Morningstar Equity Analyst Report | Report as of 02 Apr 2014 | Page 1 of 8

Coca-Cola Co KO (XNYS)
Morningstar Rating

Last PriceFair Value Estimate

Price/Fair Value

Dividend Yield %Market Cap (Bil)Industry

Stewardship

QQQQ

38.33 USD

44.00 USD

0.87

2.98

168.88Beverages - Soft Drinks

Exemplary02 Apr 201402 Apr 201402 Apr 201402 Apr 2014

Morningstar Pillars

AnalystQuantitative

Economic Moat
Valuation
Uncertainty
Financial Health

Wide
QQQQ
Low
AA-

Wide
Fairly Valued
Low
StrongSource: Morningstar Equity Research

KO
s
USA

Source: Morningstar

Bulls Say

Fairly Valued

Overvalued

Current

5-Yr Avg

0.96
20.2
16.6
16.4
21.7
2.98

0.95
18.3
—
16.5
22.3
2.75

Sector Country

1.02
19.2
15.1
11.7
19.6
1.97

1.03
20.9
14.2
12.3
20.8
2.02

Coca-Cola described its 2020 vision in 2009 and since thenhas been making steady progress in achieving its goals.
The company hopes to double the amount of Coca-Colabeverages consumed around the world and double systemrevenue in that time frame. While we believe that volume
growth during the next decade will be led by emerging
markets, we also think that Coca-Cola's sales in maturegeographies will also expand as it continues to broaden
its portfolio of still beverages. Coca-Cola's vast
distribution network and powerhouse brands are second
to none and have helped the company create one of thewidest economic moats in our consumer defensive
coverage universe. We believe the firm's wide moat
justifies an above-average multiple and that the sharesare undervalued compared with our $44 fair value
estimate.

2014 operating profit. Management remains committed
to Coke's 2020 vision and its long-term growth algorithm(which includes high-single-digit growth in constantcurrency EPS). Even though Coke's 2013 volume growth
was tepid--partly the result of emerging-market
headwinds--we believe the firm's economic moat remains
wide with a strong brand portfolio that commands pricing
power. Longer-term, we believe that Coca-Cola will
benefit from rising per capita emerging-market
consumption across its entire beverage portfolio, as
government-led wage rate increases and infrastructure
investments, a flight to urban centers, and younger
populations are all conducive to favorable emerging-market
disposal income trends. This should help drive volume
growth of 3% to 4%, and sales growth of 5% to 6%.

PL
E

Price/Intrinsic Value
Price/Earnings
Forward P/E
Price/Cash Flow
Price/Free Cash Flow
Dividend Yield %R.J. Hottovy, CFA, 27 February 2014

Investment Thesis

Quantitative Valuation

Undervalued

Coke's global brands and distribution network are unmatched.

OCoca-Cola's distribution network spans morethan 200 countries. This infrastructure would be
extremely difficult and costly for new entrants toduplicate.

While declining consumption of carbonated beverages inNorth America is a near-term headwind for Coke, we
believe international markets will provide plenty ofgrowth opportunities in the long term. Barring any
strategic missteps, we view Coca-Cola as a haven in an
uncertain economic environment, given that it has one of
the widest moats in our consumer coverage universe.

SA
M

OCoke has ample runway for growth in emerging
markets where per capita consumption isrelatively low.

OCoca-Cola and its global bottlers tend to havea very symbiotic relationship and are largely
focused on the same goals.
Bears Say

OCoke's revenue base is relatively undiversified
compared with PepsiCo's; Pepsi's snack businesshas proved quite resilient during economic
downturns.
ODespite the popularity of Coke's flagship brand,cola consumption has been declining in the U.S.

OSoft drink bottling operations are capitalintensive and lower-margin than Coke's core
concentrate and syrup business. Consequently,
Coke's profitability could be hurt by its acquisitionof CCE's North American assets.

