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Stock Strategist

A Look at Recent Fair Value Changes

We've made substantial revisions to some of our fair value estimates.

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Over the past two weeks, Morningstar analysts have made revisions to the fair value estimates of several dozen companies in light of earnings releases.

Among the major upward revisions are some quality industrials names that we consider to have economic moats:  Steel Dynamics (STLD),  Johnson Controls (JCI), and  Precision Castparts (PCP). (The latter was featured in the latest issue of Morningstar GrowthInvestor.) We also upped the fair value estimates for two wide-moat financials,  Capital One (COF) and  Bank of America (BAC). But the largest fair value change was for one of the eight Korean companies on our coverage list:  Kookmin Bank (KB). Don't rush out to pick up shares, though. Even with the upgrade, we still rate it 1 star and consider it a speculative stock.

For more on the reasons leading to each fair value change, click on the company's ticker in the table to access the latest information, including Analyst Reports.

 Notable Fair Value Estimate Upgrades
Company

New Fair Value

Old Fair Value % Change Date of Change
Kookmin Bank (KB) $65 $35 85.7% 7-28-06
Gymboree (GYMB) $24 $15 60.0% 7-27-06
Fidelity National Information (FIS) $36 $26 38.5% 7-26-06
Jones Lang LaSalle (JLL) $60 $49 22.4% 7-25-06
Steel Dynamics (STLD) $64 $53 20.8% 7-24-06
Freeport McMoRan (FCX) $44 $38 15.8% 7-31-06
Reynolds American (RAI) $113 $103 9.7% 8-2-06
Johnson Controls (JCI) $80 $73 9.6% 7-21-06
Capital One Financial (COF) $87 $80 8.7% 8-01-06
Bank of America (BAC) $64 $59 8.5% 7-20-06
Paychex (PAYX) $43 $40 7.5% 7-31-06
Precision Castparts (PCP) $75 $70 7.1% 7-26-06
Morningstar data as of Aug. 2, 2006

Among the companies with notable cuts in fair value estimate was  Amazon (AMZN), a stock that has been bouncing between 3 and 4 stars for much of 2006. We remain fans of the company, but as Joseph Beaulieu summed up in his recent Analyst Note on the stock: "Revenue growth has kept up with our expectations, but the company has continued to increase spending to the point where we believe there is no way it can meet our previous operating income or cash-flow estimates for the next several years. Amazon plans to invest in new businesses, like toys and groceries, even as it continues to slash prices and offer generous free-shipping terms."

Another important change was  Fifth Third (FITB), where we downgraded not only the fair value, but also the moat. The changes caused us to sell the stock out of our Dividend Portfolio in late July.

 Notable Fair Value Estimate Downgrades
Company

New Fair Value

Old Fair Value % Change Date of Change
MGI Pharma (MOGN) $16 $27 -40.7% 8-01-06
Valassis (VCI) $22 $27 -18.5% 8-02-06
New York Times (NYT) $33 $40 -17.5% 7-17-06
Amazon (AMZN) $32 $38 -15.8% 7-28-06
Forest Laboratories (FRX) $42 $49 -14.3% 7-26-06
Meritage Homes (MTH) $65 $75 -13.3% 7-31-06
Fifth Third (FITB) $44 $50 -12.0% 7-26-06
Boston Scientific (BSX) $25 $28 -10.7% 7-28-06
Teva Pharmaceutical (TEVA) $34 $38 -10.5% 8-01-06
Eastman Kodak (EK) $21 $23 -8.7% 8-02-06
Siemens (SI) $80 $87 -8.0% 8-02-06
United Parcel Service (UPS) $88 $94 -6.4% 7-25-06
3M (MMM) $89 $93 -4.3% 7-27-06
Morningstar data as of Aug. 2, 2006

Fair Value Changes: How to Keep Tabs
To stay abreast of fair value changes on the stocks you care about, sign up for e-mail alerts. You can elect to receive alerts on individual stocks as soon as we change a fair value estimate, or you can enter a portfolio or watch list into Morningstar's portfolio manager and receive fair value alerts on all the stocks you enter.

For any stock we cover, you can also see a history of our fair value estimates by typing in the stock ticker and clicking on the stock chart, where you can see a fair value chart.

Haywood Kelly, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.