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Deadspace,Matthew's post above pretty much hits the nail on the head in terms of the data points that Morningstar takes into account. Morningstar starts with several years of historical financials, then builds a detailed forecast of the income statement, balance sheet, and statement of cash flow for the next five years. Operating leases, pensions, and stock-based compensation are included in the model.Depending upon the nature of the business, the analyst will make assumptions for, say, store count or student enrollment. The forecasts that I have seen all go out 20 years, with a periodic decline in return on capital to reflect the tendency that most companies regress to the mean.I would send you a copy except that the model is proprietary and thus not mine to share. But, an annual subscription is available for $3,000 and up depending upon how much contact you want with the Morningstar analysts. And you may even be able to get a one-month free trial, so check with them.An alternative is to subscribe to Morningstar's StockInvestor, a 50-page monthly report which costs about $100 a year. StockInvestor was started by Mark Sellers (who kindly endorsed my book), and is now edited by Jonathan Schrader.When asked why his Morningstar portfolios had done so well, Mark told BusinessWeek that he keeps a list of companies that he likes and when they fall into his price range he buys. You should do a Google search and read (and re-read annually) this interview. Each edition of StockInvestor provides intrinsic value estimates for the companies they follow, as well as suggested buy points. The greater a firm's "moat," the closer the buy point is to intrinsic value. So, Morningstar is following the advice of Benjamin Graham who said leave yourself some room in case of "miscalculation or bad luck." Although StockInvestor subscribers do not see the spreadsheet that is used to estimate intrinsic value, the key driver assumptions (revenue growth, profit margin, etc.) are provided.Now, as for K-Swiss, Morningstar's basic criticism is that the sneaker company is largely dependent upon one style. Given the fashion risk, a rational investor will require a larger margin of safety (bigger discount to intrinsic value) than, say, Nike.Hewitt
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