Even though its distribution network spans the globe, Cokecontinues to invest for international growth. The company
and its bottling partners intend to invest billions during
the next few years in countries such as China, Russia, andBrazil, where per capita consumption is increasing in lightof a burgeoning middle class. For example, annual per
capita consumption of Coca-Cola products in China iscurrently just 38 servings, versus eight servings in 1998
and more than 400 servings in the United States. We thinkthese investments will build out the firm's manufacturing
and distribution footprint to such an extent that it would
be too costly for a new entrant to duplicate, solidifying
the sustainability of Coke's competitive advantages.
R.J. Hottovy, CFA, 18 February 2014

Analyst Note
While Coca-Cola's fourth-quarter volume growthmoderated to just 1%, 7 percentage points of adverse
exchange rates will have a negative impact on the firm's

This Friday, Coca-Cola management will present at theConsumer Analyst Group of New York, or CAGNY,
conference in Florida. They will be discussing the firm's
long-term growth opportunities in more detail. As such,
we will wait to update our valuation model or change our$45 fair value estimate. However, given the near-termcurrency headwinds, new soda taxes in Mexico, anddeclining diet soda consumption in the United States, we
may end up slightly reducing our fair value estimate.
For the year, comparable constant currency revenue grew
3%, and constant currency operating profit climbed 6%.
Adjusted EPS was $2.08, an increase of 8%. Goingforward, Coca-Cola plans to achieve $1 billion of costsavings by 2016 (primarily in supply chain and IT functions).
The firm will reinvest these cost savings into increased
media investments. In our opinion, this is a prudent use
of capital because much of Coca-Cola's wide economic
moat is centered on its power brands.

Economic Moat
27 February 2014

Coca-Cola's massive scale and global distribution network
are the key sources of the company's wide economic moat.
Although consumer tastes in several developed markets
are shifting away from Coke's core carbonated products,
the firm has aggressively pursued growth in emerging
categories. As long as Coke remains focused on the
demands of the consumer, we expect its distribution
network to preserve Coke's position as the leading global
beverage supplier and to maintain its solid returns on© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

?

Morningstar Equity Analyst Report |Page 2 of 8

Coca-Cola Co KO (XNYS)
Morningstar Rating

Last PriceFair Value Estimate

Price/Fair Value

Dividend Yield %Market Cap (Bil)Industry

Stewardship

QQQQ

38.33 USD

44.00 USD

0.87

2.98

168.88Beverages - Soft Drinks

Exemplary02 Apr 201402 Apr 201402 Apr 201402 Apr 2014

Close Competitors

Currency (Mil)Market Cap

TTM Sales

Operating Margin

TTM/PE

Nestle SA NSRGY

USD

242,920

100,005

14.15

21.51

PepsiCo Inc PEP

USD

125,954

66,415

14.61

19.16

Monster Beverage Corp MNST

USD

11,623

2,246

25.50

35.71

Dr Pepper Snapple Group, Inc. DPS

USD

10,606

5,997

17.44

17.61

invested capital.

Risk
27 February 2014

Coke's sales and profitability could be negatively affectedbeyond our forecasts by greater-than-expected increases
in commodity prices, particularly for raw materials suchas sugar, cocoa, and oranges. Ownership of the company's
North American distribution platform will increase Coke's
exposure to other commodities such as aluminum andplastic resins, and the deal is not without integration risk.
With about 60% of revenue being generated outside theU.S., the firm is subject to currency and geopolitical risks
in overseas markets. Sales of Coke's carbonated drinks
could be hurt by negative publicity regarding health issues
concerning drinks with high sugar content, and Coke's
sugary drink volume could be constrained should
governments look to increase taxes on soda.

PL
E

Furthermore, in many markets, Coke operates a direct
distribution system, whereby its distributors physicallyplace products onto retailers' shelves. This access toretailers gives Coke a significant competitive advantage
over second-tier manufacturers that distribute throughthird parties. In our view, the financial resources required
to replicate Coke's direct distribution footprint act as abarrier to entry.

targets of 5%-6% compound annual growth for the top
line and 7%-9% compound annual growth for long-term
EPS growth. For 2014, we expect Coca-Cola to generate
about $47 billion in revenue and earn $2.10 per share.

