Market Cap (DKK Mil) 111,074
52-Week High (DKK) 220.00
52-Week Low (DKK) 169.60
52-Week Total Return % 8.3
YTD Total Return % 5.5
Last Fiscal Year End 31 Dec 2012
5-Yr Forward Revenue CAGR % 7.4
5-Yr Forward EPS CAGR % -18.0
Price/Fair Value 0.85
2011 2012
2013(E) 2014(E)Price/Earnings 22.0 — 22.4 20.3
EV/EBITDA 12.3 13.0 2.7 2.6
EV/EBIT 13.8 14.2 3.0 2.8
Free Cash Flow Yield % 5.6 4.3 21.9 24.1
Dividend Yield % 1.8 1.8 9.0 9.6
2011 2012
2013(E) 2014(E)Revenue 66,346 78,026 83,746 88,609
Revenue YoY % 9.2 17.6 7.3 5.8
EBIT 22,374 29,474 32,733 35,160
EBIT YoY % 18.4 31.7 11.1 7.4
Net Income, Adjusted 17,097 21,432 25,897 27,856
Net Income YoY % 18.7 25.4 20.8 7.6
Diluted EPS 29.99 38.85 9.37 10.32
Diluted EPS YoY % 21.9 29.5 -75.9 10.1
Free Cash Flow 18,214 19,385 23,603 26,108
Free Cash Flow YoY % 36.4 6.4 21.8 10.6
A leading insulin market position and advancing pipeline supports Novo's wide moat.
Karen Andersen, CFA Senior Stock Analyst karen.andersen@morningstar.com +1 (312) 384-4826
Damien Conover, CFA Director
damien.conover@morningstar.com +1 (312) 696-6052
Research as of 09 Jan 2014 Estimates as of 02 Jan 2014 Pricing data through 15 Jan 2014 Rating updated as of 15 Jan 2014
Investment Thesis 04 Dec 2013
As a pioneer in diabetes care, Novo has been in the business for more than 85 years and claims a 45% share of the global insulin market. The prevalence of diabetes is expected to soar in the coming decades as a result of an increasingly overweight and aging population. Insulin need will grow as more patients are diagnosed with and treated for diabetes, and as patients require more-intense regimens as their disease progresses. Demographic trends are strengthened by a market shift toward modern insulin analogs (such as Novo's Levemir and NovoLog), which offer improved efficacy, safety, and convenience for patients, allowing the firm to charge roughly double the price of human insulin despite similar production costs. Novo also markets GLP-1 analog Victoza, which has leading share in a class of drugs that bridges the evolution of therapy from orals to insulin. The firm's ultra-long-acting insulin analog Tresiba also appears to offer greater dosing flexibility and less risk of hypoglycemia than Sanofi's top-selling long-acting insulin Lantus.
However, regulatory and competitive pressures could weigh on Novo. While Tresiba is approved in Europe and Japan, a complete response letter from the Food and Drug Administration requesting a cardiovascular outcomes trial will probably delay U.S. launch until at least 2017. This opens the door for new competition from Sanofi and Eli Lilly as well, and we expect Novo to struggle to gain share in the near term in the long-acting segment, which constitutes close to 50% of the global $21 billion insulin market.
We also expect that Lilly's dulaglutide could serve as a strong competitor to Victoza as early as 2014.
That said, we are confident in the long-term strength of Novo's economic moat and positioning in the diabetes market. The firm has a full line of next-generation products in its drug pipeline that promise to improve the efficacy, safety, and convenience of diabetes treatment. Novo is also leveraging its expertise with therapeutic proteins in areas like hemophilia, and high-margin established biopharmaceutical products like NovoSeven in hemophilia and growth hormone Norditropin are sizable contributors to revenue.
With almost 50% market share by volume of the global insulin market, Novo Nordisk is the leading provider of diabetes-care products in the world. Based in Denmark, the company manufactures and markets a variety of human and modern insulins, as well as oral antidiabetic agents. Novo also has a biopharmaceutical segment (constituting roughly 20% of revenue) that specializes in protein-related therapies for hemophilia and other disorders.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
(DKK Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
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6 6 6 7 8 - 10 14 16
Morningstar Analysis
Valuation, Growth and Profitability 09 Jan 2014 Our fair value estimate stands at DKK 246 per share, following a 5-for-1 stock split for Novo's B shares. We project that Novo will yield 7.2% compound annual revenue growth through 2018. We expect diabetes-care revenue to grow at a faster clip than biopharmaceuticals (8% versus 4%) thanks to Victoza's strong uptake and continued patient conversion from human insulin to modern insulin analogs.
