© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
Market Cap (EUR Mil) 27,717
52-Week High (EUR) 75.05
52-Week Low (EUR) 50.11
52-Week Total Return % 10.9
YTD Total Return % -8.1
Last Fiscal Year End 31 Dec 2012
5-Yr Forward Revenue CAGR % 10.0
5-Yr Forward EPS CAGR % 4.2
Price/Fair Value 1.69
2011 2012
2013(E) 2014(E)Price/Earnings 9.0 13.0 25.5 19.4
EV/EBITDA 8.6 13.1 25.8 16.7
EV/EBIT 9.4 15.2 30.4 18.9
Free Cash Flow Yield % 10.1 2.7 3.2 2.7
Dividend Yield % 1.0 1.0 0.8 0.9
2011 2012
2013(E) 2014(E)Revenue 5,651 4,732 5,176 6,073
Revenue YoY % 25.4 -16.3 9.4 17.3
EBIT 1,641 1,157 857 1,381
EBIT YoY % 31.2 -29.5 -25.9 61.1
Net Income, Adjusted 1,467 1,146 724 1,037
Net Income YoY % 43.6 -21.9 -36.8 43.2
Diluted EPS 4.71 3.70 2.45 3.23
Diluted EPS YoY % 46.9 -21.5 -33.7 31.4
Free Cash Flow 1,751 501 -1,228 705
Free Cash Flow YoY % 135.3 -71.4 -345.0 -157.4
ASM Lithography Reports Fourth Quarter; We Think Shares Are Expensive
See Page 2 for the full Analyst Note from 22 Jan 2014
Andy Ng Senior Stock Analyst andy.ng@morningstar.com +1 (312) 384-4032
Grady Burkett, CFA Director
grady.burkett@morningstar.com +1 (312) 696-6420
Research as of 22 Jan 2014 Estimates as of 23 Oct 2013 Pricing data through 04 Feb 2014 Rating updated as of 04 Feb 2014
Investment Thesis 24 Oct 2013
ASM Lithography is the top provider of photolithography tools, which are used in the most critical semiconductor fabrication process. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. Technological advances here are the major drivers behind the march toward smaller circuits in chip devices.
Lithography tools, which have price tags of $20 million to $30 million, account for a major portion of chipmakers' capital spending.
ASML holds the leading position in the lithography market, according to research firm Gartner, but faces competition from Nikon and Canon. With roughly 30 years of experience, ASML has developed extensive technical expertise in a highly complex field.
ASML has strengthened its competitive position in recent years, as its technology lead in state-of-the-art immersion lithography tools has provided a technological differentiator for the firm and boosted its profitability profile.
To maintain its strong technology position, ASML has been developing next-generation extreme ultra-violet lithography tools, as well as future lithography tools for creating circuits on 450-millimeter diameter semiconductor wafers, versus today's 300-millimeter wafers. The firm created a customer co-investment program, in which three major customers (Intel, Samsung, and Taiwan Semiconductor) have taken minority equity stakes in ASML and committed to help fund a portion of research-and-development over five years. In May, ASML acquired its key lithography light source supplier Cymer to enhance its EUV development efforts.
Cymer has made progress on developing EUV light sources, while ASML has done significant work on EUV lithography tools. The integration of the two firms will allow them to accelerate and reduce the risk of commercializing EUV systems.
Over time, ASML should benefit from technology tailwinds.
Lithography tools have become much more critical to enabling chipmakers to advance their manufacturing technologies over time, which will drive increasing lithography investments by customers and should position ASML to outgrow the overall chip equipment industry in the long run.
Founded in 1984 and based in the Netherlands, ASM Lithography is a leading manufacturer of photolithography systems used in the production of semiconductors. ASML markets its lithography systems to semiconductor manufacturers in the United States, Asia, and Europe.
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.
Analyst Note: Non per share data is displayed in Euro; EPS (ex charges) and Dividends are in USD
(EUR 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:
1
2 2 2 3 3 5
6 6 6 8 10 - 11 15 17
Page 1 of 20
Morningstar Analysis
ASM Lithography Reports Fourth Quarter; We Think Shares Are Expensive 22 Jan 2014
ASM Lithography reported fourth-quarter results that were within the range of our expectations. We are maintaining our fair value estimate of $48 per share and narrow moat rating.
