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Research Highlights
A weekly summary of our best ideas and developments
in the companies we cover.
Morningstar Equity Research Coal Will Continue Declining for Railroads

Jan. 2-5, 2018 Coal remains an important earnings driver for most North American railroads, and year to date, rails
hauled 8% greater carloads compared with 2016. But we still believe coal remains in secular decline.
Contents This is pertinent because we think the market is looking at the strong recent coal recovery, often in
double digits, and other volume growth versus a weak prior year and valuing several rails at multiples
Research Highlights
1 Coal Will Continue Declining for too rich based on near-term carload expectations. Since our 2015 coal update, cheap natural gas has
Railroads displaced significant coal burn, and in 2016 gas surpassed coal's share of U.S. power generation for the
3 Smooth Sailing in the Near Term for
first time. In fact, coal production in 2016 was the lowest since 1979. During 2015-16, multiple North
Cruise Lines, but Maybe Not for Long
4 Initiating Coverage of Duke Realty American coal companies declared bankruptcy (Alpha Natural Resources, Arch, Patriot, Peabody,
Walter, and Xinergy), and coal was a Trump card played during the U.S. presidential election. Coal
6 Best Ideas
carloads improved in 2017 as a result of greater utility coal shipments when natural gas prices increased
Highlighted Stocks and because of greater exported coal after a temporary coal mining restriction policy in China and
8 L Brands LB cyclone damage to coal mines in Australia.
9 Ramsay Health Care RHC:AU
10 Ford Motor Co. F
In sum, we believe cheap natural gas, sluggish power demand, growing renewable energy sources, and
Online
emissions regulations will continue to crowd out coal, even though its decline may be nonlinear and may
Interactive web-based models are available
for our Best Ideas at Trefis. ebb and flow over some periods. No new U.S. coal plants are planned, but low utilization of current
plants does leave room for coal burn to increase significantly even without new plants. The rails will
enjoy the coal business while they can get it and reap the profits of perhaps the most highly refined
operation in their networks, but we believe coal franchises will contract at all Class I rails except met-
coal-intensive Canadian Pacific. Oh, and while the new administration's Environmental Protection
Agency issued a proposal to repeal the Clean Power Plan on Oct. 10, we doubt President Donald Trump
Disclosure can repeal the laws of economics when gas is cheaper than coal, at least not without greater buy-in
The conduct of Morningstar's analysts is governed
by Code of Ethics/Code of Conduct Policy, Personal than he had with healthcare initiatives.
Security Trading Policy (or an equivalent of),
and Investment Research Policy. For information
regarding conflicts of interest, please visit: While coal has indeed been a boon to 2017 EPS growth, it now constitutes a mere midteens proportion
http://global.morningstar.com/equitydisclosures
of total revenue at even the most exposed railroad, yet it's still a material profit generator. Considering
2017 coal expansion over prior-year levels, we update our railroad coal volume expectations in light of
our utilities team's power demand expectations, September U.S. Energy Information Administration
long-run coal projections, our basic materials team's thinking on export coal demand, and our energy
team's projection of sustained cheap natural gas. In this report we discuss our utility coal demand
expectations, the current coal franchise at each rail in this era of lower coal, and our favorite rail stock at
this time.
Page 2 of 17 Weekly Highlights | Jan. 5, 2018 | See disclosures at the end of this report.
Page 2 of 17 Healthcare Observer | 5 January 2018
Page 2 of 17 Paper Title | 5 January 2018

With our horizon longer than the next two or three quarters, we view most rails as fairly valued.
Canadian Pacific is our current top pick in this industry because, while shares trade at close to our fair
Page 2 of 17 value estimate,
Healthcare Observer | 5its price/fair
January 2018 value ratio indicates that CP is the most undervalued of the rails, and it
appears to be the cheapest by several common valuation multiples, too. CP's coal franchise differs
markedly from others in that it consists mainly of serving met coal assets with cost positions that are
Page 2 of 17 more favorable
Healthcare Observer | 5than other
January 2018SNorth American railroads' coal portfolios.
North American railroad coal carloads declined at terrible rates in 2015-16, and 2017 volumes fare
favorably to these weak comps. Utility volumes improved due to more expensive natural gas, and export
volume grew when disaster shut low-cost mines elsewhere in the world. Rails will enjoy this business
while they can and reap the profits of perhaps their most highly optimized operations. Hauling coal is
highly profitable because of decent pricing power, and because it is highly repeatable, flowing from the
same mine mouth to the same power plant or port for decades in unit trains that require little sortation
(unlike manifest or intermodal trains).
Exhibit 1 Coal Has Been in Secular Decline at U.S. Railroads for Years
Annual coal carloads, thousands, 2007-18E
Source: SEC filings, Morningstar.
× We model a 3% decline in utility coal volume per year from 2017-25 based on expectations from our
utilities analysts, which are at the lower end of EIA's long-run projections. We expect eastern U.S.
railroad export coal to revert to 2016 levels in future years.
× The four large U.S. railroads (BNSF, CSX, Norfolk Southern, and Union Pacific) are most exposed to
declining utility coal volumes. CN derives only about 4% of revenue from coal and Kansas City Southern,
about 6%, so coal is less critical in driving these stocks. We thus focus on utility coal demand.
× The EIA agrees with us directionally, but projects a more modest 0.7% decline per year through 2025 in
its natural gas price bear-case scenario (High Oil & Gas Resource & Technology Case). We assume a
midcycle Henry Hub natural gas price of $3 per million British thermal units. However, this is partially
offset by our more bullish estimate of the growth in electric demand.
× Canadian Pacific, our favorite railroad stock at this time, trades right at our DCF-derived valuation. CP is
also cheap by common multiples and has little coal downside, in our opinion.
Keith Schoonmaker, CFA | keith.schoonmaker@morningstar.com