We expect Tresiba could reach the U.S. market based on interim analysis of the cardiovascular outcomes study in 2017, allowing Sanofi's Lantus to remain the top-selling insulin for the foreseeable future and leaving room for Sanofi and Lilly to introduce novel long-acting insulins before Tresiba. However, based on strong fundamental diabetes market growth and Novo's impressive pipeline, we expect diabetes care to grow from 78% of Novo's overall sales to 86% in 10 years. While this does put pressure on margins--operating margins are about 10 percentage points lower in this segment than in the biopharmaceuticals segment because of low pricing and high manufacturing and selling costs--we this will be more than countered by manufacturing efficiencies and operating leverage as Victoza and modern insulins gain share and Novo's diabetes salesforce has more products to sell. Overall, we forecast operating margins expanding by almost 500 basis points to 42% by the end of our 10-year forecast. Operating leverage and a slight improvement in tax rates allow for five-year average net income growth slightly ahead of revenue growth at 8.5%, and share repurchases should push this to 10.9% on a per share basis. We use an 8% cost of equity in our valuation of Novo.
Scenario Analysis
While we estimate Novo's fair value at DKK 246 per share, we've examined two additional scenarios to test our base-case assumptions and develop a range of potential outcomes. Our bull case assumes Tresiba and Ryzodeg launch in 2017 in the U.S. and Sanofi and Lilly experience delays or introduce inferior competing products, allowing
Novo to gain share in the long-acting insulin market. We also assume that Victoza remains the GLP-1 market leader as competitors fail to show superiority. This pushes our 10-year sales CAGR from 6.4% to 7.8%. We also assume that operating margins could grow to almost 47% by year 10, as Novo enjoys better uptake of its newer products that have higher pricing power. This results in a fair value estimate of DKK 322 per share. Our bear case assumes that Tresiba and Ryzodeg fail to reach the U.S. market and Victoza loses its status as the GLP-1 market leader as new entrants like Lilly's dulaglutide reach the market. This leads to a 10-year sales CAGR of 2.9%, and more limited operating leverage leads to operating margins of 40% in year 10. This results in a fair value estimate of DKK 168 per share.
Economic Moat
Novo Nordisk's global scale and strong intangible assets in the more than $40 billion global diabetes market give the firm a wide economic moat that will shield profitability for the long run. Novo accounts for more than one fourth of this global market and roughly half of the $20 billion portion of the market comprising insulin therapy.
Novo's human insulin patents have expired, and generic
insulin is available on a limited basis in some countries,
including China and India. However, entering the insulin
market requires significant up-front costs, including high
costs for clinical trials as well as high-cost manufacturing
relative to small-molecule therapies. In addition, the prices
on human insulin are quite low in virtually all markets, and
even branded modern insulins are at least 90% cheaper
than most biologics on an annual basis. Sophisticated pen
systems are standard in most markets, another up-front
investment that adds to manufacturing costs. Efficient
manufacturing techniques and economies of scale allow
Novo's insulin business to provide strong global profitability,
qualities that it shares with the only two other global insulin
players, Sanofi and Eli Lilly. Successful commercialization
of diabetes products also requires a strong sales presence,
such as Novo's 15,000-plus sales employees scattered across the globe. These dynamics have led to branded insulin products retaining more than 90% of the insulin market despite generic human insulin competitors. We expect Novo, Sanofi, and Lilly to enjoy continued insulin volume growth for the foreseeable future, as the increasingly overweight and aging global population initiates or requires more intensive treatment to control blood sugar and prevent diabetes-related complications or death.
Novo's pipeline productivity has also made older, human insulin therapies less desirable for patients, and 75% of the firm's insulin sales today derive from modern insulin analogs. These products provide better control of blood sugar--with less hypoglycemia and weight gain--than their human counterparts. Patents on the firm's three biggest modern insulin therapies generally expire within the next few years, but Novo is rolling out a new generation of therapies that are innovative enough to reset its patent protection clock.
Beyond Novo's focused R&D strategy, which allows the firm
to extend patent protection through innovation, the firm's diverse portfolio is also an intangible asset. While insulin accounts for 62% of Novo's top line, injectable GLP-1 analog Victoza has achieved best-in-class status and sees $2 billion in annual sales. Outside of diabetes, Novo's more profitable biopharmaceutical arm (roughly 20% of sales) includes NovoSeven and Norditropin, two biologics with leading share in niche markets.
Moat Trend
We believe Novo's wide economic moat is stable, given the firm's solid place in an oligopoly of three global insulin manufacturers. Strong demographic tailwinds and Novo's impressive pipeline would serve to widen Novo's moat even further in isolation, but regulatory setbacks, increasing competition, and the global pricing environment serve as counterweights, in our opinion.
Weight gain and an aging population are driving increasing
prevalence and diagnosis of diabetes. Despite numerous
treatment options, only half of diabetics receiving care get
sufficient treatment to control their blood glucose. This
opens the door for future innovation. We consider Novo
Nordisk the most innovative of diabetes players, given its
substantial pipeline. For example, the firm has a
combination of Tresiba and Victoza, known as IDegLira,
which could reach the market in Europe in 2014. This puts
the firm well ahead of competitors looking to offer GLP-1
and insulin combination therapies. Novo has pushed an
ultra-rapid-acting insulin into Phase III trials, and potentially
better post-meal glucose control than NovoLog could give
it an edge in a relatively undifferentiated rapid-acting
market. A once-weekly GLP-1, semaglutide, also recently
entered Phase III trials, and superiority to Victoza in Phase
II bodes well for Novo's ability to retain the best-in-class
position in the GLP-1 market despite new products from
Sanofi and Lilly. Novo's early-stage pipeline includes oral
insulins and oral GLP-1 analogs. While these programs are
still high risk, their success would dramatically differentiate
Novo’s diabetes offerings from competitors, which do not currently have such products in development.
