Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

We initiate coverage of <a href="https://www.smartkarma.com/entities/17054" target="_blank" data-smartkarma-citation="entities:17054:1">Calbee Inc (2229 JP)</a> with a fair value estimate of JPY 4,350, and assign it narrow moat and stable moat trend ratings. The stock is trading at a 10% discount to our fair value estimate although our near-term earnings forecasts are nearly 10% below the consensus. We expect that the potential growth opportunities in expanding Frugra sales in China will sustain the premium exhibited in its valuations, contrary to the derating implied by consensus. We also expect its efforts to reduce excessive promotional spending will further drive margin expansion. The current market price appears to have priced in a long-term earnings growth rate at low-single digits compared with our estimate of mid-single-digit growth. Any potential partnership with PepsiCo presents upside that has not been factored into our fair value estimate, implying fiscal 2018 price/earnings of 28.7 and enterprise value/EBITDA of 14 times, about the average of its historical range.We assign the domestic business a narrow moat rating, underpinned by intangible assets. Specifically, the intangible assets encompass brand equity backed by its product development capabilities and an exclusive sourcing network of domestic potatoes which creates barriers to entry. A dominant 72% share in Japan’s potato chips market demonstrates the strength of its moat. The moat trend looks stable. Despite a recent plunge in potato chips sales resulting from a potato shortage, its edge in potato sourcing stays intact. Potato imports from the United States will remain an expensive option to competitors even if tariffs are removed because passing on higher costs to consumers is not feasible.We project a 7% EPS CAGR over the next five years on the premise that rationalizing domestic promotional spend will lift domestic margin expansion. Overseas growth will regain momentum, likely in 2018, once the U.S. restructuring is completed and Frugra starts gaining traction with Chinese consumers. The double-digit growth targets for the U.S. and Korean markets currently undergoing transition seem overly optimistic, which is likely to trigger downward revision of fiscal 2017 guidance.We attribute Calbee’s 18% underperformance over the past two years in the Topix Food Index to disappointment over its overseas growth in addition to adverse impacts of potato  shortages on sales. We expect lost shelf space of potato chips will be recovered from the end of the second quarter.  Unsuccessful attempts of Frugra’s launch in China or U.S. margin revival are potential risks to our positive view.Analyst: Jennie Chen

We initiate coverage of Calbee Inc (2229 JP) with a fair value estimate of JPY 4,350, and assign it narrow moat and stable moat trend ratings. The stock is trading at a 10% discount to our fair value estimate although our near-term earnings forecasts are nearly 10% below the consensus. We expect that the potential growth opportunities in expanding Frugra sales in China will sustain the premium exhibited in its valuations, contrary to the derating implied by consensus. We also expect its efforts to reduce excessive promotional spending will further drive margin expansion. The current market price appears to have priced in a long-term earnings growth rate at low-single digits compared with our estimate of mid-single-digit growth. Any potential partnership with PepsiCo presents upside that has not been factored into our fair value estimate, implying fiscal 2018 price/earnings of 28.7 and enterprise value/EBITDA of 14 times, about the average of its historical range.We assign the domestic business a narrow moat rating, underpinned by intangible assets. Specifically, the intangible assets encompass brand equity backed by its product development capabilities and an exclusive sourcing network of domestic potatoes which creates barriers to entry. A dominant 72% share in Japan’s potato chips market demonstrates the strength of its moat. The moat trend looks stable. Despite a recent plunge in potato chips sales resulting from a potato shortage, its edge in potato sourcing stays intact. Potato imports from the United States will remain an expensive option to competitors even if tariffs are removed because passing on higher costs to consumers is not feasible.We project a 7% EPS CAGR over the next five years on the premise that rationalizing domestic promotional spend will lift domestic margin expansion. Overseas growth will regain momentum, likely in 2018, once the U.S. restructuring is completed and Frugra starts gaining traction with Chinese consumers. The double-digit growth targets for the U.S. and Korean markets currently undergoing transition seem overly optimistic, which is likely to trigger downward revision of fiscal 2017 guidance.We attribute Calbee’s 18% underperformance over the past two years in the Topix Food Index to disappointment over its overseas growth in addition to adverse impacts of potato  shortages on sales. We expect lost shelf space of potato chips will be recovered from the end of the second quarter.  Unsuccessful attempts of Frugra’s launch in China or U.S. margin revival are potential risks to our positive view.Analyst: Jennie Chen

Launching Coverage of Calbee With Narrow Moat and Stable Moat Trend Ratings; FVE of JPY 4,350