?
AMN Healthcare Services, Inc. AHS [NYSE]
TM
Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship
4.55 USD 13.00 USD 6.50 USD 26.00 USD High Narrow C .
AMN Healthcare should be able to take advantage of
changing U.S. demographics.
by Vishnu Lekraj
Thesis Aug. 05, 2010
Stock Analyst
Analysts covering this company do not The health-care market has been growing as a percentage
own its stock.
of gross domestic product, and this is expected to
Pricing data through August 26, 2010. continue. AMN Healthcare Services’ opportunity to
Rating updated as of
leverage this trend and its strong established position in
August 26, 2010.
the health-care staffing industry give us reason to like this
Currency amounts expressed with "$" firm. The weak economy has created strong near-term
are in U.S. dollars (USD) unless
headwinds, but AMN’s narrow economic moat should
otherwise denoted.
allow the firm to achieve decent long-term returns.
Stock Price
23.0
AMN is one of the world’s largest providers of temporary
16.0 health-care workers, with the core of its business in the
travel nurse market niche. This division sends temporary
nurses on assignments anywhere in the United States
8.0 where a client has a need. The firm has a large
nationwide client base, which has attracted a quality
6.0
supply of job-seekers. AMN’s strict educational and
4.0
experience requirements add to the quality of its worker
06 07 08 09 10
pool. These factors have combined to create a formidable
niche employment network. This network has assisted
AMN in producing solid returns on invested capital.
The firm should have an opportunity to expand these
returns over the long term, given the current trends in the
health-care industry. Demographic shifts and medical
advances should have an aging effect upon the U.S.
population, and shortages among health-care workers are
anticipated. According to the Department of Health and
Human Services, the current shortage of nurses will
become severe by 2020, given recent trends.
The ability to attract and maintain a quality supply of
job-seekers is key to AMN’s long-term prospects, and as
the supply of nurses tightens, the amount AMN may have
to pay its temporary workers could increase significantly.
Clients may turn away from its services if they think AMN
can no longer provide a quality product at a reasonable
price. One way AMN has tried to combat this trend is
through the recruitment of international health-care
| QQQQQ
Morningstar Credit Rating Industry
Staffing & Outsourcing Services
workers. The firm taps resources from parts of Europe,
South Africa, and Asia and sends these temporary workers
on longer-duration assignments within the U.S. Visa limit
restrictions have hampered growth for this business, but
limits are expected to loosen in the near future. If this is
not the case, however, the firm will need to find other
ways to solidify its temporary worker supply.
AMN is also pushing to expand its temporary and
permanent physician divisions, where it sees potential for
revenue and profitability growth. Operating margins for
AMN’s permanent physician placement division have
averaged 4 times those of its temporary staffing business,
and growth here would help profitability.
Valuation
We are lowering our fair value estimate to $13 per share
from $17. The firm recently acquired privately held
health-care staffer Nursefinders, and we believe the
transaction is highly dilutive to shareholders. After
analyzing the deal, we believe the transaction itself would
have been accretive to shareholders by $1.66 per share if
it were paid for in all cash. However, the deal was paid for
with AMN stock at a price per share of $7, which is
significantly lower than our initial $17 fair value estimate.
Additionally AMN assumed all of Nursefinders’
outstanding debt totaling $132 million. This part of the
deal is highly questionable, given AMN’s recent issues
with its own debt covenants. Management’s behavior and
actions during this acquisition have also built more
uncertainty into operations. Combining this fact with a
greater debt load has prompted us to raise our weighted
average cost of capital by 100 basis points. Blending the
increased cost of capital and the fact that the company
used undervalued stock as currency for the purchase of
Nursefinders dilutes current shareholders by about $4,
according to our analysis. Apart from this latest
acquisition, we believe AMN’s operations are poised to
flourish over the long term. We anticipate the firm will
face fierce headwinds over the near term as the economy
slowly recovers. We also believe AMN’s past
top-performing geographic areas, Florida and California,
AMN Healthcare Services, Inc. AHS [NYSE] | QQQQQ
TM
Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry
4.55 USD 13.00 USD 6.50 USD 26.00 USD High Narrow C . Staffing & Outsourcing Services