Smooth Sailing in the Near Term for Cruise Lines, but Maybe Not for Long
With Royal Caribbean and Carnival generating 2017 share performance gains of 45% and 27%,
Page 3 of 17 respectively,
Healthcare we
Observer | 5 have
Januarystepped
2018 back to reassess the durability of ongoing strength in shares. Both
equities are trading at or around all-time highs, as significant changes in operations and brand
awareness have bolstered the profitability and ROIC profile over the last decade. We posit that
Page 3 of 17 expansion
Healthcare in EBITDA
Observer metrics
| 5 January 2018S can continue, given the cruise operators' willingness to adapt new
technology to both the operations side of the business as well as the consumer engagement, with the
proliferation of customer demand alongside controlled supply growth, which we believe is likely.
While shares of Carnival and Royal Caribbean are fairly valued relative to our fair value estimates of $65
and $120, respectively, shares of Norwegian remain undervalued, trading at a 19% discount to our $66
fair value estimate (despite clocking a 25% share gain in 2017). In our view, investors interested in the
space would be wise to book shares. However, we also think a few factors, including potentially
conservative 2018 outlooks, a consumer sentiment hiccup, higher fuel costs, or volatile foreign exchange
could allow shares to pare back, offering a better entry point for Norwegian and Royal investments. We
stand by our long-term thesis that demand in North America and China stemming from demographic
tailwinds provide support for cruising that should allow ships to sail full without fail over at least the
next decade, bolstering productivity metrics.
× Current efforts of the large cruise operators on both the cost (improving efficiencies) and price (rational
marketing, onboard efforts) side can continue to help expand EBITDA margins, improving ROICs ahead.
× Road bumps that are largely external, including rising energy prices or volatile foreign exchange rates,
could arise temporarily crimping profits, creating a buying opportunity for Royal Caribbean and Carnival
shares.
× Norwegian remains the most undervalued cruise operator, trading at a 19% discount to our fair value
estimate and 12.5 times 2018 earnings, with an estimated 14% earnings per share growth over the next
five years.
Cruise Operators' Narrow Moats Remain Intact, as Brand Equity and Cost Leadership Prevail
We haven’t wavered on our moat prognosis for any of the three cruise operators and believe that
Carnival, Royal Caribbean, and Norwegian’s narrow moat ratings remain intact. In fact, we think that the
rising returns on invested capital the companies have delivered in recent years suggest that each has
been able to increase the spread on excess economic rents relative to our weighted average cost of
capital, a trend we think will continue. The focus in recent years on controlling costs, rational pricing,
and strategic supply growth have been integral in keeping returns trending in the right direction, and a
relatively stable global economic environment has kept momentum in consumer spending trending
positively, supporting leisure activities.
Jaime M. Katz, CFA | jaime.katz@morningstar.com


Initiating Coverage of Duke Realty
We are initiating coverage of industrial REIT Duke Realty with a fair value estimate of $29.80 per share
Page 4 of 17 and a no-moat
Healthcare Observer | rating.
5 JanuaryWe
2018think the stock still has some room to run, currently trading at a 10% discount
to our fair value estimate. But our high uncertainty rating, driven by elevated supply currently under
construction, puts it in only 3-star territory.
Page 4 of 17 Healthcare Observer | 5 January 2018S
Duke Realty has capitalized on demand led by e-commerce and has shifted its strategy away from office
property to focus solely on industrial space. This was a timely shift in that more and more retailers are
rethinking brick-and-mortar strategies in favor of online. E-commerce warehouses typically require more
space than their brick-and-mortar counterparts. The layout is more complex and the frequency of returns
can equate to as much as three times the amount of space needed compared with traditional retail
warehouses. While future demand seems robust, construction has been at record levels since early
2016. We believe that these new facilities coming to market should cool Duke Realty’s pricing power a
bit as tenants will soon have more options, though this should take a few years. Supply is relatively easy
to add for a few reasons. Industrial warehouses are generally shells built on large plots of land typically
located off highways, miles away from densely populated cities. Once the space is rented, with an
average lease length of about seven years for Duke Realty’s portfolio, it’s up to the tenant to fill it with
everything from machinery to employees.
We do not view industrial landlords as moatworthy given the commoditized nature of the end product
and the ability to easily add supply, evidenced by the elevated levels seen over the past six quarters. We
do believe that Duke Realty will maintain high occupancy and strong leasing spreads over the next
several years while competition trickles into the market. Given the average lease term of seven years,
the company has many of its tenants tied up for the short to medium term, but we still think that once
the market becomes more balanced, pricing power will soften and leasing spreads will be reduced,
potentially even becoming negative if the industry becomes substantially oversupplied, as cost savings
outweigh the nuisance of tenants relocating operations.
Duke Realty has enjoyed a solid run, shifting its portfolio from suburban office properties to become the
leading domestic-only industrial REIT in the U.S. The company has capitalized on depressed supply and
an explosion of growth driven by a better economy and the rise of e-commerce. However, with industrial
vacancy rates at record lows, investors may be late to the party, as supply has increased to levels not
seen since 2007, posing a significant threat to Duke Realty’s ongoing success.
As we note in our no-moat argument for the company, Duke Realty’s properties are largely
commoditized, with locations that are often along highways, miles away from metropolitan areas. While
prices for this type of land have risen over the years, the structures are easily replicable, causing other
real estate companies to throw their hats in the ring, diversifying to meet the demand for industrial
property.
Major retailers continue to shift their strategies as brick-and-mortar shopping loses ground to its online
counterpart. Fortunately for Duke Realty, warehouses that support e-commerce sales require more

space, up to three times as much as traditional retail warehouses. While e-commerce currently accounts
for only about 10% of total retail sales, its piece of the pie is growing at a double-digit pace annually.
Page 5 of 17 We eventually
Healthcare Observer |see additional
5 January 2018 supply bringing Duke Realty’s returns to the cost of capital, since nothing
prohibits new entrants to this market.
Page 5 of 17 Despite Observer