For the quarter, revenue was EUR 1.85 billion, up 40%
sequentially, and an increase from sales of EUR 1.02 billion in the year-ago quarter. ASML saw strength across its customer base, as foundries, integrated device manufacturers, and memory chipmakers all increased demand for lithography tools. The firm also recognized revenue on one next-generation extreme ultraviolet, or EUV, lithography tool during the quarter. Orders came in at EUR 1.45 billion, compared with EUR 1.42 billion in the third quarter. ASML's order numbers do not consider bookings for EUV tools, which the firm has been working to commercialize. On the profit front, ASML posted an operating income of EUR 480 million, an increase from EUR 212 million in the third quarter.
Management expects first-quarter revenue to be about EUR 1.4 billion, which would indicate a sequential decline of 24%. ASML also forecasts that sales in the first half of 2014 will be about EUR 3 billion, excluding EUV systems. These projections suggest that the overall business environment for ASML should be pretty solid for the foreseeable future.
Foundries and integrated device manufacturers, namely Intel, are buying lithography tools to advance their chip manufacturing technologies. In addition, memory chipmakers are increasing lithography demand to expand manufacturing capacity in response to the recent pickup in business conditions in the memory market. Nonetheless, we currently view ASML's shares as overvalued and would avoid the stock until there is an adequate margin of safety.
Valuation, Growth and Profitability 24 Oct 2013 Our fair value estimate is EUR 37 per share and takes into account ASML's acquisition of Cymer, which closed in mid-2013. In the deal, Cymer shareholders received $20 in cash and 1.1502 shares of ASML stock per Cymer share.
ASML's revenue declined 16% to EUR 4.7 billion in 2012, as the firm benefited from solid business conditions in the first half of the year, but saw some cyclical softening later in 2012. In 2013, we expect revenue contribution from Cymer and growth in ASML's core business to result in total revenue of EUR 5.2 billion in 2013. We project a pickup in industry conditions in 2014, along with a full year of revenue contribution from Cymer, leading to total revenue of EUR 6.1 billion for the year. After revenue growth of 2% in 2015, we believe the firm will grow around 11% in the longer term.
We think ASML can grow faster than the overall semiconductor equipment market over time as chipmakers will need to increase investments in lithography tools and light sources to drive continued advances in their semiconductor fabrication technologies in the years ahead.
ASML's profitability levels have improved significantly over the last decade as the firm has taken a technology leadership position in the lithography market. We expect the firm to continue to achieve healthy operating margins over full business cycles and forecast they will run in the low- to mid-20s range in the longer term. We project some research-and-development expense synergies with Cymer, particularly on the EUV front.
Scenario Analysis
In our base case, we assume that revenue contribution from
the Cymer acquisition and growth in ASML's core business
will result in total revenue of EUR 5.2 billion for the year. In
2014, we forecast a pickup in business conditions, and
ASML will benefit from a full year of financial contributions
from Cymer, leading to total revenue of EUR 6.1 billion for
the year. After 2% revenue growth in 2015, we think the
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
firm can grow around 11% on average annually over the longer term, driven by chipmaker purchases of lithography tools and Cymer's light sources for manufacturing capacity additions and for technology advances. We expect operating margin to come in at 17% in 2013. Over the longer term, we think that operating margins will run in the low- to mid-20s.
For our bull-case scenario, we forecast that revenue will be EUR 5.3 billion in 2013, thanks to higher-than-expected demand for lithography tools from chipmakers and sales contributions from Cymer. In 2014, we project revenue growth of 23% to EUR 6.5 billion, with Cymer contributing a full year of sales. After 5% revenue growth in 2015, we forecast that longer-term sales growth will be around 13%
annually as chipmakers make stronger-than-expected investments in lithography tools and light sources to advance their semiconductor fabrication technologies over time, thereby allowing ASML to significantly outgrow the broader chip equipment industry. We forecast operating margins of 17% in 2013 and expect them to trend toward the 30% range over the long run. In this case, our fair value estimate is EUR 52 per share.