Bulls Say
Close Competitors Currency(Mil) Market Cap TTM Sales Oper Income Net Income
The health-care industry is one of the fastest-growing
AMN Healthcare Services, Inc. USD 149 604 13 -4
in the U.S., and staffing opportunities should
Manpower, Inc. USD 3,592 17,287 133 12
increase.
Kforce, Inc. USD 405 926 24 14
Changing demographics of the U.S. population bode
Cross Country Healthcare, Inc. USD 228 493 12 4 well for AMN.
Morningstar data as of August 26, 2010. Having the largest and widest nationwide client base of
will continue to experience a tougher employment any health-care staffer has enabled the firm to build a
environment than the rest of the U.S. Additionally, quality supply of temporary health-care workers.
patients have been delaying elective medical procedures
and hospital admission rates have fallen materially
Bears Say
nationwide. Despite the plethora of near-term troubles
facing AMN, we believe its solid position and the positive Health-care worker shortages could pressure revenue
long-term health-care market trends will enable the firm and profits if AMN can’t maintain a quality supply of
to produce good results beyond the current recessionary job-seekers.
period. We forecast revenue to slow in the near term but The staffing industry is highly sensitive to economic
recover to a compound annual growth rate of 11% during cycles, and short-term headwinds could be on the
our seven-year explicit forecast period. We expect horizon, given the current business environment.
operating margins to range from a low of 3.6% to a high As physician staffing becomes a larger part of AMN’s
of 7.2% and average 6.2%. business, litigation will become a larger risk.

Financial Overview
Risk
AMN has faced tough headwinds over the past year with Growth: Growth has been sporadic recently, as AMN has
the economic slowdown. Health-care workers have been grown through a few acquisitions and moved through an
less willing to leave their current full-time positions. The economic downturn. However, revenue declined
firm’s debt/loan covenants are also a concern. We find a significantly during the current recession. Excluding 2009
few of these covenants relatively tight, which could cause results, revenue increased at a 26% compound annual
some distractions for the firm. A longer-term risk factor growth rate over the prior seven years, mostly because of
pertains to the sustainability of a high-quality supply of acquisitions.
health-care workers. If current trends continue,
health-care workers (especially nurses) will be at a Profitability: Operating margins averaged 7.4% during the
premium. The spread between what AMN can charge seven years before 2009 and never turned negative during
customers and what it pays temporary workers may this period. However, operating margins did compress into
contract and pressure margins. Also, if its clients believe deep negative territory for 2009. We expect margins to
that AMN can no longer consistently satisfy their staffing improve to a normalized level after the current
needs, they may look elsewhere. Greater growth in the recessionary period passes.
physician staffing business could expose the firm to a
greater amount of litigation risk. Financial Health: AMN’s management has tried to improve

© 2010 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.
ß
AMN Healthcare Services, Inc. AHS [NYSE] | QQQQQ
TM
Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry
4.55 USD 13.00 USD 6.50 USD 26.00 USD High Narrow C . Staffing & Outsourcing Services

the firm’s financial health. It has paid down debt equity. AMN’s equity was trading well below our fair
continually, and as a percentage of total book capital, debt value estimate at the time, and the transaction turned out
has trended down to 38% from 50% during the past five to be highly dilutive to shareholders, in our opinion. We
years. The firm does have some restrictive debt covenants, believe a management team has a responsibility to make
which may be a concern. However, we believe AMN’s sure it uses the capital of its shareholders optimally, and
results will have to weaken significantly more than we AMN’s management has failed miserably in this area. CEO
expect during this downturn before any covenants are Susan Nowakowski has been with the firm since 1990 and
violated. Additionally, we believe the firm’s strong cash has held a variety of major management roles, including
flow should help in the event it needs to renegotiate its CFO and COO. Positively, we like the fact that the CEO and
covenants. What does concern us is AMN’s assumption of chairman roles are separated and that all board members
the debt from its purchase of Nursefinders. The firm will are up for re-election annually.
refinance its debt balance, and we anticipate a new debt
agreement in the near future.