Healthcare the competitive future
| 5 January 2018S of this industry, Duke Realty has an established presence and a solid plan
to grow in high-quality markets. Its tenants typically sign leases for an average of seven years, so it may
take some time before we see the effects of new construction on returns.
Bulls Say
× E-commerce should continue to drive demand for logistics space, and Duke Realty was an early mover
with an established tenant list.
× Duke Realty's solid balance sheet should allow it to expand into Tier 1 markets through development and
acquisition.
× Record low vacancy rates for industrial facilities should continue to warrant double-digit leasing spreads
in the short term.
Bears Say
× The commoditized nature of the underlying properties is easily replicated, so we do not see a situation in
which Duke Realty can sustain outsized returns.
× Construction is at highs not seen since 2007, so Duke Realty's pricing power should soften in the next
several years.
× The economy has been on a rapid rebound since the recession, so a slowdown could sour the outlook on
demand for industrial facilities.
Brad Schwer | brad.schwer@morningstar.com


Best Ideas
Page Paper
6 of 17 web-based models are available for our
Interactive Title
Best | 5 January
Ideas 2018
at Trefis.
Page 6 of 17 Morningstar
Healthcare Observer | 5Fair Value2018 Current
January Uncertainty Moat Price / Market
Company and Industry Rating Estimate Price Rating Rating Fair Value Cap (B) Analyst
Basic6 of
Page Materials
17 Paper Title | 5 January 2018
Cameco (CCO) QQQQQ CAD 22 CAD 12.22 High Narrow 0.56 4.84 Inton
Compass
Page Minerals International (CMP)
6 of 17 QQQ Observer | 5$84
Healthcare January 2018S $75.15 High Wide 0.89 2.54 Goldstein
Martin Marietta Materials (MLM) QQQQ $263 $228 High Narrow 0.87 14.33 Inton
Communication Services
China Mobile (CHL) QQQQ $67 $50.08 Medium Narrow 0.75 204.71 Baker
Millicom International Cellular (MIC SDB) QQQQ SEK 690 SEK 558.5 High Narrow 0.81 57.17 C. Nichols
Quebecor (QBR.B) QQQQ CAD 27 CAD 23.57 Medium Narrow 0.87 5.67 Zhao
Telefonica (TEF) QQQQ $15.5 $9.97 High Narrow 0.64 51.72 C. Nichols
Telstra (TLS) QQQQ AUD 4.6 AUD 3.73 Medium Narrow 0.81 44.36 Han
Consumer Cyclical
Advance Auto Parts (AAP) QQQQQ $155 $111 Medium Narrow 0.72 8.20 Akbari
Domino's Pizza Enterprises (DMP) QQQQ AUD 53 AUD 46.22 Medium Narrow 0.87 4.05 Faul
Fiat Chrysler Automobiles (FCAU) QQQ $21 $20.65 Very High None 0.98 37.28 Hilgert
General Motors (GM) QQQQ $56 $44.14 High None 0.79 62.70 Whiston
Great Wall Motor (2333) QQQQ HKD 14 HKD 9.79 High None 0.70 119.67 Hu
Hanesbrands (HBI) QQQQQ $32 $21.26 Medium Narrow 0.66 7.75 Weishaar
Mattel (MAT) QQQQ $25.5 $15.91 High Narrow 0.62 5.47 Katz
Starbucks (SBUX) QQQQ $66 $58.93 Medium Wide 0.89 83.85 Hottovy
The Interpublic Group of Companies (IPG) QQQQ $25 $20.17 Medium Narrow 0.81 7.84 Mogharabi
TripAdvisor (TRIP) QQQQ $55 $34.92 High Narrow 0.63 4.85 Wasiolek
Walt Disney (DIS) QQQQ $130 $112.23 Medium Wide 0.86 169.16 Macker
Williams-Sonoma (WSM) QQQQ $65 $52.68 Medium Narrow 0.81 4.43 Katz
WPP (WPP) QQQQ GBX 1640 GBX 1319 Medium Narrow 0.80 16.75 Mogharabi
Consumer Defensive
Coca-Cola Amatil (CCL) QQQQ AUD 9.4 AUD 8.61 Medium Narrow 0.92 6.38 Fleck
Imperial Brands (IMB) QQQQ GBX 3900 GBX 3129.5 Low Wide 0.80 29.85 Gorham
JM Smucker (SJM) QQQ $133 $124.39 Medium Narrow 0.94 14.13 Akbari
Kao (4452) QQQ JPY 7900 JPY 7678 Medium Wide 0.97 3715.10 Wei
Mondelez International (MDLZ) QQQQ $51 $42.68 Medium Wide 0.84 63.78 Lash
Energy
Cenovus Energy (CVE) QQQQ $21 $12.97 Very High None 0.62 15.94 Gemino
Enbridge (ENB) QQQQ $64 $50.98 Medium Wide 0.80 86.01 Gemino
Enterprise Products Partners (EPD) QQQQ $30 $27.81 Low Wide 0.93 60.10 Ellis
Royal Dutch Shell (RDS.B) QQQ $71 $70.37 Low None 0.99 284.24 Good
RSP Permian (RSPP) QQQ $44 $41.17 High None 0.94 6.53 Meats
Santos (STO) QQQ AUD 5.75 AUD 5.55 High None 0.97 11.56 Taylor
Financial Services
American International Group (AIG) QQQQ $76 $60.4 Medium None 0.79 54.30 Horn
Assicurazioni Generali (G) QQQ EUR 17.7 EUR 15 Very High None 0.85 23.42 Heathfield
Capital One Financial (COF) QQQ $108 $101.42 Medium Narrow 0.94 49.16 Plunkett
Mitsubishi UFJ Financial Group (8306) QQQ JPY 880 JPY 866.8 Medium None 0.99 11495.11 Kumagai
QBE Insurance Group (QBE) QQQQ AUD 13 AUD 10.76 High Narrow 0.83 14.63 Ellis
Wells Fargo (WFC) QQQ $67 $62.33 Medium Wide 0.93 306.93 Sinegal
Source: Morningstar. As of Jan. 5, 2018