Additionally, the Coca-Cola brand is arguably one of thestrongest and most enduring brands in the world. This candrive meaningful retail traffic, giving Coke substantiallymore power over retailers than many other consumer
staple companies.

SA
M

Management

Valuation

R.J. Hottovy 27 February 2014

27 February 2014

Coca-Cola generally has a high standard of management
stewardship. We attribute the firm's consistent execution
in the difficult operating environment of the past several
years to strong leadership and a very deep bench. We arealso impressed by management's focus on the company's
2020 vision, which emphasizes making the best decisions
to expand the business over the long term, not just thenext quarter.

Following the company's fourth-quarter earnings, we are
reducing our fair value estimate to $44 per share from$45, as near-term currency swings have meaningfully
muted the company's earnings growth in 2014. Our new
fair value estimate implies fiscal 2014 price/earnings ofnearly 21 times, an enterprise value/EBITDA of 15 times,
a free cash flow yield of 4.4%, and a dividend yield of
2.5%. We believe that Coca-Cola's wide economic moatand opportunities for continued growth merit
above-average valuation multiples.
Volume and pricing are key drivers of our valuation model.
We forecast Coca-Cola's top line to grow roughly 5.5%
per year during the next decade, driven by roughly 3%-4%
volume growth and 1%-2% pricing growth. We believe
operating margins should range between 25% and 27.5%,
in line with the average adjusted operating margin during
the past five years. From our perspective, earnings per
share growth should outpace top-line growth as the firmuses the substantial free cash flow it generates to reduce
debt and repurchase shares.

Muhtar Kent is CEO and chairman. In general, we preferto see these roles separated. Executive compensation is
generous, but incentive-based pay does appear to bealigned with the long-term interests of shareholders.

Our estimates for Coke's revenue and earnings per share
growth are within the range of the company's long-term© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

?

Morningstar Equity Analyst Report |Page 3 of 8

Coca-Cola Co KO (XNYS)
Morningstar Rating

Last PriceFair Value Estimate

Price/Fair Value

Dividend Yield %Market Cap (Bil)Industry

Stewardship

QQQQ

38.33 USD

44.00 USD

0.87

2.98

168.88Beverages - Soft Drinks

Exemplary02 Apr 201402 Apr 201402 Apr 201402 Apr 2014

Analyst Notes Archive
Near-Term Challenges Do Not Diminish CocaCola's Long-Term Opportunities
R.J. Hottovy 18 February 2014

SA
M

PL
E

While Coca-Cola's fourth-quarter volume growthmoderated to just 1%, 7 percentage points of adverse
exchange rates will have a negative impact on the firm's
2014 operating profit. Management remains committed
to Coke's 2020 vision and its long-term growth algorithm(which includes high-single-digit growth in constantcurrency EPS). Even though Coke's 2013 volume growth
was tepid--partly the result of emerging-market
headwinds--we believe the firm's economic moat remains
wide with a strong brand portfolio that commands pricing
power. Longer-term, we believe that Coca-Cola will
benefit from rising per capita emerging-market
consumption across its entire beverage portfolio, as
government-led wage rate increases and infrastructure
investments, a flight to urban centers, and younger
populations are all conducive to favorable emerging-market
disposal income trends. This should help drive volume
growth of 3% to 4%, and sales growth of 5% to 6%.

Coca-Cola and Green Mountain Coffee Roasters haveentered into a 10-year collaboration deal that will
introduce Coca-Cola brands for use in GMCR's soon-to-bereleased Keurig Cold at-home beverage system. The
system and Coke pods will be sold around the world. In
connection with this agreement, GMCR will issue Coke
16.7 million newly issued shares at $74.98 per share,
representing 10% of GMCR. Coca-Cola's equity
investment will total $1.25 billion, and given the surge in
GMCR's stock price following the announcement,
Coca-Cola has already garnered more than $800 millionof paper profits. We believe that by entering this new
premium channel, the Coca-Cola brand will continue to beviewed as the leading global soft drink brand, and we
consequently maintain our wide moat rating and $45 fairvalue estimate.