Company Overview
Profile: AMN Healthcare Services is the largest
health-care staffing firm in the United States. In 2009, it
placed an average of 3,500 nurse and allied health-care
workers with clients nationwide. About two thirds of its
business is generated from its temporary nursing division,
and the other third is generated from its temporary and
permanent placement physician divisions. The firm has
about 1,100 employees and is based in San Diego.

Strategy: AMN’s management team is seeking to diversify

the firm’s customer base and expand its job offerings by
pushing into other health-care facilities outside of
hospitals and private doctors’ offices. Specialized surgery
centers, dentistry providers, and laboratory facilities are a
few areas where management thinks the company can
expand. It will also heavily emphasize international
recruitment in the coming years as the nursing shortage
becomes increasingly more severe.

Management: Management’s recent actions have been

value destructive to shareholders, in our opinion. We are
lowering our stewardship rating to a C from a B. The
recent acquisition of Nursefinders was done using all

© 2010 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.
ß
AMN Healthcare Services, Inc. AHS [NYSE] | QQQQQ
TM
Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry
4.55 USD 13.00 USD 6.50 USD 26.00 USD High Narrow C . Staffing & Outsourcing Services

Analyst Notes

Jul. 29, 2010 AMN to Buy Nursefinders

offerings by giving AMN an entry into the home health-care
AMN Healthcare reported its results for the second quarter and managed services markets. These markets are
and announced its acquisition of Nursefinders, a privately relatively untapped and the growth potential is material, in
held medical staffing firm. Quarterly and year-to-date our opinion. We also believe these new service segments
results paint an improving picture for the firm as the will build more stability into results, as the revenue stream
operating environment slowly recovers. For the first six from these services is less cyclical than AMN’s current
months of 2010, revenue is down 35% year over year, but offerings. However, we think paying for the acquisition with
this trend did improve on a quarterly basis to negative 25%. AMN stock can’t help but lead to value destruction for
When comparing the second quarter with the first quarter shareholders, as we believe the shares are deeply
of 2010, revenue increased 4%, as all operating metrics undervalued. After speaking with AMN’s management
continue on an upward trajectory. The operating margin team, it is the firm’s belief that, had the company waited,
decreased 230 basis points to 2.8% for the first six months the purchase price would have increased at a greater rate
of this year compared with the same period last year. The than its own shares. However, we think this misses the
operating margin also decreased further on a quarterly point that, despite any operational benefits, passing on the
basis, falling 280 basis points to 2.3% as acquisition costs acquisition was an available and better option. We are
weighed on profits. We believe profitability will improve placing AMN under review while we asses the impact of
over the near term as the firm gains the upper hand in its this acquisition, but at first glance, we expect a material
bill/pay spread. Management said it expects results to reduction in our fair value estimate.
slowly improve through the rest of year, which is in line
with our own expectations.

AMN also announced its acquisition of Nursefinders for

$220 million in a stock transaction. From an operational
standpoint, this acquisition will round out the firm’s service

May 07, 2010 AMN Healthcare’s Condition Stabilizes

more staffing consultants in anticipation of a recovery, and
AMN Healthcare Services reported first-quarter results that this factor drove costs slightly higher during the first
suggest the environment has stabilized. Over the past year, quarter. Management was also much more optimistic than
the firm has reported significantly weak results as a it has been recently and reported that it believes the firm
historically poor health-care employment market has has seen a trough in its business environment.
challenged all health-care staffers. Year over year, revenue
fell 38%; however, it remained essentially flat on a Revenue for AMN’s core travel nurse staffing segment
sequential basis. Operating margins compressed 90 basis increased 1.6% sequentially but fell 54% year over year.
points to 3.3% (when factoring out one-time charges from Lower admission rates at medical facilities and a lower
last year’s results), but were only down 40 basis points level of staffing turnover have provided some steep
sequentially. Management did say it has begun to hire headwinds for this division. Nevertheless, management