Best Ideas
Page Paper
7 of 17 web-based models are available for our
Interactive Title
Best | 5 January
Ideas 2018
at Trefis.
Page 7 of 17 Morningstar
Healthcare Observer | 5Fair Value2018 Current
January Uncertainty Moat Price / Fair Market
Company and Industry Rating Estimate Price Rating Rating Value Cap (B) Analyst
Healthcare
Allergan (AGN) QQQQQ $263 $171.58 Medium Wide 0.65 57.06 Waterhouse
Page 7 of Scripts
Express 17 Holding (ESRX) Healthcare
QQQQ Observer | 5$89
January 2018S $76.08 Medium Wide 0.85 43.09 Lekraj
Healthscope (HSO) QQQQ AUD 2.6 AUD 2.11 Medium Narrow 0.81 3.67 Kallos
McKesson (MCK) QQQQ $210 $155.06 Medium Wide 0.74 32.33 Lekraj
Ramsay Health Care (RHC) QQQQ AUD 87 AUD 70.6 Medium Narrow 0.81 14.27 Kallos
Roche Holding (ROG) QQQQQ CHF 332 CHF 252.2 Low Wide 0.76 215.52 Andersen
Shire (SHPG) QQQQ $205 $157.29 Medium Narrow 0.77 47.94 Andersen
Vertex Pharmaceuticals (VRTX) QQQQ $175 $153.07 Medium Narrow 0.87 38.71 Tsai
Industrials
Anixter International (AXE) QQQQ $103 $76.3 Medium Narrow 0.74 2.54 Bernard
Beijing Enterprises Holdings (392) QQQQ HKD 56 HKD 46.55 Medium Narrow 0.83 58.75 Song
Brambles (BXB) QQQQ AUD 11.2 AUD 9.98 Medium Wide 0.89 15.88 Fleck
CK Hutchison Holdings (1) QQQQ HKD 110 HKD 99.25 Low None 0.90 382.87 Tan
Fluor (FLR) QQQ $60 $53.26 High Narrow 0.89 7.45 Silver
G4S (GFS) QQQQ GBX 312 GBX 273.9 Medium None 0.88 4.25 Field
GEA Group (G1A) QQQQ EUR 47 EUR 40.94 Medium Wide 0.87 7.44 Molina
Guangshen Railway (525) QQQ HKD 5.8 HKD 5.62 High None 0.97 46.15 Song
Johnson Controls International (JCI) QQQQ $54 $39.85 High Narrow 0.74 36.88 Bernard
KION GROUP (KGX) QQQQ EUR 86 EUR 75.7 Medium Narrow 0.88 8.91 Molina
Royal Philips (PHIA) QQQQ EUR 40 EUR 32.28 Medium Narrow 0.81 30.24 Vonk
Stericycle (SRCL) QQQQQ $105 $70.85 Medium Wide 0.67 6.05 Noverini
United Technologies (UTX) QQQ $134 $130.45 High Wide 0.97 104.17 Noverini
Real Estate
AVEO Group (AOG) QQQQ AUD 3.25 AUD 2.81 Medium None 0.86 1.63 Sherlock
Vornado Realty Trust (VNO) QQQQ $92 $74.8 Medium None 0.81 14.20 Schwer
Technology
Guidewire Software (GWRE) QQQQ $95 $76.59 Medium Wide 0.81 5.88 Nelson
Qualcomm (QCOM) QQQ $75 $66.03 High Narrow 0.88 97.34 Davuluri
Sabre (SABR) QQQQ $26 $20.89 Medium Narrow 0.80 5.74 Wasiolek
Salesforce.com (CRM) QQQQ $131 $106.68 Medium Wide 0.81 77.05 Nelson
Synaptics (SYNA) QQQQ $64 $41.82 Very High None 0.65 1.42 Davuluri
TDK (6762) QQQ JPY 11000 JPY 9730 High None 0.88 1227.92 Ito
Tencent Holdings (700) QQQ HKD 492 HKD 433.2 High Wide 0.88 4114.81 Tam
Utilities
Dominion Energy (D) QQQQ $87 $76.83 Low Wide 0.88 49.44 Fishman
Gas Natural SDG (GAS) QQQ EUR 22 EUR 20.76 Medium Narrow 0.94 20.76 Fulop
SCANA (SCG) QQQQ $60 $46.33 Medium Narrow 0.77 6.61 Miller


Highlighted Stocks
Page 8 of 17 L BrandsObserver
Healthcare LB | 5 January 2018

Morningstar Fair Value Current Uncertainty Price/Fair Market
Rating Industry Moat Trend Currency Estimate Price Rating Moat Rating Value Cap (Bil)
Page 8 of 17 QQQQ ObserverConsumer
Healthcare | 5 January 2018S Stable USD 69 50.51 Medium Wide 0.73 14.40
In the long run, we see improved product, easier comparables, and a growing exposure to China driving
sales performance back into mid-single-digit territory.
Analyst Note, Jan. 4, 2018

Although market expectations seem to have gotten ahead of wide-moat L Brands’ recovery with news of
3% sales growth in December resulting in a midteens slide in share value, our $69 fair value estimate
already reflects our belief that near-term performance will be muted by L Brands’ heavy mall exposure
with about 50% of North American stores in B and C malls. Therefore, we see little change to our fair
value estimate, which is currently based on 2.6% average annual revenue growth over the next five
years and $2.03 adjusted earnings per share in the fourth quarter of fiscal 2017 (only slightly higher than
updated guidance for $2.00 versus $1.95-$2.10 prior). In the long run, we see improved product, easier
comparables, and a growing exposure to China driving sales performance back into mid-single-digit
territory.
December sales growth was driven by strength at Bath & Body Works (4% comparable sales growth in
stores and direct sales) and direct sales at Victoria’s Secret (which boosted segment combined
comparable sales performance to a 1% decline versus 6% at stores only). At Victoria’s Secret, growth in
the beauty and Pink businesses was more than offset by a decline in lingerie. Further, management
disclosed that the merchandise margin rate was down significantly driven by increased promotional
activity. We await further insight into profitability trends, expected on the fourth-quarter earnings call
scheduled for March 1, 2018.
Bridget Weishaar | bridget.weishaar@morningstar.com


Ramsay Health Care RHC:AU

Page 9 of 17 Healthcare
Rating ObserverIndustry
| 5 January 2018 Moat Trend Currency Estimate Price Rating Moat Rating Value Cap (Bil)
QQQQ Healthcare Stable AUD 87 70.60 Medium Narrow 0.81 14.27
We continue to believe the market is underappreciating the company’s leadership position in the
Australian private hospital market.

