toyota also hold significant stakes in Tesla, totaling roughly 10% and 5% of the firm’s float, respectively. We think management has exhibited sound capital decision-making, and the company has managed its debt levels well, most notably after Tesla paid off its $465 million loan from the U.S. Department of Energy nine years early. The company is not only investing in electric vehicle technology but also infrastructure to promote the advance of the EV on a global scale, with significant investment in battery technology and the firm’s Supercharger Networks in North America and Europe. © 2013 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Tesla Motors, Inc. TSLA (XNAS)  Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Uncertainty Economic Moat Market Cap (Bil) Stewardship Industry Group USD225.40 03 april 2014 USD174.28 1.29 — 03 april 2014 High Narrow USD27.77 03 april 2014 — Auto Manufacturers Analyst Notes Archive "gigafactory." We believe Tesla's brand continues to gain traction with consumers on an international scale, but we think the dearth of switching costs in the auto industry Tesla Issues $1.6 Billion in Convertible Notes to Finance Gigafactory, Vehicle continues as an impediment to Tesla's claims to any material competitive advantage. Production Rodney Nelson, 27 February 2014 Fourth-quarter adjusted revenue ($761.3 million) and adjusted earnings per share Tesla Motors announced a $1.6 billion convertible note offering to help the company ($0.33) came in well ahead of consensus estimates of $677 million and $0.21, finance the construction of its $4 billion-$5 billion battery production factory. It will respectively. The firm surpassed its automotive gross margin target of 25% in the invest $2 billion in the factory through 2020, with unidentified partners absorbing the fourth quarter as CEO Elon Musk noted improvements in labor efficiency continue to balance of the cost. The company will also use some of the proceeds to aid in pay dividends. Continuing these gains will be crucial as the company will assemble the development and production of its mass market Model E third-generation vehicle. Model X on the same production line as the Model S. Management anticipates total While we continue to believe Tesla is without a competitive advantage, the successful vehicle deliveries will reach 35,000 in 2014, representing 50% increase over 2013's ramping of this factory would help ensure Tesla’s longevity in the auto industry. The gigafactory should significantly ease Tesla’s supply issues and costs, as the company believes the factory will produce enough battery power (roughly 35 total. The gigafactory should significantly ease battery pack costs and supply constraints, which could greatly improve profitability for Tesla, though we have some concerns over GWh/year) to meet management’s 2020 expected volume of 500,000 vehicles per management's long-term midteens operating margin target. Musk has intimated that year. If Tesla is to succeed in making an affordable electric car for the mass market, Tesla will sacrifice premium prices for brand loyalty, which could limit the firm's ability this factory’s development and efficiency will be vital to that cause. to reach these levels. The firm is also undertaking significant increases in capital expenditures in 2014 to prepare for mass Model X deliveries in early 2015. Though we In our view, the construction and ramp-up timeline looks tight, yet feasible, relative to the Model E’s projected launch date in 2017. The firm plans to have construction complete by FYE 2015, with production ramping in early 2017. Tesla’s proposed think Tesla continues to lay the foundation for a secular transition to electric vehicles, shares are trading at a level that assumes flawless execution through the Model X launch and Model E development. pricing for the Model E is contingent on the gigafactory’s operation, and any setbacks could hinder either the launch or Tesla’s pricing structure. While Tesla continues to Extension of Electric-Vehicle Subsidy in China Is Bullish for Tesla, but Shares take the appropriate steps to making mass-market electric vehicles a reality, we think Still Rich Rodney Nelson, 10 February 2014 the market’s fervor for the shares has reached exceptional levels. Tesla has made incredible progress as an auto developer, but it now faces new challenges as it enters As China continues to wage war against its spiraling pollution problems, regulators the battery manufacturing industry. There has been speculation that this factory could announced the extension of its electric-vehicle subsidy through the end of 2015. lead to new business opportunities, but we think those beliefs are premature. We Subsidies will decrease just 5% and 10% versus the original 10% and 20% over the continue to believe Tesla shares are priced to perfection, and an investment in the course of 2014 and 2015, respectively. The extension is incredibly timely for Tesla, shares at these levels assumes the company will maintain flawless execution moving whose Model S vehicles will debut in the country shortly at a price tag of roughly forward. $120,000. While this represents a markup of roughly 50% versus U.S. retail prices, the majority of the price hike incorporates excess taxes and transport fees. Still, we think Tesla Sets Sights on Margin Expansion, Model X Prep in 2014; Shares Priced to Perfection Rodney Nelson, 20 February 2014 the extension of the subsidy should help to