© 2010 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.
ß
AMN Healthcare Services, Inc. AHS [NYSE] | QQQQQ
TM
Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry
4.55 USD 13.00 USD 6.50 USD 26.00 USD High Narrow C . Staffing & Outsourcing Services

Analyst Notes (continued)

reported that customer orders were up, pricing held steady, but any growth will most likely be gradual, in our opinion.
and the number of hours worked by the firm’s nurses After incorporating these latest results, we are reiterating
increased sequentially. All of these factors should provide a our fair value estimate.
solid base for improvement. We expect the firm’s
operations to continue to stabilize over the course of 2010,

Mar. 05, 2010 Harsh Environment Challenges AMN Healthcare

compress 130 basis points to 8.8%. Lower admission rates
The operating environment for all health-care staffers has at medical facilities and less staffing turnover have
been one of the harshest on record, and AMN Healthcare provided some steep head winds for this division.
Services’ 2009 results reflect this fact. For the full year, Management did say it has seen a stabilizing factor move
revenue declined 38% from year-ago levels. Operating into weekly operating metrics through the first few months
margins compressed to negative 20% from positive 6% a of the year. This falls in line with the overall stabilizing
year prior. Excluding one-time charges, however, operating trend we have observed in the employment market. We
margins only decreased to positive 4%. We believe some of expect the firm’s operations to stabilize in the first half of
these one-time charges the firm experienced over 2009 may 2010 and then improve in the second half.
be related to the cyclicality of the economy and most likely
will return during the next economic downturn. We are placing AMN under review as we take into
consideration management’s expectations for the first
The core travel nurse staffing segment saw revenue fall quarter in combination with the Bureau of Labor Statistics’
49% over the course of 2009 and operating margins employment report.

Feb. 24, 2010 Slowly Recovering Job Market Will Help Staffers
staffers such as AMN Healthcare . The firm’s results over
The unemployment rate has risen to 9.7%, and the last year have been extremely weak, and the
year-over-year job losses total over 7 million. However, we uncertainty surrounding health-care reform has added to a
have seen a stabilizing trend within the employment market poor health-care labor market. Given the aforementioned
over the last few months. We do anticipate an improving factors, we believe AMN will report results next week that
labor market over the next few quarters, but we think this should reflect a weak operating environment. However, we
improvement will be slow. Additionally, the health-care also expect to see improvement in some of its key
market has been hurt to a greater degree then during past operating metrics.
recessions. This dynamic has challenged health-care

Disclaimers & Disclosures

No Morningstar employees are officers or directors of this company. Morningstar Inc. does not own more than 1% of the shares of this company. Analysts
covering this company do not own its stock. 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.

© 2010 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.
ß
Morningstar ® Stock Data Sheet Pricing data thru Aug. 26, 2010 Rating updated as of Aug. 26, 2010 Fiscal year-end: December

AMN Healthcare Services, Inc. AHS Sales USD Mil Mkt Cap USD Mil Industry
604 149 Staffing
Sector
Business Services
& Outsourcing Services

AMN Healthcare Services is the largest health-care staffing Morningstar Rating Last Price Fair Value Uncertainty Economic Moat
TM
Stewardship Grade
firm in the United States. In 2009, it placed an average of QQQQQ 4.55 13.00 High Narrow C
3,500 nurse and allied health-care workers with clients per share prices in USD
nationwide. About two thirds of its business is generated 27.90 37.40 18.95 21.56 20.39 28.33 29.10 20.38 11.00 10.00 Annual Price High
from its temporary nursing division, and the other third is 20.52 13.41 8.95 10.70 12.85 17.28 16.40 7.45 4.56 4.14 Low
Recent Splits
generated from its temporary and permanent placement
Price Volatility
physician divisions. The firm has about 1,100 employees and Monthly High/Low
is based in San Diego. Rel Strength to S&P 500
19.0
52 week High/Low
11.00 - 4.14
7.0
10 Year High/Low
37.40 - 4.14
3.0
Bear-Market Rank
12235 El Camino Real Suite 200 1.0 1 (10=worst)
San Diego, CA 92130
Trading Volume Thousand
Phone: 1 858 792-0711Website: http://www.amnhealthcare.com 508.0
208.0