We maintain our AUD 87 per share fair value estimate for narrow-moat Ramsay Health Care after
management reiterated fiscal 2018 EPS growth guidance of between 8% and 10%. This compares with
our forecast 2018 EPS growth assumption of 9%, representing EPS of AUD 2.85. At current levels, shares
are trading at a significant discount to our valuation. We continue to believe the market is
underappreciating the company’s leadership position in the Australian private hospital market and those
initiatives under way which we think underpin steady growth and margin expansion potential over the
long term.
We remain positive on Ramsay’s move into community pharmacy, unveiled in fiscal 2016, and consider it
complementary to acute treatment settings. Further, we think the move increases the company’s
opportunity to engage with the patient by extending the company’s reach into chronic disease
management. We think this is an important dynamic, given age-related morbidities and the ageing of
the Australian population. Our base case assumes pharmacy revenue of around AUD 3 million per store,
with stores reaching 81 by 2020, to generate around AUD 250 million, or 3.8% of forecast Australian
divisional revenue and 4% of forecast divisional EBITDA.
Our modeling of the pharmacy initiative factors in potential economies of scale with respect to
procurement of pharmaceuticals across the group inclusive of in-hospital dispensaries. It does not,
however, incorporate potential synergies relating to post-hospital discharge service offerings on the
pharmacy front, nor the potential to fold in ancillary service offerings through the pharmacy channel
such as medication management/monitoring programs.
Chris Kallos, CFA | chris.kallos@morningstar.com


Ford Motor Co. F

Page 10 of 17 Healthcare
Rating ObserverIndustry
| 5 January 2018 Moat Trend Currency Estimate Price Rating Moat Rating Value Cap (Bil)
QQQQ Consumer Negative USD 15 13.22 High None 0.88 51.56
We expect 2018 sales to again decline but not severely.

Automakers closed out 2017 U.S. auto sales with December numbers reported Jan. 3. December light-
vehicle sales declined by 5% year over year, but we calculate a 1.3% decline adjusting for one less
selling day than December 2016. Crossovers continue to do well at the expense of sedans, and we
expect that trend to continue in 2018. Premium brands such as Lexus, Cadillac, and Lincoln all had a
weak month. Ford believes consumers are valuing function over brand cachet and buying expensive SUV
models such as Explorer at premium prices. For the full year 2017, sales came in at about 17.25 million,
which was the third straight year at over 17 million and the fifth time ever. The 1.8% year-over-year
decline was the industry’s first annual decline since 2009. We expect 2018 sales to again decline but not
severely. We continue to believe that leasing is done growing its penetration at about 30% of new
vehicle sales and a continued rise in off-lease supply will in our view draw some consumers back into
the used vehicle market.
Ford’s December volume rose 0.9% year over year as a 16.8% fleet increase more than offset a 4%
decline from the retail channel. Ford’s rental fleet sales made up 11.8% of December sales, a 560-basis-
point increase from December 2016 but not dramatically off from the company’s full-year rental mix of
11.1%. Crossovers and SUV volume rose 8%, while cars fell 5.5% and the truck segment fell 1%. The F-
Series pickup, however, rose 2.1% for its best December and best full-year sales since 2005 at nearly
897,000 units, with record average transaction price of $47,800, up $3,400 from 2016. Ford’s SUVs had a
record year, selling just under 800,000 vehicles and a record December. Explorer’s sales rose 33% for the
month for its best December since 2003 and best full year since 2005. Although Lincoln struggled with
the rest of the premium market, with its December sales down 17%, the one bright spot was the new
Navigator, which rose 30%.
David Whiston, CFA, CPA, CFE | david.whiston@morningstar.com


Research Methodology for Valuing Companies
Overview
Page 11 of 17 Healthcare Observer
At the heart of our| valuation
5 January 2018
system is a detailed projection of a company's future cash flows, resulting from our analysts' research.
Analysts create custom industry and company assumptions to feed income statement, balance sheet, and capital investment
Page 11 of 17 Paper Title | 5 January
assumptions into our2018
globally standardized, proprietary discounted cash flow, or DCF, modeling templates. We use scenario
analysis, in-depth competitive advantage analysis, and a variety of other analytical tools to augment this process. Moreover, we
Page 11 of 17 Healthcare Observer
think analyzing | 5 January
valuation 2018Sdiscounted cash flows presents a better lens for viewing cyclical companies, high-growth firms,
through
businesses with finite lives (e.g., mines), or companies expected to generate negative earnings over the next few years. That said,
we don't dismiss multiples altogether but rather use them as supporting cross-checks for our DCF-based fair value estimates. We
also acknowledge that DCF models offer their own challenges (including a potential proliferation of estimated inputs and the
possibility that the method may miss short-term market price movements), but we believe these negatives are mitigated by deep
analysis and our long-term approach.
Morningstar's equity research group ("we," "our") believes that a company's intrinsic worth results from the future cash flows it
can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth—or fair
value estimate, in Morningstar terminology. Five-star stocks sell for the biggest risk-adjusted discount to their fair values, whereas
1-star stocks trade at premiums to their intrinsic worth.
Morningstar Research Methodology
Source: Morningstar.
Four key components drive the Morningstar rating: (1) our assessment of the firm's economic moat, (2) our estimate of the stock's
fair value, (3) our uncertainty around that fair value estimate, and (4) the current market price. This process ultimately culminates
in our single-point star rating.
Economic Moat
The concept of an economic moat plays a vital role not only in our qualitative assessment of a firm's long-term investment
potential, but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm
to sustain excess profits over a long period of time. We define economic profits as returns on invested capital (ROIC) over and
above our estimate of a firm's cost of capital, or weighted average cost of capital (WACC). Without a moat, profits are more
susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect,
cost advantage, and efficient scale.
Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the
next 10 years. Wide-moat companies are those in which we have very high confidence that excess returns will remain for 10 years,
with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its
intrinsic value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward their cost of capital
more quickly than companies with moats.
To assess the sustainability of excess profits, analysts perform ongoing assessments of the moat trend. A firm's moat trend is
positive in cases where we think its sources of competitive advantage are growing stronger, stable where we don't anticipate
changes to competitive advantages over the next several years, or negative where we see signs of deterioration.