stimulate electric-vehicle demand in the region. While we view this development as a positive near-term catalyst, we think the market has priced in a substantial amount of upside in Tesla shares on the back of After a groundbreaking 2013, Tesla will probably face increased scrutiny over execution as it readies to introduce its second mainstream vehicle. Management has set lofty yet attainable goals for the year, including vehicle gross margin expansion to 28%, increased capital expenditures to begin deliveries in China, ramping up Model X better-than-consensus sales figures announced last month in conjunction with the subsidy development, and the firm remains without a competitive advantage in the hotly contested auto industry, though we acknowledge the firm is making headway in growing its brand power. production, and easing pressures on battery pack supplies and costs at its forthcoming © 2013 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Tesla Motors, Inc. TSLA (XNAS)  Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Uncertainty Economic Moat Market Cap (Bil) Stewardship Industry Group USD225.40 03 april 2014 USD174.28 1.29 — 03 april 2014 High Narrow USD27.77 03 april 2014 — Auto Manufacturers CEO Elon Musk has expressed cautious optimism over Tesla’s business opportunity in China, suggesting demand could reach similar levels seen in the U.S. as early as 2015. Given the success of the Tesla brand and its association with high quality in the United States, we certainly believe this is a possibility, and early reports have indicated that Chinese consumers hold the company in similar regard. Although Tesla is forgoing the significant markup that other foreign manufacturers implement (certain models from Mercedes, BMW, and others have been marked up 100% or more in China), we think this will better position the firm in the eyes of consumers if and when it chooses to bring its Model X and high-volume Model E to market over the next several years. Musk has also expressed interest in opening a production facility in China, though no formal plans have been developed. Model S Sales Surge for Tesla in Fourth Quarter; Company Announces Charger Fix Rodney Nelson 14 January 2014 Tesla Motors issued a statement outlining a fix for the software and hardware surrounding the firm’s in-home charging station, while the firm also announced that revenue would exceed management’s expectations by nearly 20% after the company delivered a record 6,900 Model S units in the quarter. We are encouraged by these developments as Tesla continues to show improving execution in manufacturing and delivering its vehicles, though we continue to believe that the firm is without a competitive advantage given the dearth of switching costs in the auto industry. The first release addresses recent reports of fires occurring in the garages of Model S owners as a result of faulty charging units. Though these reports have been sporadic and minimal in number, Tesla is issuing a software update that can reduce charging current if fluctuations in power to the vehicle from the charger, which should eradicate the problem. The firm is also offering an improved wall adapter to Model S owners free of charge to ensure maximum safety precautions have been taken. We view these as prudent steps to help eliminate any concerns that the Model S or its charging mechanisms are unsafe, which should help promote the viability of electric vehicles over the long term. The number of Model S deliveries is a tremendous achievement for the firm and puts Tesla on pace for more than 22,000 deliveries in its first full year of sales. The sales figures suggest that Tesla’s vehicles are sustaining, if not improving, momentum that should help the firm bridge the product gap between the Model S and Model X launch sometime in late 2014 or early 2015. The release also noted improving parts availability, most notably from battery supplier Panasonic, which helps ease some of our concerns over supply strain. Although we think this is yet another step in the right direction, Tesla’s shares appear rich after today’s 21% rally, and investors should wait for a better entry before putting new capital to work. © 2013 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. LITE PICTURE © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in t he 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 shou ld not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Morningstar Equity & Credit Research Methodology Fundamental Analysis Economic Moat At Morningstar, we believe buying shares of superior businesses at a discount and The economic moat concept is a cornerstone of Morningstar’s investment philosophy allowing them to compound over time is the surest way to create wealth in the stock and is used to distinguish high-quality companies with sustainable competitive market. The long-term fundamentals of businesses, such as cash flow, competition, advantages. An economic moat is a structural feature that allows a firm to sustain economic cycles, and stewardship, are our primary focus. Occasionally, this approach excess returns over a long period of time. Without a moat, a company’s profits are more causes our recommendations to appear out of step with the market, but willingness to be susceptible to competition. Companies with narrow moats are likely to achieve contrarian is an important source of outperformance and a benefit of Morningstar’s normalized excess returns beyond 10 years while wide-moat companies are likely to independence. Our analysts conduct primary research to inform our views on each firm’s sustain excess returns beyond 20 years. The longer a firm generates economic profits, moat, fair value and uncertainty. the higher its intrinsic value. We believe lower-quality no-moat companies will see their returns gravitate toward the firm’s cost of capital more quickly than companies with moats will. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in t he 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Morningstar Equity & Credit Research Methodology Fair Value Estimate Credit Rating Our analyst-driven fair value estimate is based primarily on Morningstar’s proprietary three- The Morningstar Corporate Credit Rating measures the ability of a firm to satisfy its debt stage discounted cash flow model. We also use a variety of supplementary fundamental and debtlike obligations. The higher the rating, the less likely we think the company is to methods to triangulate a company’s worth, such as sum-of-the-parts, multiples, and yields, default on these obligations. among others. Quantitatively Driven Valuations We’re looking well beyond next quarter to determine the cash-generating ability of a company’s assets because we believe the market price of a security will migrate toward To complement our analysts’ work, we produce Quantitative Ratings for a much larger the firm’s intrinsic value over time. Economic moats are not only an important sorting universe of companies. These ratings are generated by statistical models that are meant mechanism for quality in our framework, but the designation also directly contributes to our to divine the relationships between Morningstar’s analyst-driven ratings and key financial estimate of a company’s intrinsic value through sustained excess returns on invested data points. Consequently, our quantitative ratings are directly analogous to our analyst- capital. driven ratings. Uncertainty Rating Quantitative Fair Value Estimate (QFVE): The QFVE is analogous to Morningstar’s fair value estimate for stocks. It represents the per-share value of the equity of a company. The Morningstar Uncertainty Rating demonstrates our assessment of a firm’s cash flow The QFVE is displayed in the same currency as the company’s last close price. predictability, or valuation risk. From this rating, we determine appropriate margins of safety: The higher the uncertainty, the wider the margin of safety around our fair value Valuation: The valuation is based on the ratio of a company’s quantitative fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, estimate to its last close price. Quantitative Uncertainty: This rating describes our level medium, high, very high, and extreme. of uncertainty about the accuracy of our quantitative fair value estimate. In this way it is analogous to Morningstar’s fair value uncertainty ratings. Quantitative Economic Moat: With each uncertainty rating is a corresponding set of price/fair value ratios that drive our The quantitative moat rating is analogous to Morningstar’s analyst-driven economic recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, moat rating in that both are meant to describe the strength of a firm’s competitive while higher price/fair value ratios (>1.0) lead to negative recommendations. In very rare position. Financial Health: Financial health is based on Morningstar’s proprietary cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot Distance to Default calculation. be properly estimated. For these firms, we use a rating of extreme. Very high and extreme uncertainty companies tend to have higher risk and volatility. © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in t he 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc. Morningstar Equity & Credit Research Methodology Understanding Differences Between Analyst and Quantitative Valuations If our analyst-driven ratings did not sometimes differ from our quantitative ratings, there would be little value in producing both. Differences occur because our quantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few comparable companies, the quantitative model will have more trouble assigning correct ratings, while an analyst will have an easier time recognizing the true characteristics of the company. On the other hand, the quantitative models incorporate new data efficiently and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerful predictors of future performance. When the analyst driven rating and the quantitative rating agree, we find the ratings to be much more predictive than when they differ. In this way, they provide an excellent second opinion for each other. When the ratings differ, it may be wise to follow the analyst’s rating for a truly unique company with its own special situation, and follow the quantitative rating when a company has several reasonable comparable companies and relevant information is flowing at a rapid pace. © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in t he 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. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MeDirect - Keizerinlaan 66 Boulevard de l’Impératrice - 1000 Brussels - Belgium Contact - Tel: 02 518 0000 - www.medirectbank.be - [email protected] MeDirect is the trade name under which Mediterranean Bank (Malta) plc (BTW /TVA: BE 0843.062.632) operates in Belgium. Mediterranean Bank (Malta) plc is a branch of Mediterranean Bank plc.