Growth Rates Compound Annual 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD Stock Performance
Grade: C 1 Yr 3 Yr 5 Yr 10 Yr . . -38.3 1.5 -7.3 24.3 39.2 -37.6 -50.7 7.1 -49.8 Total Return %
Revenue % -37.6 -11.1 3.9 . . . -14.9 -24.9 -16.3 21.3 25.6 -41.1 -12.2 -16.3 -43.7 +/- Market
Operating Income % . . . . . . -16.1 -38.3 -13.7 20.5 25.3 -15.8 -20.4 -24.8 -36.5 +/- Industry
Earnings/Share % . . . . . . . . . . . . . . 0.0 Dividend Yield %
Dividends % . . . .
. 1159 727 483 451 569 937 581 276 296 149 Market Cap USD Mil
Book Value/Share % -40.0 -10.0 1.6 .
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Financials
Stock Total Return % -52.0 -36.5 -22.0 .
231 518 776 714 629 706 1082 1164 1217 760 604 Revenue USD Mil
+/- Industry -46.5 -22.7 -16.8 .
26.1 25.0 24.3 22.7 23.0 24.1 26.7 26.0 26.0 26.9 27.8 Gross Margin %
+/- Market -53.9 -25.6 -19.2 .
2 16 86 64 36 47 73 72 72 -154 13 Oper Income USD Mil
Profitability Analysis 1.0 3.2 11.1 9.0 5.8 6.6 6.8 6.2 5.9 -20.2 2.1 Operating Margin %
Grade: D Current 5 Yr Avg Ind Mkt -5 -4 52 38 17 22 35 37 34 -122 -4 Net Income USD Mil
Return on Equity % -2.2 0.4 -9.1 22.1 -0.23 -0.14 1.12 0.95 0.55 0.69 1.02 1.05 1.02 -3.75 -0.11 Earnings Per Share USD
Return on Assets % -0.9 -0.4 -4.1 8.4 Dividends USD
. . . . . . . . . . .
Fixed Asset Turns 29.4 44.1 30.2 7.0 22 31 47 40 31 32 35 35 34 33 33 Shares Mil
Inventory Turns . . 1223.7 13.8 6.43 6.88 4.13 4.83 6.72 7.19 8.16 8.72 5.24 5.34 Book Value Per Share USD
.
Revenue/Employee USD K 534.2 621.0 * . 843.4
-2 2 57 65 39 44 55 80 64 99 43 Oper Cash Flow USD Mil
Gross Margin % 27.8 26.0 24.5 40.2 -2 -5 -4 -13 -5 -4 -10 -9 -9 -4 -3 Cap Spending USD Mil
Operating Margin % 2.1 1.1 2.8 14.1 -4 -3 53 52 34 40 45 70 55 95 40 Free Cash Flow USD Mil
Net Margin % -0.6 -0.8 -2.2 9.3
Free Cash Flow/Rev % 6.7 6.6 3.6 0.1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Profitability
R&D/Rev % . . . 10.2 -2.5 -1.7 15.9 11.6 5.9 4.9 5.7 5.8 5.4 -23.7 -0.9 Return on Assets %
-7.8 -2.6 18.4 18.4 13.7 13.5 16.0 14.0 12.3 -53.7 -2.2 Return on Equity %
Financial Position -2.3 -0.8 6.8 5.3 2.8 3.1 3.2 3.1 2.8 -16.1 -0.6 Net Margin %
Grade: C 12-09 USD Mil 06-10 USD Mil