However, significant headwinds prevent us from assigning Novo a positive moat trend. First, long-acting insulin Tresiba as well as Ryzodeg (a mix of rapid-acting NovoLog and Tresiba) are both launching in Japan and Europe, but the products have encountered significant delays in the lucrative U.S. market, which accounts for almost half of the firm's diabetes-care sales. A cardiovascular outcomes study began in October 2013 and should have interim data in 2016, allowing for approval in 2017. While we're optimistic that the product will reach the U.S. market at that time, this opens the door for Sanofi and Lilly to launch new long-acting products ahead of Novo, which could prevent Novo from improving its relatively weak 19% share of the long-acting insulin market in the U.S. Competitors are also innovating in the GLP-1 market, and Lilly's dulaglutide is a front-runner in the race to surpass Victoza's best-in-class efficacy.
Outside of diabetes, NovoSeven's growth has slowed, and Baxter has a me-too product in late-stage testing. Biosimilar competition is likely to limit future growth of growth hormone Norditropin.
Pricing power--through periodic price increases and conversion of patients to more-expensive modern insulin analogs--have been huge drivers of Novo's growth, accounting for about two thirds of the 16% global insulin market growth over the past five years. However, modern insulins already constitute about three fourths of insulin sold globally on a volume basis. We believe this leaves limited room for continued conversion, as many patients in emerging markets can receive human insulin for as little as
$0.20 per day. Novo faces ongoing pricing pressure in Europe, and we also think the benefits of the newest diabetes therapies may not be enough to sway payers in an increasingly cost-conscious environment, particularly given demographic trends. While high-single-digit net price
increases have been typical in recent years in the U.S.
market, we're concerned that this dynamic may not be sustainable. For example, Express Scripts recently excluded Novolin and NovoLog (in favor of Lilly's insulin products) from its national formulary, and it also excluded Novo's GLP-1 analog Victoza in favor of Bristol and Astra's Byetta and Bydureon. We believe this will create at least a 1%
drag on Novo's top line in 2014. While a similar formulary
decision from CVS in 2012 favored Novo over Lilly, we think
consolidation among pharmacy benefit managers and the
narrowing window for high price increases that was
provided by the patent cliff limit Novo's pricing power--and
ultimately its growth--going forward.
Bulls Say/Bears Say
Bulls Say Bears Say
3 The increased prevalence of obesity and patient conversion to pricier modern insulin offerings should expand the branded diabetes-care market by 12%
annually over the next five years.
3 With a promising pipeline full of next-generation insulins, Novo is well positioned to defend its formidable diabetes market share in the long run.
3 Novo's prowess developing therapeutic proteins has led to the creation of a highly profitable line of biopharmaceutical products for hemophilia and other disorders, helping to diversify its top line and further boost margins.
3 Tresiba and Ryzodeg won't reach the lucrative U.S.
market until at least 2017, allowing Sanofi's Lantus to continue to dominate the market and both Sanofi and Lilly to introduce new products in the interim.
3 Novo and its insulin market peers have enjoyed tremendous U.S. pricing power in recent years, but the passing of the patent cliff and increased consolidation of PBMs could limit this power in the future.
3 Novo's Victoza has been a strong growth driver, but
exclusion from the Express Scripts formulary in 2014
and the introduction of more potent GLP-1 analogs
could weigh on growth.
2013(E) 2014(E) 2015(E) 2016(E) 2017(E)
Cash and Equivalents (beginning of period) 17,036 16,858 17,547 19,953 23,097
Adjusted Available Cash Flow 15,798 17,627 19,306 21,621 23,833
Total Cash Available before Debt Service 32,834 34,485 36,854 41,573 46,930
Principal Payments — — — — —
Interest Payments -600 -600 -600 -600 -600
Other Cash Obligations and Commitments -1,181 -1,249 -1,352 -1,459 -1,569 Total Cash Obligations and Commitments -1,781 -1,849 -1,952 -2,059 -2,169
DKK Millions
% of Commitments
Beginning Cash Balance 17,036 173.7
Sum of 5-Year Adjusted Free Cash Flow 98,185 1,000.8
Sum of Cash and 5-Year Cash Generation 115,221 1,174.5
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 115,221 1,174.5
Sum of 5-Year Cash Commitments -9,810 —
NOVO B Sector Universe
Business Risk 2
Cash Flow Cushion 2 — —
Solvency Score 2 — —
Distance to Default — — —
Credit Rating — — —
Five Year Adjusted Cash Flow Forecast (DKK Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Novo boasts a DKK 13 billion cash and marketable securities balance and has no long-term debt obligations. Considering its strong balance sheet and robust free cash flow generation north of DKK 20 billion per year, the firm is in excellent financial health, and we believe equity will continue to make up the vast majority of Novo's capital structure. In our opinion, Novo will throw off 30% of revenue in the form of free cash flow during the next five years, which we believe it will deploy to fund internal capital requirements, targeted acquisitions, and its ambitious dividend and share-repurchase schedule. The firm has steadily increased its dividend payout ratio over the years and paid out 45% of 2012's earnings in the form of dividends in early 2013. Novo is also returning DKK 14 billion worth of value to shareholders in 2013 through share repurchases.