In our bear-case scenario, we forecast revenue of EUR 5.1 billion in 2013. In 2014, ASML's sales are projected to rise 15% to EUR 5.8 billion, mainly due to a full year of revenue contribution from Cymer. After flat sales in 2015, we expect revenue will grow in the upper single digits in the longer term in this scenario. While we forecast operating margins to be 16% in 2013, we anticipate that a resurgence in competition in the lithography market will cause operating margins to decline to the upper-teens in the long run. Our fair value estimate under these assumptions is EUR 25 per share.
Economic Moat
ASML is the leading provider of photolithography tools, and we believe it has a narrow moat. The moat stems from the firm's scale and technological know-how in the lithography market. The field is highly arcane, and the in-depth technical knowledge and the large R&D expenditures required to stay competitive serve as barriers to entry. However, the firm does not have a wide moat because of competition from Nikon and, to a lesser extent, Canon, as well as several other factors. ASML has a concentrated customer base, including chip industry bellwethers such as Intel INTC and Taiwan Semiconductor Manufacturing TSM, and depends on several key suppliers, such as Zeiss for lenses, which limit the firm's moat to narrow.
Moat Trend
We believe ASML's moat trend is positive. Major customers, Intel, TSMC and Samsung, have taken minority equity stakes totaling 23% in aggregate in ASML in exchange for EUR 3.85 billion and have agreed to provide EUR 1.85 billion in R&D subsidies for the development of EUV and future 450-millimeter tools over a five-year period via ASML's customer co-investment program. In May, ASML made a EUR 1.95 billion acquisition of leading lithography light source supplier Cymer, which has made significant progress in its development of EUV light sources, a critical
Page 3 of 20
component to the commercialization of EUV lithography
tools. We believe that the customer co-investments and the
purchase of Cymer will provide ASML with advantages over
the competition in taking the technology lead in
next-generation tools.
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
Bulls Say/Bears Say
Bulls Say Bears Say
3 ASML is a market leader and innovator in photolithography, an integral part of chip manufacturing.
3 The extensive technical expertise needed to develop lithography tools, which are highly complex and play a critical role in semiconductor manufacturing, serves as a barrier to entry.
3 ASML has focused on operational efficiency in recent years to improve profitability throughout industry cycles.
3 ASML depends on a handful of powerful customers and will sell only several hundred systems each year.
3 Dependence on a limited number of suppliers for key components exposes ASML to pricing power and possible disruptions to its supply chain.
3 The firm depends on the deeply cyclical semiconductor industry for demand.
Page 5 of 20
2013(E) 2014(E) 2015(E) 2016(E) 2017(E)
Cash and Equivalents (beginning of period) 1,768 2,069 2,539 2,498 3,380
Adjusted Available Cash Flow -1,360 562 53 981 1,075
Total Cash Available before Debt Service 408 2,631 2,592 3,478 4,455
Principal Payments -2 -2 -2 -2 -600
Interest Payments -36 -36 -36 -36 -36
Other Cash Obligations and Commitments -41 -49 -50 -55 -61
Total Cash Obligations and Commitments -80 -87 -88 -94 -697
EUR Millions
% of Commitments
Beginning Cash Balance 1,768 169.0
Sum of 5-Year Adjusted Free Cash Flow 1,311 125.4
Sum of Cash and 5-Year Cash Generation 3,079 294.3
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 3,079 294.3
Sum of 5-Year Cash Commitments -1,046 —
ASML Sector Universe
Business Risk 4 4.6 5.1
Cash Flow Cushion 4 4.0 6.1
Solvency Score 3 3.7 5.0
Distance to Default 1 2.3 3.9
Credit Rating A- A BBB+
Five Year Adjusted Cash Flow Forecast (EUR 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
ASML has a solid financial position. At the end of the third quarter, the firm had EUR 2.7 billion in cash and short-term investments and EUR 1.1 billion in debt on its balance sheet, while its debt/equity ratio was 0.2.