1.10 2.00 2.36 2.19 2.13 1.56 1.74 1.85 1.91 1.47 1.50 Asset Turnover
Cash 27 41 3.1 1.1 1.2 2.6 2.1 3.2 2.5 2.3 2.3 2.3 2.3 Financial Leverage
Inventories . .
Receivables 93 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 06-10 Financial Health
Current Assets 137 157 44 116 137 77 77 100 115 114 89 74 78 Working Capital USD Mil
115 . . 126 97 195 160 120 100 100 95 Long-Term Debt USD Mil
Fixed Assets 20 17
67 272 296 116 137 193 245 276 284 171 175 Total Equity USD Mil
Intangibles 195 193
1.72 . . 1.08 0.71 1.01 0.66 0.44 0.35 0.59 0.54 Debt/Equity
Total Assets 389 402
Payables 14 . 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TTM Valuation
Short-Term Debt 6 8 . . 15.1 18.1 28.9 28.6 27.0 16.3 8.3 . . Price/Earnings
Current Liabilities 63 79 . . . . . . . . . . . P/E vs. Market
Long-Term Debt 100 95 . 1.6 1.0 1.0 0.8 0.9 0.9 0.5 0.2 0.4 0.3 Price/Sales
Total Liabilities 218 227 . 4.3 2.5 4.2 3.3 3.0 3.8 2.1 1.0 1.7 0.8 Price/Book
. . 13.9 10.5 12.8 14.1 17.3 7.5 4.5 3.0 3.5 Price/Cash Flow
Total Equity 171 175
Valuation Analysis Quarterly Results Industry Peers by Market Cap
Current 5 Yr Avg Ind Mkt Revenue USD Mil Sep 09 Dec 09 Mar 10 Jun 10 Mkt Cap USD Mil Rev USD Mil P/E ROE%
Price/Earnings . . 36.6 14.2 Most Recent Period 166.4 144.7 143.3 149.3 AMN Healthcare Servi 149 604 . -2.2
Forward P/E 14.4 . . 12.3 Prior Year Period 315.0 295.9 249.6 199.1 Manpower, Inc. 3592 17287 . 0.5
Price/Cash Flow 3.5 9.3 13.7 6.5 Rev Growth % Sep 09 Dec 09 Mar 10 Jun 10 Kforce, Inc. 405 926 30.1 6.0
Price/Free Cash Flow 3.7 10.7 15.9 13.9
Most Recent Period -47.2 -51.1 -42.6 -25.0
Dividend Yield % . . 1.4 2.1 Major Fund Holders
Prior Year Period 4.9 3.5 -15.0 -36.3
Price/Book 0.8 2.3 2.4 1.9 % of shares
Price/Sales 0.3 0.6 0.6 1.1 Earnings Per Share USD Sep 09 Dec 09 Mar 10 Jun 10 Artisan Small Cap Value Investor 7.59
PEG Ratio 1.0 . . 1.4 Most Recent Period -0.06 -0.09 0.02 0.00 Manning & Napier Life Sciences 2.05
Prior Year Period 0.28 0.24 -3.74 0.13 Victory Small Company Opportunity R 1.48
*3Yr Avg data is displayed in place of 5Yr Avg TTM data based on rolling quarterly data if available; otherwise most recent annual data shown.