This Friday, Coca-Cola management will present at theConsumer Analyst Group of New York, or CAGNY,
conference in Florida. They will be discussing the firm's
long-term growth opportunities in more detail. As such,
we will wait to update our valuation model or change our$45 fair value estimate. However, given the near-termcurrency headwinds, new soda taxes in Mexico, anddeclining diet soda consumption in the United States, we
may end up slightly reducing our fair value estimate.
For the year, comparable constant currency revenue grew
3%, and constant currency operating profit climbed 6%.
Adjusted EPS was $2.08, an increase of 8%. Goingforward, Coca-Cola plans to achieve $1 billion of costsavings by 2016 (primarily in supply chain and IT
functions). The firm will reinvest these cost savings into
increased media investments. In our opinion, this is a
prudent use of capital because much of Coca-Cola's wide
economic moat is centered on its power brands.

Coca-Cola and GMCR Enter Into a Long-Term
Partnership; Great Deal for GMCR, Good Deal for
Coke
Thomas Mullarkey 05 February 2014

GMCR will be Coca-Cola’s exclusive partner for the
production and sale of Coca-Cola branded single-serve,
pod-based, cold beverages. We expect that the Coca-Cola
pods will be available during 2015, and as such are notyet incorporating the associated equity income of GMCR
in our Coca-Cola valuation model. Green Mountain will beable to sign on other cold beverage brands, and we suspectthat it is actively courting Pepsi, Dr Pepper, Red Bull, andMonster to join the ecosystem.
Coca-Cola Takes Another Step Toward Refranchising
North American Bottling Operations
Thomas Mullarkey 13 December 2013

As of Jan. 1, 2014, Coca-Cola will operate its Coca-Cola
Americas segment under a new operating model. The
company's business in North America will follow a more
traditional model, with Coca-Cola North America
supporting the brand and delivering the concentrate andCoca-Cola Refreshments being the wholly owned bottlingoperation. CCR will become part of Coca-Cola's Bottling
Investment Group, which owns and operates bottlingoperations in various countries around the globe. The Latin
America group, which is currently part of Coca-Cola
Americas, will join the Coca-Cola international segment.
These hierarchical changes will not affect our $45 fairvalue estimate or wide moat rating.
By separating CCNA and CCR, Coca-Cola should be able
to more nimbly shed bottling assets and distribution
territories when the time is right. We believe that over the
next few years, Coca-Cola will eventually unload all of
CCR's current distribution territories while looking to© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

?

Morningstar Equity Analyst Report |Page 4 of 8

Coca-Cola Co KO (XNYS)
Morningstar Rating

Last PriceFair Value Estimate

Price/Fair Value

Dividend Yield %Market Cap (Bil)Industry

Stewardship

QQQQ

38.33 USD

44.00 USD

0.87

2.98

168.88Beverages - Soft Drinks

Exemplary02 Apr 201402 Apr 201402 Apr 201402 Apr 2014

maintain a singular ownership structure for the bottlingoperations, thereby reducing any redundancy in the entire
system and helping to keep systemwide costs as low as
possible.
Coke's Long-Term Outlook Remains Bright; Shares
Are Attractively Priced
Thomas Mullarkey 15 October 2013

PL
E

In the midst of currency headwinds and volatile emerging
markets, Coca-Cola posted good third-quarter results,
increasing global beverage volume 2% and gaining sharein the global nonalcoholic ready-to-drink category.
Although the currency headwinds are likely to result in aslight lowering of our 2013 and 2014 earnings per shareestimates, we are maintaining our $45 fair value estimate
as well as our long-term outlook and view Coca-Cola's
shares as attractively priced.