Enterprise Risk
Novo faces competition from branded and generic drug
manufacturers alike. Generic competition for human insulin,
which is one of the easiest large-molecule drugs to
replicate, and competition from new diabetes treatments,
such as long-acting GLP-1 analogs and long-acting insulin
analogs, could limit the commercial success of Novo's
product line. The company also faces the risk that
widespread health-care reform will force mandatory price
cuts on its high-margin products. In the U.S., future
formulary exclusions--such as Express Scripts' exclusion of
Novolin, NovoLog, and Victoza from its 2014 national
formulary--could also weigh on sales and reduce pricing
power. The FDA is also requiring additional safety data for
diabetes drug candidates both prior to and following
approval, which could significantly increase R&D expenses
and weighs on margins.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
American Funds Europacific Growth Fund 5.48 4.04 783 30 Sep 2013
American Funds New Perspective Fund 2.42 3.95 — 30 Sep 2013
Harbor International Fund 1.23 2.08 -888 30 Sep 2013
Thornburg International Value Fund 0.89 2.59 — 30 Nov 2013
Hansard EU Carmignac Patrimoine 0.72 1.49 — 30 Sep 2013
Concentrated Holders
PFA Afd. 12 Danske Aktier 0.47 34.06 83 31 Dec 2012
SSgA Denmark Index Equity Fund — 31.61 1 31 Oct 2013
PFA+ Danske aktier 0.02 29.72 -2 30 Sep 2013
iShares MSCI Denmark Capped 0.02 22.14 — 14 Jan 2014
Sparinvest INDEX OMX C20 Capped 0.01 14.17 1 31 Dec 2013
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date Government Pension Fund of Norway - Global 2.31 0.24 2,228 31 Dec 2011
Capital Research and Management Company 9.00 1.78 791 30 Sep 2013
Bellevue Asset Management AG 0.11 3.78 512 30 Sep 2013
ARGA Investment Management, LP 0.06 0.59 267 30 Sep 2013
Bessemer Investment Management LLC 0.10 0.85 250 31 Oct 2013
Top 5 Sellers
Harbor Capital Advisors Inc 1.23 2.07 -890 30 Sep 2013
T. Rowe Price Associates, Inc. 0.20 0.43 -645 30 Sep 2013
Legal and General 0.56 0.73 -387 30 Nov 2013
Grantham, Mayo, Van Otterloo & Co., LLC 0.06 0.23 -370 31 Aug 2013
Eaton Vance 0.03 0.74 -261 31 Oct 2013
Management 13 Sep 2013
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
We believe Novo has been an exemplary steward of shareholder capital. Stellar execution by management has helped the stock outperform its peer group by a huge margin during the past decade. CEO Lars Rebien Sorensen has led the firm since 2000 and boasts nearly 30 years of experience at the company. We believe executive compensation to be very reasonable, especially compared with the often-excessive compensation packages at competing firms such as Eli Lilly. But we are wary of the firm's board independence--or relative lack thereof. Only four of the firm's 11 board members are considered independent; three members are elected by the Novo Nordisk Foundation, and four are chosen by the company's employees, in accordance with Danish law. Furthermore, the company's A shares, which are controlled exclusively by the foundation, carry 10 times the voting power of the publicly traded B shares.
Although this control structure could conceivably
compromise the interests of minority shareholders, we are
reassured by Novo's impressive record of protecting
shareholder value.
Analyst Notes
Maintaining Our Novo Nordisk Fair Value Estimate; 2014 Guidance Consistent with Our Expectations 31 Oct 2013 Novo Nordisk reported third-quarter results that put it on track to meet our estimates for the full year, but management's outlook for high-single-digit sales and operating profit growth in 2014 is likely weighing on the firm's share price. However, Novo's 2014 guidance is consistent with our expectations, and the firm's wide economic moat (a factor of its dominant position in the insulin market and its innovative pipeline) as well as reliable global insulin market volume growth (due to demographic trends in the U.S. and growing treatment rates outside the U.S.) remain key to our $209 fair value estimate.
Sales grew 10% in local currencies in the third quarter, or 3% as reported to DKK 20.5 billion. Basal insulin pricing power in the U.S. and stronger biopharmaceuticals growth (a more profitable segment) led to a 40-basis-point improvement in Novo Nordisk's gross margin to 82.8%.
Local currency growth in operating expenses was largely in line with top-line growth, with operating profit in local currencies up 12% (2% as reported).
Looking forward to 2014, we expect management's outlook is disappointing investors. While we expect Tresiba's launch to be gradual-- Novo's strong position on premium pricing will likely slow the rollout in Europe, and the U.S. launch is not likely before 2017--we still think the firm is well- positioned in the basal insulin market in the long run.