The firm typically holds a significant cash position, which is appropriate given the cyclical nature of the semiconductor equipment industry. During downturns, the cash cushion allows ASML to continue investing heavily in research and development in order to maintain its cutting-edge technology position. This is especially critical in the highly arcane lithography market, where firms that failed to stay at the technological forefront have seen their competitive positions erode in the past. Nonetheless, ASML has more debt on its balance sheet than the typical chip-equipment firm, which we think is justified as the company's cash flow generation has become much more consistent during the last decade.
ASML's debt primarily consists of EUR 238 million worth of 5.75% notes due 2017 and EUR 750 million worth of 3.375%
notes due 2023. In 2012, the firm created a customer co-investment program, in which three customers acquired minority equity stakes totaling 23% in ASML for an aggregate EUR 3.85 billion and committed to funding a portion of R&D over the next five years. ASML has since returned the EUR 3.85 billion to shareholders via a synthetic buyback. The firm recently acquired Cymer in a EUR 1.95 billion stock and cash deal, which used up about EUR 0.5 billion of ASML's cash. ASML generally returns excess cash to shareholders via annual dividend payments and share buybacks.
Enterprise Risk
ASML must maintain its leading technical expertise in
lithography to remain competitive. Demand for lithography
tools depends on the deeply cyclical semiconductor industry.
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
Credit Analysis
Because of long product lead times, customers order beyond their business visibility during industry upturns, which leads to growing backlogs. During downturns, however, customers quickly cancel their orders, resulting in large losses for ASML. In addition, ASML relies on a limited number of suppliers for several key components. Although lens supplier Zeiss has a strategic alliance with ASML, any disruption in their relationship would have a large negative impact on ASML.
Page 7 of 20
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 Growth Fund of America 1.97 0.62 -4,043 31 Dec 2013
American Funds Europacific Growth Fund 1.88 0.68 — 31 Dec 2013
American Funds New Perspective Fund 1.19 0.93 -2,565 31 Dec 2013
American Funds Fundamental Investors 0.94 0.60 — 31 Dec 2013
American Funds AMCAP Fund 0.81 0.95 875 31 Dec 2013
Concentrated Holders
iShares EURO STOXX Technology (DE) — 15.51 0 31 Dec 2013
iShares STOXX Europe 600 Technology (DE) 0.01 11.56 -3 31 Dec 2013
Etoile Technologie Europe 0.01 11.45 4 30 Nov 2013
SPDR MSCI Europe Information Techn ETF — 11.05 3 31 Dec 2013
K 2005 Exklusivfonds 0.01 9.36 — 31 Dec 2013
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date
BlackRock Advisors LLC 5.02 — 22,239 30 Aug 2013
T. Rowe Price Associates, Inc. 0.44 0.58 440 31 Dec 2013
UBS Global Asset Management (UK) Ltd 0.12 1.77 412 31 Dec 2013
AXA Life Europe 0.42 0.81 261 31 Dec 2013
Legal and General 0.54 0.32 224 30 Nov 2013
Top 5 Sellers
Capital Research and Management Company 8.95 0.66 -7,923 31 Dec 2013
Thornburg Investment Management, Inc. 0.66 0.95 -1,863 31 Dec 2013
Ivy Investment Management Co 0.61 0.73 -292 31 Dec 2013
Colonial First State Investments Limited 0.04 0.55 -216 31 Dec 2013
BlackRock Investment Management (UK) Ltd. 0.44 1.24 -127 31 Oct 2013
Management 24 Oct 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.
Peter Wennink took over as CEO from Eric Meurice in July 2013. Wennink was previously the CFO of ASML and has been with the firm since 1999. Most members of the current executive team have more than a decade of experience at ASML. Relative to peers, management's compensation looks reasonable. Option grants are also modest, with outstanding options accounting for 1% of total shares.
However, management holds a minimal ownership stake in ASML.
