Tata Motors is now trading close to Morningstar's fair value estimate following a 47% rise in about three months, since we initiated equity research coverage on the stock.
On November 21, 2011, equity analyst Manish Vaswani had issued a Stock Analyst Report (free registration required) for Tata Motors, pegging the firm's estimated fair value at Rs 253 per share, while the stock then traded at Rs 170.
As the stock was trading at a discount to our fair value estimate, Tata Motors was then a 4-star stock.
In the period since, Tata Motors rose swiftly, outperforming the benchmark Nifty, which climbed a little above 12%. With shares of the auto firm trading Rs 250 levels, it has now become a 3-star stock (meaning the firm's stock price is trading close to our perceived fair value),
Morningstar's equity research philosophy
Unlike most research firms that issue research reports with a 'buy', 'sell' or 'hold' rating along with a target price, we take a longer-term approach to investing.
Our analysts evaluate businesses for what they think their fair value should be, which is arrived at by considering various metrics such as return on invested capital, free cash flow, and sustainability of competitive advantages among other things.
Stocks that trade close to our fair value estimate will be assigned 3 stars. The stars increase if the market price of a stock is lower than our perceived fair price (with 5-star being the most heavily-discounted stock) and will fall if the stock is expensive based on our valuation.
Along with issuing a fair-value estimate for a stock, and a star rating based on its market price, we issue an Economic Moat™ rating for each firm on the scale of None, Narrow and Wide. We believe in Warren Buffet's philosophy that a company's sustainability of its competitive advantages, or "moat", over its competitors is crucial in creating value over the long term.
Each business is different when it comes to the ease or difficulty of ascertaining its fair value and so we assign an "Uncertainty" rating, the scale being: low, medium, high and very high. The higher a stock's uncertainty rating, the more the discount on it will have to be for it to achieve higher star rating.
Finally, we will assign a "Consider Buy" and "Consider Sell" price, where we think a stock will have become attractive or expensive to be bought or sold.
Further details
For more information, you may read more about Morningstar's approach to rating stocks in the methodology document here (PDF). Here is an FAQ for the Morningstar Rating for Stocks.
Morningstar registered users access research reports for companies currently under our coverage here.
We look to expand our equity research initiative and will roll out reports on more stocks in the near future.