Management did detail some of the reasons for 2014 sales growth falling below the 11%-13% growth levels for 2013.
Prandin generics in the U.S. should shave 100 basis points from top-line growth in 2014, and while significant uncertainty still surrounds the impact of the Express Scripts national formulary, management indicated that this could also have a 100-basis-point impact. Positive developments in 2013--such as volatility in NovoSeven sales and significant share gains for Norditropin--also weigh on the
2014 outlook. However, these developments are already factored in our valuation.
Novo Nordisk is facing different dynamics in the diabetes care market, from region to region. The U.S. remains the biggest driver, accounting for two thirds of the firm's 15%
modern insulin growth so far this year, thanks to strong pricing power and share gains for Levemir. The Express Scripts formulary decision for 2014 will weigh on U.S. sales of Victoza and NovoRapid in particular, and this could signify a more competitive pricing dynamic in the broader U.S.
diabetes care market. However, we do not assume continued strong U.S. price increases in our valuation for Novo. In Europe, despite continuing conversion to modern insulins, volume growth is low and austerity measures weigh on prices, making this the weakest market for pricing of Novo's insulin products (and making Tresiba's premium price hard to swallow in this region). Novo is also seeing declines in a mature and price-conscious Japanese insulin market. Volume growth in other international markets, particularly the Middle East, remains strong. In China, while modern insulins are growing at a strong double-digit rate, this growth is decelerating, and human insulin growth is more modest. While modest human insulin growth could mean more uptake of premium modern insulins, it could also reflect human insulin competition from within China, as government reimbursement in some provinces encourages human insulin use. In the long run, we think resistance to price premiums for innovative insulin products in Europe, as well as the potential slowing of modern insulin conversion in markets outside the U.S. and Europe, as the biggest risks to our valuation.
Novo Shares Remain Undervalued; Strong Pricing
Power and Tresiba Progress in the First Half of 2013 08
Analyst Notes
Aug 2013
Novo raised its full-year sales and operating profit outlook in conjunction with its first-half results, but free cash flow expectations for the year of DKK 22 billion remain unchanged. These adjustments don't have a significant impact on our valuation, as we had already assumed free cash flow just under DKK 23 billion for the year. Recent share prices remain at a 20% discount to our fair value estimate of $212 per ADR (DKK 1,204). We continue to see Novo's industry-leading 27% share of the growing diabetes market and strong barriers to entry for the competition as creating a wide moat around the firm's profitability, and Novo's innovative pipeline contributes to its positive moat trend.
Novo raised its top-line growth expectations to 11%-13%
in local currencies, 200 basis points higher than previous guidance, but only 100 basis points higher on a reported basis, including a 400-basis-point headwind from currency fluctuations. In the first half, sales rose 14% in local currencies (11% in Danish kroner) to DKK 41.4 billion, driven by modern insulin and Victoza. Novo remains reliant on the U.S. market for growth, as the 23% growth rate in North America for the first six months of the year has contributed 70% of growth over this period, and 46% of total sales.
These improved expectations for 2013 sales growth also filtered down to operating profit expectations, which now call for higher 12%-15% growth in local currencies. In the first half, gross margin improved 90 basis points versus the prior-year period, due to price increases in the U.S. and increased use of higher-margin modern insulin and Victoza.
Novo did not gain any operating leverage in sales and distribution, which grew 15% in local currencies due to salesforce expansion (particularly in the United States) and the Tresiba launch in Europe. However, R&D costs and administrative costs both grew at single-digit levels, allowing for 19% operating profit improvement in local
currencies.
Diving deeper into top-line results, global modern insulin sales grew 15% in the first half to DKK 18.6 billion. Market conversion from human insulin and a positive U.S. pricing environment are both allowing Novo and its competitors to achieve strong pricing power, and underlying growth of the diabetes market is also a key contributor. While Novo's global volume share of the modern insulin market is relatively stable at 46%, the global insulin market has grown at an average rate of 16.2% over the past five years, with an average 6.5% growth in volumes over this period. In addition, Novo's share of the U.S. market for modern insulins has steadily improved. Victoza sales grew 32% to DKK 5.6 billion, as Novo now has a 65% share of the GLP-1 market and the class continues to gain share of the overall diabetes market.
The most significant pipeline announcements tied to Tresiba
and the 3 mg.-dose of Victoza. Novo announced that it plans
to begin a cardiovascular outcomes trial for Tresiba by the
end of the year. As we previously anticipated, data to
support FDA resubmission (interim data from this trial) is
likely at least 2-3 years out. In addition, a 3 mg.-dose of
Victoza should be filed in the U.S. and Europe by the end of
the year to support use of the product in obesity, further
extending the product's growth trajectory, in our view.