SA
M

Recently, investors have been concerned that Coca-Cola
is facing a plethora of problems, including
emerging-markets softness, weakening pricing power inNorth America, softening demand for carbonated softdrinks in the United States, and a potential soda tax in
Mexico. We believe these worries are overblown andanticipate that Coca-Cola will be able to continue to invest
in its brands and successfully execute its 2020 vision. Overthe next decade, we believe worldwide per capita
consumption of Coke's beverages will continue to grow.
This combined with a growing global population and asteadily expanding global middle class should result in
consistent revenue and earnings growth for Coca-Cola.
We expect that the bulk of Coke's growth will come fromcarbonated soft drinks in emerging and developing
countries, where per capita consumption is low, and fromstill beverage growth in developed markets as consumers'
tastes shift away from sparkling beverages.
Coca-Cola continues to make plans to divvy up its North
American bottling operations by selling off distribution
territories to several independent bottlers. Although thefirst volley of five distribution territories was announced
following the firm's second-quarter earnings release, noadditional announcements were made today. We believethat more details will come to light over the next year andthat the production assets will remain centrally operated.

© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

?

Page
Page
5 of1 8of 1

Quantitative Equity Report | Release Date: 02 April 2014 | Reporting Currency: USD | Trading Currency: USD

Coca-Cola Co KO
Last Close

Quantitative Fair Value Estimate

Market Cap (Bil)SectorIndustry

Country of Domicile

38.33

40.15

169.2

s Consumer Defensive

Beverages - Soft Drinks

USA United States

Coca-Cola Co manufactures, distributes and markets nonalcoholic beverage concentrates and syrups.

Price Versus Quantitative Fair Value
2010

2011

2012

2013

2014

2015

Sales/Share
Forecast Range
Forcasted Price
Dividend
Split

60

Quantitative Scores

48

ScoresMomentum:
Negative
Standard Deviation: 12.81

All Rel Sector Rel Country

Quantitative Moat
Wide
100
Valuation
Fairly Valued 79
Quantitative Uncertainty Low
99
Financial HealthStrong
86

100
86
98
83

36

100
79
95
86

Quantitative Fair Value Estimate
24

Total Return

36.83

52-Wk

43.43

21.00

5-Yr

43.43

12
s
USA

Undervalued

Fairly Valued

Overvalued

Valuation

SectorMedianCurrent 5-Yr Avg

Price/Quant Fair Value
Price/Earnings
Forward P/E
Price/Cash Flow
Price/Free Cash Flow
Dividend Yield %Price/Book
Price/Sales

0.96
20.2
16.6
16.4
21.7
2.98
5.1
3.7

PL
E

KO

0.95
18.3
—
16.5
22.3
2.75
5.1
3.9

1.02
19.2
15.1
11.7
19.6
1.97
1.8
0.9

Current 5-Yr Avg

SectorMedian

1.03
20.9
14.2
12.3
20.8
2.02
2.4
1.9

CountryMedian

9.2
7.7
2.69
19.0
3.5

6.5
-9.7
2.81
18.4
3.5

Return on Equity %Return on Assets %Revenue/Employee (K)

26.0
9.7
358.8

30.8
13.3
316.2

11.6
5.9
529.1

12.1
5.0
289.7
Score
100

Quantitative Moat

80
60
40
20
0

2007

2008

2009

2010

2011

2012

2013

Financial HealthDistance to Default
Solvency Score
Assets/Equity
Long-Term Debt/Equity