© 2010 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.
ß
Morningstar’s Approach to Rating Stocks

Our Key Investing Concepts

TM
At Morningstar, we evaluate stocks as pieces of a just on movement in the share price. If we think a stock’s
Economic Moat Rating
business, not as pieces of paper. We think that purchasing fair value is $50, and the shares decline to $40 without
Discounted Cash Flow
Discount Rate shares of superior businesses at discounts to their much change in the value of the business, the star rating
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Uncertainty over long periods of time is the surest way to create hasn’t changed, but the shares are more attractive as an
Margin of Safety
Consider Buying/Consider Selling wealth in the stock market. investment at $40 than they were at $50.
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down the road, and cash from a stable and consistently
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TM
we think the business is. Even the best company is a bad Economic Moat Rating
TM
deal if an investor overpays for its shares. The Economic Moat Rating is our assessment of a firm’s
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Methodology for Valuing Competitive Economic Company Fair Value Uncertainty
Companies Analysis
TM
Moat Rating Valuation Estimate Assessment QQQQQ

Analyst conducts The depth of the Analyst considers DCF model leads to An uncertainty Q The current stock
company and industry firm’s competitive company financial the firm’s Fair Value assessment QQ price relative to fair
research: advantage is rated: statements and Estimate, which establishes the QQQ value, adjusted
competitive position anchors the rating margin of QQQQ for uncertainty,
Management None to forecast future framework. safety required for QQQQQ determines the
interviews Narrow cash flows. the stock rating. rating.
Conference calls Wide
Trade-show visits Assumptions are
Competitor, supplier, input into a dis-
distributor, and counted cash-flow
customer interviews model.

© 2010 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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Morningstar’s Approach to Rating Stocks (continued)

economic profits, but companies that can earn them for an Very High, or Extreme. The greater the level of uncertainty,
extended time by creating a competitive advantage the greater the discount to fair value required before a
possess an Economic Moat. We see these companies as stock can earn 5 stars, and the greater the premium to fair
superior investments. value before a stock earns a 1-star rating.

Discounted Cash Flow Margin of Safety

This is a method for valuing companies that involves This is the discount to fair value we would require before
projecting the amount of cash a business will generate in recommending a stock. We think it’s always prudent to
the future, subtracting the amount of cash that the buy stocks for less than they’re worth.The margin of safety
company will need to reinvest in its business, and using is like an insurance policy that protects investors from bad
the result to calculate the worth of the firm. We use this news or overly optimistic fair value estimates. We require
technique to value nearly all of the companies we cover. larger margins of safety for less predictable stocks, and
smaller margins of safety for more predictable stocks.

Discount Rate
We use this number to adjust the value of our forecasted Consider Buying/Consider Selling
cash flows for the risk that they may not materialize. For a The consider buying price is the price at which a stock
profitable company in a steady line of business, we’ll use would be rated 5 stars, and thus the point at which we
a lower discount rate, also known as "cost of capital," would consider the stock an extremely attractive
than for a firm in a cyclical business with fierce purchase. Conversely, consider selling is the price at
competition, since there’s less risk clouding the firm’s which a stock would have a 1 star rating, at which point
future. we’d consider the stock overvalued, with low expected
returns relative to its risk.

Fair Value
This is the output of our discounted cash-flow valuation Stewardship Grades
models, and is our per-share estimate of a company’s We evaluate the commitment to shareholders
intrinsic worth. We adjust our fair values for off-balance demonstrated by each firm’s board and management team
sheet liabilities or assets that a firm might have--for by assessing transparency, shareholder friendliness,
example, we deduct from a company’s fair value if it has incentives, and ownership. We aim to identify firms that
issued a lot of stock options or has an under-funded provide investors with insufficient or potentially
pension plan. Our fair value estimate differs from a "target misleading financial information, seek to limit the power
price" in two ways. First, it’s an estimate of what the of minority shareholders, allow management to abuse its
business is worth, whereas a price target typically reflects position, or which have management incentives that are
what other investors may pay for the stock. Second, it’s a not aligned with the interests of long-term shareholders.
long-term estimate, whereas price targets generally focus The grades are assigned on an absolute scale--not relative
on the next two to 12 months. to peers--and can be interpreted as follows: A means
"Excellent," B means "Good," C means "Fair," D means
"Poor," and F means "Very Poor."
Uncertainty
To generate the Morningstar Uncertainty Rating, analysts
consider factors such as sales predictability, operating
leverage, and financial leverage. Analysts then classify
their ability to bound the fair value estimate for the stock
into one of several uncertainty levels: Low, Medium, High,

© 2010 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.
ß