Growth (% YoY)
3-Year
Hist. CAGR 2010 2011 2012
2013 20145-Year Proj. CAGR
Revenue 15.2 19.0 9.2 17.6 7.3 5.8 7.4
EBIT 25.4 26.5 18.4 31.7 11.1 7.4 9.2
EBITDA 22.5 22.2 17.6 28.1 11.1 7.1 9.1
Net Income 25.8 33.8 18.7 25.4 20.8 7.6 11.2
Diluted EPS 29.7 38.1 21.9 29.5 -75.9 10.1 -18.0
Earnings Before Interest, after Tax 14.0 25.7 6.8 10.4 23.0 7.8 11.7
Free Cash Flow 14.1 2.3 36.4 6.4 21.8 10.6 12.3
Profitability
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Operating Margin % 34.2 31.1 33.7 37.8 39.1 39.7 40.1
EBITDA Margin % 38.1 35.1 37.9 41.2 42.7 43.2 43.7
Net Margin % 25.7 23.7 25.8 27.5 30.9 31.4 31.9
Free Cash Flow Margin % 24.8 22.0 27.5 24.8 28.2 29.5 29.8
ROIC % 44.8 40.9 44.7 48.8 58.0 60.1 60.4
Adjusted ROIC % 33.2 34.0 32.8 32.9 34.8 34.3 35.3
Return on Assets % 28.3 24.8 27.1 32.9 38.9 40.8 42.5
Return on Equity % 46.8 39.6 46.0 54.9 62.3 64.1 65.1
Leverage
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Debt/Capital 0.03 0.06 0.02 0.01 — — —
Total Debt/EBITDA 0.05 0.10 0.03 0.02 — — —
EBITDA/Interest Expense 18.19 10.38 26.18 17.99 59.55 63.77 70.40
2011 2012
2013(E) 2014(E)Price/Fair Value 5.32 — — —
Price/Earnings 22.0 — 22.4 20.3
EV/EBITDA 12.3 13.0 2.7 2.6
EV/EBIT 13.8 14.2 3.0 2.8
Free Cash Flow Yield % 5.6 4.3 21.9 24.1
Dividend Yield % 1.8 1.8 9.0 9.6
Cost of Equity % 8.0
Pre-Tax Cost of Debt % 5.0
Weighted Average Cost of Capital % 8.0
Long-Run Tax Rate % 22.5
Stage II EBI Growth Rate % 7.0
Stage II Investment Rate % 35.0
Perpetuity Year 20
DKK Mil Firm Value (%) Per Share
Value
Present Value Stage I 227,126 35.9 83.20
Present Value Stage II 136,610 21.6 50.04
Present Value Stage III 269,481 42.6 98.71
Total Firm Value 633,217 100.0 231.95
Cash and Equivalents 17,036 — 6.24
Debt -500 — -0.18
Preferred Stock — — —
Other Adjustments -19,329 — -7.08
Equity Value 630,424 — 230.92
Projected Diluted Shares 2,730
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(DKK)
2010 2011 2012
2013 2014Revenue 60,776 66,346 78,026 83,746 88,609
Cost of Goods Sold 11,680 12,589 13,465 14,446 14,621
Gross Profit 49,096 53,757 64,561 69,300 73,989
Selling, General & Administrative Expenses 21,260 22,249 24,856 26,171 27,823
Research & Development 9,602 9,628 10,897 11,096 11,741
Other Operating Expense (Income) -657 -494 -666 -700 -735
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) 18,891 22,374 29,474 32,733 35,160
Restructuring & Other Cash Charges — — — — —
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 18,891 22,374 29,474 32,733 35,160
Interest Expense 2,057 959 1,788 600 600
Interest Income 1,452 510 125 1,500 1,500
Pre-Tax Income 18,286 21,925 27,811 33,633 36,060
Income Tax Expense 3,883 4,828 6,379 7,736 8,204
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) — — — — —
(Preferred Dividends) — — — — —
Net Income 14,403 17,097 21,432 25,897 27,856
Weighted Average Diluted Shares Outstanding 585 570 552 2,765 2,701
Diluted Earnings Per Share 24.60 29.99 38.85 9.37 10.32
Adjusted Net Income 14,403 17,097 21,432 25,897 27,856
Diluted Earnings Per Share (Adjusted) 24.60 29.99 38.85 9.37 10.32
Dividends Per Common Share 7.52 10.00 14.03 3.60 3.96
EBITDA 21,358 25,111 32,167 35,733 38,261
Adjusted EBITDA 21,358 25,111 32,167 35,733 38,261
Morningstar Analyst Forecasts
Income Statement (DKK Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Cash and Equivalents 16,051 17,550 17,036 16,858 17,547
Investments — — — — —
Accounts Receivable 8,500 9,349 9,639 10,346 10,946