Estimated Fair Value
Page 12 of 17 Combining
Paper Title | 5our analysts'
January 2018 financial forecasts with the firm's economic moat helps us assess how long returns on invested capital are
likely to exceed the firm's cost of capital. Returns of firms with a wide economic moat rating are assumed to fade to the perpetuity
Page 12 of 17 period overObserver
Healthcare a longer
| 5 period
Januaryof2018
time than the returns of narrow-moat firms, and both will fade slower than no-moat firms, increasing
our estimate of their intrinsic value.
Our model is divided into three distinct stages:
Stage I: Explicit Forecast
In this stage, which can last 5 to 10 years, analysts make full financial statement forecasts, including items such as revenue, profit
margins, tax rates, changes in working capital accounts, and capital spending. Based on these projections, we calculate earnings
before interest, after taxes (EBI) and net new investment (NNI) to derive our annual free cash flow forecast.
Stage II: Fade

The second stage of our model is the period it will take the company's return on new invested capital—the return on capital of the
next dollar invested (RONIC)—to decline (or rise) to its cost of capital. During the Stage II period, we use a formula to approximate
cash flows in lieu of explicitly modeling the income statement, balance sheet, and cash flow statement as we do in Stage I. The
length of the second stage depends on the strength of the company's economic moat. We forecast this period to last anywhere
from one year (for companies with no economic moat) to 10–15 years or more (for wide-moat companies). During this period, cash
flows are forecast using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average
return on new invested capital (RONIC), and the number of years until perpetuity, when excess returns cease. The investment rate
and return on new invested capital decline until a perpetuity value is calculated. In the case of firms that do not earn their cost of
capital, we assume marginal ROICs rise to the firm's cost of capital (usually attributable to less reinvestment), and we may truncate
the second stage.
Stage III: Perpetuity

Once a company's marginal ROIC hits its cost of capital, we calculate a continuing value, using a standard perpetuity formula. At
perpetuity, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any
new investment provides a return in line with estimated WACC.
Because a dollar earned today is worth more than a dollar earned tomorrow, we discount our projections of cash flows in stages I,
II, and III to arrive at a total present value of expected future cash flows. Because we are modeling free cash flow to the firm—
representing cash available to provide a return to all capital providers—we discount future cash flows using the WACC, which is a
weighted average of the costs of equity, debt, and preferred stock (and any other funding sources), using expected future
proportionate long-term, market value weights.
Uncertainty Around That Fair Value Estimate

Morningstar's uncertainty rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin
of safety required before investing, which in turn explicitly drives our stock star rating system. The uncertainty rating represents
the analysts' ability to bound the estimated value of the shares in a company around the fair value estimate, based on the
characteristics of the business underlying the stock, including operating and financial leverage, sales sensitivity to the overall
economy, product concentration, pricing power, and other company-specific factors.
Analysts consider at least two scenarios in addition to their base case: a bull case and a bear case. Assumptions are chosen such
that the analyst believes there is a 25% probability that the company will perform better than the bull case and a 25% probability
that the company will perform worse than the bear case. The distance between the bull and bear cases is an important indicator of
the uncertainty underlying the fair value estimate.
Our recommended margin of safety widens as our uncertainty regarding the estimated value of the equity increases. The more
uncertain we are about the estimated value of the equity, the greater the discount we require relative to our estimate of the value
of the firm before we would recommend the purchase of the shares. In addition, the uncertainty rating provides guidance in
portfolio construction based on risk tolerance.

Our uncertainty ratings for our qualitative analysis are low, medium, high, very high, and extreme.
Page 13 of 17 × Low: Margin
Paper of safety
Title | 5 January for 5-star rating is a 20% discount and for 1-star rating is a 25% premium.
2018
× Medium: Margin of safety for 5-star rating is a 30% discount and for 1-star rating is a 35% premium.
Page 13 of 17 × High: Margin
Healthcare of safety
Observer for 5-star
| 5 January 2018rating is a 40% discount and for 1-star rating is a 55% premium.
× Very high: Margin of safety for 5-star rating is a 50% discount and for 1-star rating is a 75% premium.
Page 13 of 17 × Extreme:
Paper Title Margin of safety
| 5 January 2018 for 5-star rating is a 75% discount and for 1-star rating is a 300% premium.

Morningstar Equity Research Star Rating Methodology
Market Price
The market prices used in this analysis and noted in the report come from the exchange on which the stock is listed, which we
believe is a reliable source.
For more details about our methodology, please go to http://global.morningstar.com/equitydisclosures.
Morningstar Star Rating for Stocks

Once we determine the fair value estimate of a stock, we compare it with the stock's current market price on a daily basis, and the
star rating is automatically recalculated at the market close on
every day the market on which the stock is listed is open. Our analysts keep close tabs on the companies they follow and, based on
thorough and ongoing analysis, raise or lower their fair value estimates
as warranted.
Please note, there is no predefined distribution of stars. That is, the percentage of stocks that earn
5 stars can fluctuate daily, so the star ratings, in the aggregate, can serve as a gauge of the broader market's valuation. When
there are many 5-star stocks, the stock market as a whole is more undervalued, in our opinion, than when very few companies
garner our highest rating.
We expect that if our base-case assumptions are true, the market price will converge on our fair value estimate over time,
generally within three years (although it is impossible to predict the exact time frame in which market prices may adjust).