We believe that ASML's management generally has been a good steward of shareholder capital. It has done a great job of helping the firm strengthen its competitive and market positions in the lithography tool segment of the chip equipment industry. The firm has taken a technology lead in the space in the last several years, which has resulted in market share gains, at the expense of competitors Nikon and Canon. However, ASML has not rested on its laurels and continues to invest heavily in research and development. The firm has been ramping up its investments to develop next-generation lithography tools in order to maintain its strong technology position.
In 2012, management created a customer co-investment
program in which major customers Intel, Samsung, and
Taiwan Semiconductor took an aggregate 23% minority
stake in ASML for EUR 3.85 billion, and committed EUR 1.85
billion to help fund ASML's R&D development of extreme
ultraviolet lithography tools and future lithography tools for
creating circuits on 450-millimeter diameter semiconductor
wafers. We think the program is an innovative way for ASML
to help fund the costly R&D investments that will be needed
to successfully commercialize EUV and 450-millimeter
lithography tools, and helps align customer interests with
those of the firm. ASML has returned the cash proceeds
from the share issuance transactions for the minority equity
stakes under its customer co-investment program back to
shareholders, which we view as responsible stewardship.
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
More recently, ASML acquired key lithography light source supplier Cymer in May for EUR 1.95 billion in stock and cash in an effort to accelerate EUV lithography commercialization.
While the deal makes strategic sense, we believe the price tag for Cymer is pretty hefty and that ASML may be overpaying. Nonetheless, the final verdict on this deal is likely several years out.
Management has shown a willingness to return excess cash to shareholders. The firm began paying an annual dividend in 2008, and the payment fluctuates each year, depending on management's forecast liquidity requirements for ASML.
ASML also makes stock repurchases to return cash to shareholders.
Page 9 of 20
Analyst Notes
ASM Lithography Reports 3Q; Benefiting From Pick-Up in Lithography Demand 16 Oct 2013
ASM Lithography reported third-quarter results that were within the range of our expectations. We are maintaining our fair value estimate and moat rating.
For the quarter, revenue was EUR 1.32 billion, up 11%
sequentially, and an increase from sales of EUR 1.23 billion in the year-ago quarter. Sales benefited from improved business conditions and a full quarter of contribution from ASML's recent acquisition of lithography light source maker Cymer. Orders grew to EUR 1.4 billion from EUR 1.07 billion in the second quarter. ASML's order numbers do not consider bookings for next-generation extreme ultraviolet tools, which the firm has been working to commercialize.
As expected, ASML continued to benefit from growing demand from foundry chipmakers and Intel during the quarter, as these customers increase purchases of cutting- edge lithography tools to advance their semiconductor fabrication technologies. In addition, the firm saw higher demand from memory chipmakers, as this segment increases capital spending in response to a pick-up in the memory market. Of ASML's total orders, memory chipmakers made up 42%, while foundries and integrated device manufacturers accounted for 32% and 26%, respectively. The firm achieved an operating profit of EUR 212 million.
Looking to the fourth quarter, management expects revenue
to be about EUR 1.8 billion, which would imply sequential
growth of 37%. The pick-up in business conditions in the
lithography space will further strengthen and continue to
benefit ASML for the foreseeable future, as chipmakers
continue to invest in lithography equipment to advance their
chip manufacturing technologies, and management expects
sales to remain robust into the first half of 2014.