Inventory 9,689 9,433 9,543 10,238 10,362
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 3,053 3,259 3,945 3,945 3,945
Current Assets 37,293 39,591 40,163 41,388 42,801
Net Property Plant, and Equipment 20,507 20,931 21,539 22,039 22,438
Goodwill — — — — —
Other Intangibles 1,458 1,489 1,495 1,495 1,495
Deferred Tax Assets (Long-Term) — — — — —
Other Long-Term Operating Assets — — — — —
Long-Term Non-Operating Assets 2,144 2,687 2,472 2,472 2,472
Total Assets 61,402 64,698 65,669 67,394 69,205
Accounts Payable 2,906 3,291 3,859 4,140 4,190
Short-Term Debt 1,720 351 500 — —
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 13,850 17,137 17,279 17,279 17,279
Current Liabilities 18,476 20,779 21,638 21,419 21,469
Long-Term Debt 504 502 — — —
Deferred Tax Liabilities (Long-Term) — — — — —
Other Long-Term Operating Liabilities — — — — —
Long-Term Non-Operating Liabilities 5,457 5,969 3,399 3,399 3,399
Total Liabilities 24,437 27,250 25,037 24,818 24,868
Preferred Stock — — — — —
Common Stock — — — — —
Additional Paid-in Capital 600 580 560 560 560
Retained Earnings (Deficit) 36,097 37,111 39,001 54,944 72,106
(Treasury Stock) -28 -24 -17 -14,017 -29,417
Other Equity 296 -219 1,088 1,088 1,088
Shareholder's Equity 36,965 37,448 40,632 42,575 44,337
Minority Interest — — — — —
Total Equity 36,965 37,448 40,632 42,575 44,337
Morningstar Analyst Forecasts
Balance Sheet (DKK Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Net Income 14,403 17,097 21,432 25,897 27,856
Depreciation 2,467 2,737 2,693 3,000 3,101
Amortization — — — — —
Stock-Based Compensation — — — — —
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes — — — — —
Other Non-Cash Adjustments 2,512 1,106 -2,221 — —
(Increase) Decrease in Accounts Receivable -1,878 -822 -290 -707 -601
(Increase) Decrease in Inventory 327 256 -110 -695 -124
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable 664 385 568 281 50
Change in Other Short-Term Liabilities 1,184 615 142 — —
Cash From Operations 19,679 21,374 22,214 27,776 30,283
(Capital Expenditures) -3,376 -3,073 -3,372 -3,500 -3,500
Net (Acquisitions), Asset Sales, and Disposals — — — — —
Net Sales (Purchases) of Investments 1,223 70 53 — —
Other Investing Cash Flows -3,426 -456 -751 — —
Cash From Investing -5,579 -3,459 -4,070 -3,500 -3,500
Common Stock Issuance (or Repurchase) -8,820 -10,595 -11,896 -14,000 -15,400
Common Stock (Dividends) -4,400 -5,700 -7,742 -9,954 -10,694
Short-Term Debt Issuance (or Retirement) — — — -500 —
Long-Term Debt Issuance (or Retirement) — -507 -502 — —
Other Financing Cash Flows — — — — —
Cash From Financing -13,220 -16,802 -20,140 -24,454 -26,094
Exchange Rates, Discontinued Ops, etc. (net) 46 -16 -8 — —
Net Change in Cash 926 1,097 -2,004 -178 689
Morningstar Analyst Forecasts
Cash Flow (DKK Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 0.78 11.4 15.2 13.4 12.0 10.6 9.6 14.7 20.8 15.0 1.7 1.7 1.7 2.7 3.0 2.8
Bristol-Myers Squibb Company BMY 1.29 16.4 31.6 31.5 11.5 23.6 23.6 8.3 29.4 35.2 3.9 7.0 7.3 3.0 5.6 5.9
Eli Lilly and Company LLY USA 0.95 14.5 12.7 18.7 7.8 9.3 13.9 12.9 14.9 20.0 3.8 3.7 3.7 2.5 2.6 3.0
Baxter International Inc. BAX USA 0.87 14.7 14.9 13.7 11.1 11.3 10.1 18.0 22.7 18.4 5.5 5.0 4.3 2.6 2.5 2.2
Average 14.3 18.6 19.3 10.6 13.7 14.3 13.5 22.0 22.2 3.7 4.4 4.3 2.7 3.4 3.5
Novo Nordisk A/S NOVO B DK 0.85 — 22.4 20.3 13.0 2.7 2.6 23.1 4.6 4.1 10.7 2.6 2.5 5.6 1.3 1.3
Company/Ticker Total Assets