Our star ratings are guideposts to a broad audience, and individuals must consider their own specific investment goals, risk
Page 14 of 17 tolerance,
Paper Title | tax situation,
5 January 2018time horizon, income needs, and complete investment portfolio, among other factors.
Page 14 of 17 The Morningstar

Healthcare ObserverStar Ratings2018
| 5 January for stocks are defined below:
Page 14 of 17 QQQQQ
Paper We believe
Title | 5 January 2018 appreciation beyond a fair risk-adjusted return is highly likely over a multiyear time frame. Scenario
analysis developed by our analysts indicates that the current market price represents an excessively pessimistic outlook, limiting
Page 14 of 17 downside Observer
Healthcare risk and|maximizing upside potential.
5 January 2018S
QQQQ We believe appreciation beyond a fair risk-adjusted return is likely.
QQQ Indicates our belief that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).
QQ We believe investors are likely to receive a less than fair risk-adjusted return.
Q Indicates a high probability of undesirable risk-adjusted returns from the current market price over a multiyear time frame,
based on our analysis. Scenario analysis by our analysts indicates that the market is pricing in an excessively optimistic outlook,
limiting upside potential and leaving the investor exposed to capital loss.
Risk Warning
Please note that investments in securities are subject to market and other risks, and there is no assurance or guarantee that the
intended investment objectives will be achieved. Past performance of a security may or may not be sustained in the future and is
no indication of future performance. A security investment return and an investor's principal value will fluctuate so that, when
redeemed, an investor's shares may be worth more or less than their original cost. A security's current investment performance
may be lower or higher than the investment performance noted within the report. Morningstar's uncertainty rating serves as a
useful data point with respect to sensitivity analysis of the assumptions used in our determining a fair value price.
General Disclosure
Unless otherwise provided in a separate agreement, recipients accessing this report may only use it in the country in which the
Morningstar distributor is based. Unless stated otherwise, the original distributor of the report is Morningstar Research Services
LLC, a U.S.-domiciled financial institution.
This report is for informational purposes only and has no regard to the specific investment objectives, financial situation or
particular needs of any specific recipient. This publication is intended to provide information to assist institutional investors in
making their own investment decisions, not to provide investment advice to any specific investor. Therefore, investments discussed
and recommendations made herein may not be suitable for all investors: Recipients must exercise their own independent
judgment as to the suitability of such investments and recommendations in the light of their own investment objectives,
experience, taxation status, and financial position.
The information, data, analyses, and opinions presented herein are not warranted to be accurate, correct, complete, or timely.
Unless otherwise provided in a separate agreement, neither Morningstar, Inc. nor the Equity Research Group represents that the
report contents meet all of the presentation and/or disclosure standards applicable in the jurisdiction the recipient is located.
Except as otherwise required by law or provided for in a separate agreement, the analyst, Morningstar, Inc., and the Equity
Research Group and their officers, directors, and employees shall not be responsible or liable for any trading decisions, damages,
or other losses resulting from, or related to, the information, data, analyses, or opinions within the report. The Equity Research
Group encourages recipients of this report to read all relevant issue documents (e.g., prospectus) pertaining to the security
concerned, including without limitation, information relevant to its investment objectives, risks, and costs before making an
investment decision and, when deemed necessary, to seek the advice of a legal, tax, and/or accounting professional.
The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability, or use
would be contrary to law or regulation or which would subject Morningstar, Inc. or its affiliates to any registration or licensing
requirements in such jurisdiction.

Where this report is made available in a language other than English and in the case of inconsistencies between the English and
Page 15 of 17 translated
Paper Title | versions
5 January of the report, the English version will control and supersede any ambiguities associated with any part or
2018
section of a report that has been issued in a foreign language. Neither the analyst, Morningstar, Inc., nor the Equity Research
Page 15 of 17 Group guarantees
Healthcare Observer |the accuracy
5 January 2018of the translations.
Page 15 of 17 This report

Paper Title | 5may be distributed
January 2018 in certain localities, countries and/or jurisdictions ("Territories") by independent third parties or
independent intermediaries and/or distributors ("Distributors"). Such Distributors are not acting as agents or representatives of the
Page 15 of 17 analyst, Morningstar,
Healthcare Inc., or2018S
Observer | 5 January the Equity Research Group. In Territories where a Distributor distributes our report, the Distributor is
solely responsible for complying with all applicable regulations, laws, rules, circulars, codes, and guidelines established by local
and/or regional regulatory bodies, including laws in connection with the distribution third-party research reports.
Conflicts of Interest
× No interests are held by the analyst with respect to the security subject of this investment
research report.
× Morningstar, Inc. may hold a long position in the security subject of this investment research report that exceeds 0.5% of
the total issued share capital of the security. To determine if such is the case, please click http://msi.morningstar.com and
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× Analysts' compensation is derived from Morningstar, Inc.'s overall earnings and consists of salary, bonus, and in some cases
restricted stock.
× Neither Morningstar, Inc. nor the Equity Research Group receives commissions for providing research nor do they charge
companies to be rated.
× Neither Morningstar, Inc. nor the Equity Research Group is a market maker or a liquidity provider of the security noted within
this report.
× Neither Morningstar, Inc. nor the Equity Research Group has been a lead manager or co-lead manager over the previous 12
months of any publicly disclosed offer of financial instruments of the issuer.
× Morningstar, Inc.'s investment management group does have arrangements with financial institutions to provide portfolio
management/investment advice, some of which an analyst may issue investment research reports on. However, analysts do not
have authority over Morningstar's investment management group's business arrangements nor allow employees from the
investment management group to participate or influence the analysis or opinion prepared by them.
× Morningstar, Inc. is a publicly traded company (ticker symbol: MORN) and thus a financial institution the security of which is the
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Further information on Morningstar, Inc.'s conflict of interest policies is available from