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
Growth (% YoY)
3-Year
Hist. CAGR 2010 2011 2012
2013 20145-Year Proj. CAGR
Revenue 43.7 182.4 25.4 -16.3 9.4 17.3 10.0
EBIT — -857.9 31.2 -29.5 -25.9 61.1 10.7
EBITDA — -5,751.1 28.8 -25.6 -24.7 54.4 9.9
Net Income — -777.0 43.6 -21.9 -36.8 43.2 4.9
Diluted EPS — -767.2 46.9 -21.5 -33.7 31.4 4.2
Earnings Before Interest, after Tax — -643.0 51.5 -24.0 -40.1 42.2 3.5
Free Cash Flow — -738.9 135.3 -71.4 -345.0 -157.4 18.9
Profitability
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Operating Margin % 27.1 27.7 29.0 24.5 16.6 22.7 20.9
EBITDA Margin % 30.5 31.1 32.0 28.4 19.6 25.7 23.9
Net Margin % 24.3 22.7 26.0 24.2 14.0 17.1 16.1
Free Cash Flow Margin % 19.4 16.5 31.0 10.6 -23.7 11.6 4.6
ROIC % 31.3 30.3 38.3 25.2 10.3 13.1 12.0
Adjusted ROIC % 31.1 30.2 38.0 25.3 12.0 15.0 13.6
Return on Assets % 19.4 20.6 21.8 15.6 8.5 10.2 9.6
Return on Equity % 40.9 44.9 47.2 30.5 14.4 16.2 14.7
Leverage
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Debt/Capital 0.18 0.20 0.18 0.16 0.15 0.14 0.12
Total Debt/EBITDA 0.49 0.51 0.41 0.56 1.08 0.69 0.70
EBITDA/Interest Expense 110.13 60.18 53.54 216.68 27.99 43.18 42.93
2011 2012
2013(E) 2014(E)Price/Fair Value 1.25 1.30 — —
Price/Earnings 9.0 13.0 25.5 19.4
EV/EBITDA 8.6 13.1 25.8 16.7
EV/EBIT 9.4 15.2 30.4 18.9
Free Cash Flow Yield % 10.1 2.7 3.2 2.7
Dividend Yield % 1.0 1.0 0.8 0.9
Cost of Equity % 10.0
Pre-Tax Cost of Debt % 8.8
Weighted Average Cost of Capital % 9.9
Long-Run Tax Rate % 20.0
Stage II EBI Growth Rate % 5.0
Stage II Investment Rate % 25.0
Perpetuity Year 15
EUR Mil Firm Value (%) Per Share
Value
Present Value Stage I 1,119 8.9 2.52
Present Value Stage II 5,310 42.5 11.98
Present Value Stage III 6,080 48.6 13.72
Total Firm Value 12,509 100.0 28.23
Cash and Equivalents 2,698 — 6.09
Debt -758 — -1.71
Preferred Stock — — —
Other Adjustments 1,419 — 3.20
Equity Value 15,867 — 35.81
Projected Diluted Shares 443
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.
(EUR)
Page 11 of 20
2010 2011 2012
2013 2014Revenue 4,508 5,651 4,732 5,176 6,073
Cost of Goods Sold 2,553 3,202 2,726 3,193 3,455
Gross Profit 1,955 2,449 2,005 1,984 2,618
Selling, General & Administrative Expenses 181 218 259 309 371
Research & Development 523 590 589 877 932
Other Operating Expense (Income) — — — -64 -68
Depreciation & Amortization (if reported separately) — — — 4 3
Operating Income (ex charges) 1,251 1,641 1,157 857 1,381
Restructuring & Other Cash Charges — — — — —
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 1,251 1,641 1,157 857 1,381
Interest Expense 23 34 6 36 36
Interest Income 15 41 — 31 38
Pre-Tax Income 1,243 1,649 1,151 852 1,383
Income Tax Expense 221 182 4 128 346
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) — — — — —
(Preferred Dividends) — — — — —
Net Income 1,022 1,467 1,146 724 1,037
Weighted Average Diluted Shares Outstanding 439 429 427 407 443
Diluted Earnings Per Share 2.33 3.42 2.68 1.78 2.34
Adjusted Net Income 1,022 1,467 1,146 724 1,037
Diluted Earnings Per Share (Adjusted) 2.33 3.42 2.68 1.78 2.34
Dividends Per Common Share 0.27 0.55 13.29 0.73 0.73
EBITDA 1,402 1,806 1,343 1,012 1,563
Adjusted EBITDA 1,402 1,806 1,343 1,012 1,563
Morningstar Analyst Forecasts
Income Statement (EUR Mil)
Fiscal Year Ends in December Forecast