2014

Current 5-Yr Avg

SectorMedianCountryMedian

0.8
386.3
2.7
0.6

0.8
—
2.4
0.4

0.6
496.9
1.8
0.2

0.6
579.5
1.7
0.3

1-Year

3-Year

5-Year

10-Year

-2.4
-5.1
-3.2
9.8
2.7
-3.1

10.1
6.7
-9.0
8.4
3.7
7.3

8.0
3.9
8.9
8.1
11.2
13.8

8.3
7.0
8.0
9.8
10.1
6.2

Growth Per Share

Revenue %Operating Income %Earnings %Dividends %Book Value %Stock Total Return %

17.0
-16.1
2.71
21.7
4.0

-6.5
-9.3
2.98
20.2
3.7

Total Return %+/– Market (Morningstar US Index)
Dividend Yield %Price/Earnings
Price/Revenue
Undervalued
Fairly Valued
Overvalued

Monthly Volume (Million Shares)
Liquidity: High

52

2009

2010

2011

2012

2013

TTM

30,990-3.035,11913.3

46,54232.5

48,0173.2

46,854-2.4

46,854
0.0

Financials (Fiscal Year in Mil)
Revenue% Change

8,231
-2.5
6,824

8,449
2.6
11,80910,15420.2
8,572

10,7796.2
9,019

10,228-5.1
8,584

10,2280.0
8,584Operating Income% Change
Net Income

8,186-1,993
6,193
20.0

9,532
-2,215
7,317
20.8

9,474
-2,920
6,554
14.1

10,645-2,780
7,865
16.4

10,542-2,550
7,992
17.1

10,542-2,5507,992
17.1

Operating Cash Flow
Capital Spending
Free Cash Flow
% Sales

1.47
17.7
1.33

2.53
72.7
1.57

1.85
-27.1
1.41

1.97
6.8
1.72

1.90
-3.6
1.77

1.90
0.0
1.77

EPS
% Change
Free Cash Flow/Share

0.82
5.38
4,584

0.88
6.76
4,526

0.94
6.99
4,469

1.02
7.34
4,402

1.12
7.54
4,406

1.12
7.53
4,406

Dividends/ShareBook Value/Share
Shares Outstanding (Mil)

30.2
15.3
22.0
0.69
2.0

42.3
19.4
33.6
0.58
2.4

27.4
11.2
18.4
0.61
2.5

28.0
10.9
18.8
0.58
2.6

26.0
9.7
18.3
0.53
2.7

26.0
9.7
18.3
0.53
2.8

Profitability
Return on Equity %Return on Assets %Net Margin %Asset Turnover
Financial Leverage

64.2
26.6
5,059

63.9
24.1
14,041

60.9
21.8
13,65660.3
22.5
14,736

60.7
21.8
19,15460.7
21.8
19,154Gross Margin %Operating Margin %Long-Term Debt

24,7993.5

31,003
2.9

31,635
3.1

32,7903.3

33,173
3.2

33,173
3.2

Total Equity
Fixed Asset TurnsSA
M

Profitability

CountryMedian

18.5
1.7
2.68
13.0
4.4

Quarterly Revenue & EPS
Revenue (Mil)
Mar
Jun
Sep
Dec
Total
2013
11,035.0 12,749.0 12,030.0 11,040.0 46,854.0
2012
11,137.0 13,085.0 12,340.0 11,455.0 48,017.0
2011
10,517.0 12,737.0 12,248.0 11,040.0 46,542.0
2010
7,525.0 8,674.0 8,426.0 10,494.0 35,119.0
Earnings Per Share
2013
0.39
0.59
0.54
0.38
1.90
2012
0.45
0.61
0.50
0.41
1.97
2011
0.41
0.60
0.48
0.36
1.85
2010
0.35
0.51
0.44
1.23
2.53

Revenue Growth Year On Year %

5.2

5.9
3.8

2.7
0.8

-0.9
-2.6
2011

2012

©2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information
contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution
is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

-2.5

-3.6

2013

®

ß

Morningstar
Morningstar Equity
Equity Analyst
Analyst Report
Report |Page 6 of 8

Morningstar Equity & Credit Research Methodology
Fundamental Analysis

Fair Value Estimate
Our analyst-driven fair value estimate is based primarily on Morningstar’s proprietary three-stage discounted
cash flow model. We also use a variety of supplementary fundamental methods to triangulate a company’s
worth, such as sum-of-the-parts, multiples, and yields,
among others. We’re looking well beyond next quarterto determine the cash-generating ability of a company’s
assets because we believe the market price of a security will migrate toward the firm’s intrinsic value overtime. Economic moats are not only an important sorting
mechanism for quality in our framework, but the designation also directly contributes to our estimate of acompany’s intrinsic value through sustained excess returns on invested capital.