http://global.morningstar.com/equitydisclosures. Also, please note analysts are subject to the CFA Institute's Code of Ethics and
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For a list of securities that the Equity Research Group currently covers and provides written analysis on, please contact your local
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For Recipients in Australia: This Report has been issued and distributed in Australia by Morningstar Australasia Pty Ltd (ABN: 95
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the Report contains general advice, it has been prepared without reference to an investor's objectives, financial situation, or
Page 16 of 17 needs.Title
Paper Investors should
| 5 January 2018consider the advice in light of these matters and, if applicable, the relevant Product Disclosure Statement
before making any decision to invest. Refer to our Financial Services Guide (FSG) for more information at
Page 16 of 17 http://www.morningstar.com.au/fsg.pdf.
Healthcare Observer | 5 January 2018
Page 16 of 17 For Recipients

Paper in Hong
Title | 5 January 2018 Kong: The Report is distributed by Morningstar Investment Management Asia Limited, which is regulated
by the Hong Kong Securities and Futures Commission to provide services to professional investors only. Neither Morningstar
Page 16 of 17 InvestmentObserver
Healthcare Management Asia
| 5 January Limited nor its representatives are acting or will be deemed to be acting as an investment advisor to
2018S
any recipients of this information unless expressly agreed to by Morningstar Investment Management Asia Limited. For enquiries
regarding this research, please contact a Morningstar Investment Management Asia Limited Licensed Representative at
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For Recipients in India: This Investment Research is issued by Morningstar Investment Adviser India Private Limited. Morningstar
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About Morningstar® Institutional Equity ResearchTM
Morningstar Institutional Equity Research provides independent, fundamental equity research
Page 17 of 17 differentiated
Healthcare Observerby a consistent
| 5 January 2018 focus on sustainable competitive advantages, or Economic Moats.

For More Information
Page 17 of 17 +1 312 696-6869
Healthcare Observer | 5 January 2018S
equitysupport@morningstar.com
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22 West Washington Street
Chicago, IL 60602 USA
©2018 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the
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Morningstar Equity Research Coal Will Continue Declining for Railroads

Page 2 of 17 Healthcare Observer | 5 January 2018

Page 2 of 17 Paper Title | 5 January 2018

Page 2 of 17 Healthcare Observer | 5 January 2018

Source: SEC filings, Morningstar.

Keith Schoonmaker, CFA | keith.schoonmaker@morningstar.com

Page 3 of 17 Healthcare Observer | 5 January 2018

Page 3 of 17 Paper Title | 5 January 2018

Page 3 of 17 Healthcare Observer | 5 January 2018

Jaime M. Katz, CFA | jaime.katz@morningstar.com

Page 4 of 17 Healthcare Observer | 5 January 2018

Page 4 of 17 Paper Title | 5 January 2018

Page 4 of 17 Healthcare Observer | 5 January 2018

Page 5 of 17 Healthcare Observer | 5 January 2018

Page 5 of 17 Paper Title | 5 January 2018

Page 5 of 17 Healthcare Observer | 5 January 2018

Page 5 of 17 Despite Observer

Brad Schwer | brad.schwer@morningstar.com

Page 6 of 17 Healthcare Observer | 5 January 2018

Page 6 of 17 Paper Title | 5 January 2018

Page 6 of 17 Healthcare Observer | 5 January 2018

Source: Morningstar. As of Jan. 5, 2018

Page 7 of 17 Healthcare Observer | 5 January 2018

Page 7 of 17 Paper Title | 5 January 2018

Page 7 of 17 Healthcare Observer | 5 January 2018

Source: Morningstar. As of Jan. 5, 2018

Page 8 of 17 Healthcare Observer | 5 January 2018

Page 8 of 17 Paper Title | 5 January 2018

Page 8 of 17 Healthcare Observer | 5 January 2018

Page 8 of 17 Paper Title | 5 January 2018

Analyst Note, Jan. 4, 2018

Bridget Weishaar | bridget.weishaar@morningstar.com

Page 9 of 17 Healthcare Observer | 5 January 2018

Page 9 of 17 Paper Title | 5 January 2018

Page 9 of 17 Healthcare Observer | 5 January 2018

Morningstar Fair Value Current Uncertainty Price/Fair Market

Page 9 of 17 Healthcare Observer | 5 January 2018S

Analyst Note, Jan. 2, 2018

Chris Kallos, CFA | chris.kallos@morningstar.com

Page 10 of 17 Healthcare Observer | 5 January 2018

Page 10 of 17 Paper Title | 5 January 2018

Page 10 of 17 Healthcare Observer | 5 January 2018

Morningstar Fair Value Current Uncertainty Price/Fair Market

Page 10 of 17 Healthcare Observer | 5 January 2018S

We expect 2018 sales to again decline but not severely.

Analyst Note, Jan. 3, 2018

David Whiston, CFA, CPA, CFE | david.whiston@morningstar.com

Page 11 of 17 Healthcare Observer | 5 January 2018

Page 11 of 17 Paper Title | 5 January 2018

Page 11 of 17 Healthcare Observer | 5 January 2018

Morningstar Research Methodology

Page 12 of 17 Healthcare Observer | 5 January 2018

Page 12 of 17 Paper Title | 5 January 2018

Page 12 of 17 Healthcare Observer | 5 January 2018

Stage II: Fade

Stage III: Perpetuity

Uncertainty Around That Fair Value Estimate

Page 13 of 17 Healthcare Observer | 5 January 2018

Page 13 of 17 Paper Title | 5 January 2018

Page 13 of 17 Healthcare Observer | 5 January 2018

Page 13 of 17 Healthcare Observer | 5 January 2018S

For more details about our methodology, please go to http://global.morningstar.com/equitydisclosures.