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
2010 2011 2012
2013 2014Cash and Equivalents 1,950 2,732 1,768 2,069 2,539
Investments — — 930 930 930
Accounts Receivable 1,136 959 871 993 1,165
Inventory 1,497 1,625 1,857 1,662 1,893
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 361 391 407 534 627
Current Assets 4,944 5,707 5,832 6,188 7,153
Net Property Plant, and Equipment 745 1,054 1,030 1,259 1,287
Goodwill 141 146 149 1,089 1,089
Other Intangibles 14 8 10 574 574
Deferred Tax Assets (Long-Term) 71 39 39 39 39
Other Long-Term Operating Assets 265 307 350 460 539
Long-Term Non-Operating Assets — — — — —
Total Assets 6,180 7,261 7,411 9,609 10,682
Accounts Payable 555 444 373 437 473
Short-Term Debt 1 3 2 2 2
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 1,600 1,786 1,710 1,684 1,866
Current Liabilities 2,157 2,233 2,086 2,124 2,342
Long-Term Debt 709 734 756 1,086 1,084
Deferred Tax Liabilities (Long-Term) 156 177 88 88 88
Other Long-Term Operating Liabilities 385 673 413 316 371
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 3,406 3,817 3,344 3,615 3,885
Preferred Stock — — — — —
Common Stock 39 38 38 38 38
Additional Paid-in Capital 471 473 473 1,892 1,892
Retained Earnings (Deficit) 2,366 3,271 4,417 4,926 5,728
(Treasury Stock) -152 -416 -940 -940 -940
Other Equity 49 78 78 78 78
Shareholder's Equity 2,774 3,444 4,067 5,995 6,797
Minority Interest — — — — —
Total Equity 2,774 3,444 4,067 5,995 6,797
Morningstar Analyst Forecasts
Balance Sheet (EUR Mil)
Fiscal Year Ends in December Forecast
Page 13 of 20
2010 2011 2012
2013 2014Net Income 1,022 1,467 1,146 724 1,037
Depreciation 151 165 187 155 182
Amortization — — — — —
Stock-Based Compensation 78 12 19 22 27
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes — — — — —
Other Non-Cash Adjustments 28 140 65 — —
(Increase) Decrease in Accounts Receivable -769 230 89 -122 -172
(Increase) Decrease in Inventory -706 -276 -232 195 -231
Change in Other Short-Term Assets -114 -58 -16 61 -93
Increase (Decrease) in Accounts Payable 350 -126 -71 64 36
Change in Other Short-Term Liabilities 900 517 -483 -26 182
Cash From Operations 940 2,070 704 1,073 968
(Capital Expenditures) -129 -301 -172 -197 -210
Net (Acquisitions), Asset Sales, and Disposals 4 — -18 -1,880 —
Net Sales (Purchases) of Investments — — -930 — —
Other Investing Cash Flows — — — -206 -25
Cash From Investing -125 -301 -1,120 -2,283 -235
Common Stock Issuance (or Repurchase) 31 -666 3,372 1,419 —
Common Stock (Dividends) -87 -173 -189 -216 -235
Short-Term Debt Issuance (or Retirement) — — — 0 —
Long-Term Debt Issuance (or Retirement) -1 -3 -3 330 -2
Other Financing Cash Flows 150 -150 -3,726 -22 -27
Cash From Financing 93 -992 -546 1,512 -264
Exchange Rates, Discontinued Ops, etc. (net) 5 4 -2 — —
Net Change in Cash 913 782 -964 302 469
Morningstar Analyst Forecasts
Cash Flow (EUR Mil)
Fiscal Year Ends in December Forecast
© Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
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)Canon, Inc. CAJ USA 0.88 20.5 15.9 12.8 5.5 5.0 4.0 57.6 14.1 14.1 1.5 1.3 1.1 1.1 1.0 0.9
Average 20.5 15.9 12.8 5.5 5.0 4.0 57.6 14.1 14.1 1.5 1.3 1.1 1.1 1.0 0.9
ASML Holding NV ASML NL 1.69 13.0 25.5 19.4 13.1 25.8 16.7 36.8 31.6 36.5 4.8 4.6 4.1 4.1 5.4 4.6
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)Canon, Inc. CAJ USA — JPY 8.0 8.0 7.5 8.0 8.0 7.5 8.7 8.4 8.8 5.7 5.6 6.1 3.6 4.0 4.8