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 100,407 EUR 11.4 9.0 10.6 19.6 15.5 17.4 8.8 6.1 8.4 5.0 3.5 4.9 3.6 3.2 3.6
Bristol-Myers Squibb Company BMY 35,897 USD 30.0 14.1 14.8 15.6 13.0 12.0 13.3 18.9 20.0 5.7 7.3 7.9 4.3 2.5 2.4
Eli Lilly and Company LLY USA — USD 30.2 29.0 17.5 21.4 19.9 10.2 28.9 31.0 18.9 12.0 13.5 8.4 3.9 3.6 3.6
Baxter International Inc. BAX USA 19,425 USD 22.1 19.5 19.4 23.9 22.9 22.5 35.3 33.6 32.3 12.1 11.1 10.8 2.2 2.7 3.0
Average 23.4 17.9 15.6 20.1 17.8 15.5 21.6 22.4 19.9 8.7 8.9 8.0 3.5 3.0 3.2
Novo Nordisk A/S NOVO B DK — DKK 48.8 58.0 60.1 32.9 34.8 34.3 54.9 62.3 64.1 32.9 38.9 40.8 1.8 9.0 9.6
Company/Ticker Revenue
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 35,957 EUR 2.6 -6.7 4.1 4.3 -17.6 23.2 -7.4 -19.2 13.3 -235.1 -23.0 36.8 — — 13.3
Bristol-Myers Squibb Company BMY 17,621 USD -17.1 -7.4 -5.1 -39.9 -18.9 1.9 -12.6 -11.8 0.5 -127.4 -429.6 95.6 3.2 — 0.5
Eli Lilly and Company LLY USA 22,603 USD -6.9 0.7 -13.9 5.6 -2.9 -35.2 -23.2 22.4 -32.3 113.4 -40.2 -13.7 0.2 — —
Baxter International Inc. BAX USA 14,190 USD 2.1 6.2 12.6 -4.2 13.6 13.9 4.9 3.1 8.8 0.5 -255.9 -210.6 16.9 30.0 9.0
Average -4.8 -1.8 -0.6 -8.6 -6.5 0.9 -9.6 -1.4 -2.4 -62.2 -187.2 -23.0 6.8 30.0 7.6
Novo Nordisk A/S NOVO B DK 78,026 DKK 17.6 7.3 5.8 31.7 11.1 7.4 29.5 -75.9 10.1 6.4 21.8 10.6 40.4 -74.4 10.0
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 8,101 EUR 69.1 67.6 68.5 24.1 30.8 32.8 21.3 18.8 22.3 22.5 19.6 21.3 18.2 14.2 18.9
Bristol-Myers Squibb Company BMY 3,364 USD 73.8 73.4 75.1 28.6 25.0 26.3 24.7 21.6 23.2 19.1 17.9 18.5 36.3 19.1 16.8
Eli Lilly and Company LLY USA 3,784 USD 78.8 79.0 74.0 32.0 27.8 21.7 25.5 24.6 18.5 16.7 19.8 15.4 19.5 17.4 15.1
Baxter International Inc. BAX USA 2,516 USD 51.5 51.5 51.3 24.9 26.0 26.0 19.9 21.3 21.5 17.7 17.0 16.4 14.3 11.1 12.1
Average 68.3 67.9 67.2 27.4 27.4 26.7 22.9 21.6 21.4 19.0 18.6 17.9 22.1 15.5 15.7
Novo Nordisk A/S NOVO B DK 21,432 DKK 82.7 82.8 83.5 41.2 42.7 43.2 37.8 39.1 39.7 27.5 30.9 31.4 24.2 29.0 30.2
Company/Ticker Total Debt
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 14,531 EUR 25.3 27.3 25.5 20.2 21.4 20.3 15.7 16.9 21.0 1.7 1.5 1.3 1.8 1.7 1.7
Bristol-Myers Squibb Company BMY 7,394 USD 54.3 40.8 41.4 35.2 29.0 29.3 27.7 22.6 19.9 1.5 1.3 1.3 2.6 2.5 2.6
Eli Lilly and Company LLY USA 5,531 USD 37.5 40.9 39.5 27.3 29.0 28.3 40.6 42.2 26.8 0.8 1.0 1.5 2.3 2.3 2.2
Baxter International Inc. BAX USA 5,195 USD 78.9 103.9 91.8 44.1 51.0 47.9 26.8 14.6 14.9 1.5 2.0 1.8 2.9 3.1 2.9
Average 49.0 53.2 49.6 31.7 32.6 31.5 27.7 24.1 20.7 1.4 1.5 1.5 2.4 2.4 2.4
Novo Nordisk A/S NOVO B DK 500 DKK 1.2 — — 1.2 — — 18.0 59.6 63.8 0.0 — — 1.6 1.6 1.6
Company/Ticker Market Cap
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Sanofi SNY USA 135,234 USD 4.97 7.29 8.81 1.65 1.98 2.15 1.18 1.50 1.67 1.72 2.53 3.05 63.9 90.9 73.0
Bristol-Myers Squibb Company BMY 91,680 USD 3.76 2.58 4.21 1.58 1.37 1.74 1.38 1.23 1.60 7.69 19.41 31.05 116.6 88.7 85.3 Eli Lilly and Company LLY USA 59,082 USD 5.09 5.55 5.64 1.55 1.48 1.43 1.24 1.17 1.11 477.67 5.48 5.25 53.6 45.0 69.9 Baxter International Inc. BAX USA 37,804 USD 5.22 2.66 4.12 1.82 1.54 1.49 1.25 0.96 0.96 6.51 4.00 2.44 34.6 43.7 42.7
Average 4.76 4.52 5.70 1.65 1.59 1.70 1.26 1.22 1.34 123.40 7.86 10.45 67.2 67.1 67.7
Novo Nordisk A/S NOVO B DK 111,074 DKK 30.88 6.10 6.50 1.86 1.93 1.99 1.42 1.45 1.51 34.07 — — 36.1 38.4 38.4
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