PL
E

At Morningstar, we believe buying shares of superiorbusinesses at a discount and allowing them to compound over time is the surest way to create wealth in
the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus. Occasionally, this approach causes our recommendations toappear out of step with the market, but willingness tobe contrarian is an important source of outperformance and a benefit of Morningstar’s independence.
Our analysts conduct primary research to inform ourviews on each firm’s moat, fair value and uncertainty.

ward the firm’s cost of capital more quickly than companies with moats will. We have identified five sources of
economic moats: intangible assets, switching costs,
network effect, cost advantage, and efficient scale.

Fundamental Economic
Fair Value
Moat Rating Estimate
Analysis

Uncertainty
Assessment

QQQQQ
QQQQ
QQQ
QQ
Q
Star
RatingEconomic Moat

SAM

The economic moat concept is a cornerstone of Morningstar’s investment philosophy and is used to distinguish high-quality companies with sustainable competitive advantages. An economic moat is a structuralfeature that allows a firm to sustain excess returns
over a long period of time. Without a moat, a company’s profits are more susceptible to competition. Companies with narrow moats are likely to achieve normalized excess returns beyond 10 years while wide-moat
companies are likely to sustain excess returns beyond
20 years. The longer a firm generates economic profits,
the higher its intrinsic value. We believe lower-quality
no-moat companies will see their returns gravitate to-Uncertainty Rating

The Morningstar Uncertainty Rating demonstrates ourassessment of a firm’s cash flow predictability, or valuation risk. From this rating, we determine appropriate
margins of safety: The higher the uncertainty, the wider
the margin of safety around our fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, medium, high, very high, and extreme. With each uncertainty rating is a corresponding
set of price/fair value ratios that drive our recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, while higher price/fair value

Economic Moat

WIDE

Moat Sources:

Intangible
AssetsNARROW

C O M PE T I T I V E F O R C E S

NONESwitching
Costs

COMPANY PROFITABILITY

Network
EffectCost
Advantage© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

Efficient
Scale?

Morningstar
Morningstar Equity
Equity Analyst
Analyst Report
Report |Page 7 of 8

Morningstar Equity & Credit Research Methodology
ratios (>1.0) lead to negative recommendations. In veryrare cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot be properly
estimated. For these firms, we use a rating of extreme.
Very high and extreme uncertainty companies tend tohave higher risk and volatility.

Quantitative Economic Moat: The quantitative moat
rating is analogous to Morningstar’s analyst-driven
economic moat rating in that both are meant to describe the strength of a firm’s competitive position.
Financial Health: Financial health is based on Morningstar’s proprietary Distance to Default calculation.

Credit Rating
Understanding Differences Between Analyst
and Quantitative Valuations
If our analyst-driven ratings did not sometimes differ
from our quantitative ratings, there would be little value in producing both. Differences occur because ourquantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few
comparable companies, the quantitative model will
have more trouble assigning correct ratings, while ananalyst will have an easier time recognizing the true
characteristics of the company. On the other hand, thequantitative models incorporate new data efficiently
and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerfulpredictors of future performance. When the analystdriven rating and the quantitative rating agree, we findthe ratings to be much more predictive than when theydiffer. In this way, they provide an excellent second
opinion for each other. When the ratings differ, it may
be wise to follow the analyst’s rating for a truly uniquecompany with its own special situation, and follow thequantitative rating when a company has several reasonable comparable companies and relevant information is flowing at a rapid pace.