Average 8.0 8.0 7.5 8.0 8.0 7.5 8.7 8.4 8.8 5.7 5.6 6.1 3.6 4.0 4.8
ASML Holding NV ASML NL 7,411 EUR 25.2 10.3 13.1 25.3 12.0 15.0 30.5 14.4 16.2 15.6 8.5 10.2 1.0 0.8 0.9
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)Canon, Inc. CAJ USA 3,479,788 JPY -2.2 7.2 3.0 -14.3 4.1 7.3 -6.4 4.9 13.2 -29.4 64.2 -10.0 -3.5 11.8 5.0
Average -2.2 7.2 3.0 -14.3 4.1 7.3 -6.4 4.9 13.2 -29.4 64.2 -10.0 -3.5 11.8 5.0
ASML Holding NV ASML NL 4,732 EUR -16.3 9.4 17.3 -29.5 -25.9 61.1 -21.5 -33.7 31.4 -71.4 -345.0 -157.4 2,295.7 -94.5 —
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
Page 15 of 20
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)Canon, Inc. CAJ USA 224,564 JPY 47.4 48.2 48.4 16.7 16.4 16.7 9.3 9.0 9.4 6.5 6.2 6.7 2.0 7.4 6.2
Average 47.4 48.2 48.4 16.7 16.4 16.7 9.3 9.0 9.4 6.5 6.2 6.7 2.0 7.4 6.2
ASML Holding NV ASML NL 1,146 EUR 42.4 38.3 43.1 28.4 19.6 25.7 24.5 16.6 22.7 24.2 14.0 17.1 11.2 16.9 12.5
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)Canon, Inc. CAJ USA 3,983 JPY 0.2 0.1 0.0 0.2 0.1 0.0 569.5 1,113.5 1,167.7 0.0 0.0 0.0 1.5 1.5 1.5
Average 0.2 0.1 — 0.2 0.1 — 569.5 1,113.5 1,167.7 — — — 1.5 1.5 1.5
ASML Holding NV ASML NL 758 EUR 18.7 18.2 16.0 15.7 15.4 13.8 216.7 28.0 43.2 0.6 1.1 0.7 1.8 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)Canon, Inc. CAJ USA 33,396 USD 568.08 687.24 707.87 2.47 2.69 2.74 1.81 2.04 2.08 357.28 607.32 -672.92 63.4 67.5 62.6
Average 568.08 687.24 707.87 2.47 2.69 2.74 1.81 2.04 2.08 357.28 607.32 -672.92 63.4 67.5 62.6
ASML Holding NV ASML NL 27,717 EUR 4.14 5.09 5.73 2.80 2.91 3.05 1.91 2.13 2.25 712.45 869.76 1,067.11 17.1 29.8 22.7
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
@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
Page 17 of 20
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
BB CC B
CCC
Analyst conducts company and industry research:
• Management interviews
• Conference calls
• Trade show visits
• Competitor, supplier, distributor, and customer interviews
• Assign Economic Moat
™Rating
Analyst considers company financial statements and competitive dynamics to forecast future free cash flows to the firm.
Analyst derives estimate of Cash- Flow Cushion
™.
Analysts run bull and bear cases through the model to derive alternate estimates of enterprise value.
Based on compet- itive analysis, cash-flow fore- casts, and scenario analysis, the analyst assigns Business Risk.
We gauge a firm’s health using quantitative tools supported by our own backtesting and academic research.
• Morningstar Solvency Score
™• Distance to Default
Senior personnel review each company to determine the appropriate final credit rating.
• Review modeling assumptions
• Approve company-specific adjustments
AAA Extremely Low Default Risk AA Very Low Default Risk
A Low Default Risk BBB Moderate Default Risk
BB Above Average Default Risk B High Default Risk
CCC Currently Very High Default Risk CC Currently Extreme Default Risk
C Imminent Payment Default D Payment Default UR Under Review UR+ Positive Credit Implication UR- Negative Credit Implication
AAA
@Morningstar 2014. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc., which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (“NRSRO”). Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