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The Morningstar Corporate Credit Rating measures theability of a firm to satisfy its debt and debtlike obligations. The higher the rating, the less likely we think thecompany is to default on these obligations.

Quantitatively Driven Valuations

To complement our analysts’ work, we produce Quantitative Ratings for a much larger universe of companies.
These ratings are generated by statistical models thatare meant to divine the relationships between Morningstar’s analyst-driven ratings and key financial data
points. Consequently, our quantitative ratings are directly analogous to our analyst-driven ratings.

SA
M

Quantitative Fair Value Estimate (QFVE): The QFVE isanalogous to Morningstar’s fair value estimate forstocks. It represents the per-share value of the equityof a company. The QFVE is displayed in the same currency as the company’s last close price.

Valuation: The valuation is based on the ratio of a company’s quantitative fair value estimate to its last close price.
Quantitative Uncertainty: This rating describes our level of uncertainty about the accuracy of our quantitative
fair value estimate. In this way it is analogous to Morningstar’s fair value uncertainty ratings.

Uncertainty Rating
Price/Fair Value
2.00

Q

1.75

175%

1.50
1.25
1.00
0.75

125%
95%

155%
125%

115%

110%

105%
80%

QQ

135%

QQQ

90%

85%

80%

70%

QQQQ

60%

0.50

50%
QQQQQ

0.25
Low
Uncertainty Rating

MediumHigh

Very High© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.

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Morningstar Equity Analyst Report |Page 8 of 8

Coca-Cola Co KO (XNYS)
Morningstar Rating

Last PriceFair Value Estimate

Price/Fair Value

Dividend Yield %Market Cap (Bil)Industry

Stewardship

QQQQ

38.33 USD

44.00 USD

0.87

2.98

168.88Beverages - Soft Drinks

Exemplary02 Apr 201402 Apr 201402 Apr 201402 Apr 2014

© 2014 Morningstar. All Rights Reserved. Unless statedotherwise, this report was prepared by the person(s)noted in their capacity as Equity Analysts employed by
Morningstar, Inc., including its global affiliates. It has
not been made available to the issuer prior to
publication.

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The Morningstar Rating for stocks identifies stocks
trading at a discount or premium to their intrinsic value.
Five-star stocks sell for the biggest risk-adjusted
discount whereas one-star stocks trade at premiums totheir intrinsic value. Based on a fundamentally focusedmethodology and a robust, standardized set ofprocedures and core valuation tools used by
Morningstar’s Equity Analysts, four key components
drive the Morningstar Rating: 1. Assessment of thefirm’s economic moat, 2. Estimate of the stock’s fairvalue, 3. Uncertainty around that fair value estimate
and 4. Current market price. Further information on
Morningstar’s methodology is available fromhttp://global.morningstar.com/equitydisclosures.

SAM

It has not been determined in advance whether and inwhat intervals this document will be updated. Nomaterial interests are held by Morningstar or the Equity
Analyst in the financial products that are the subject of
the research reports or the product issuer. Regarding
Morningstar’s conflicts of interest: 1) Equity Analysts

are required to comply with the CFA Institute’s Code of
Ethics and Standards of Professional Conduct and 2)
Equity Analysts’ compensation is derived from
Morningstar’s overall earning and consists of salary,bonus and in some cases restricted stock; however
Equity Analysts are neither allowed to participate
directly or try to influence Morningstar’s investment
management group’s business arrangements nor allow
employees from the investment management group to
participate or influence the analysis or opinion preparedby them. Further information on Morningstar’s conflictof interest policies is available from http://global.mor­

ningstar.com/equitydisclosures.

Unless otherwise provided in a separate agreement,
you may use this report only in the country in which its
original distributor is based. The original distributor ofthis document is Morningstar Inc.. The information
contained herein is not represented or warranted to beaccurate, correct, complete, or timely. This report is for
information purposes only, and should not be
considered a solicitation to buy or sell any security.
Redistribution is prohibited without written permission.

© 2014 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained
herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without
written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

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