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What's Behind 7 Stock Ratings Changes

Matthew Coffina, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Matt Coffina, who's the editor of Morningstar StockInvestor newsletter. We're going to take a look at some recent ratings changes across our equity-research universe. Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: So, certainly one of the big headlines over the past couple of months has been a slowing China. What impact has this had on our equity research, and have we made any changes to our fair value estimates because of this slowdown? 

Coffina: It's a very important area. It's certainly something that investors are paying a lot of attention to, and a lot of companies are exposed in varying ways. There are some companies that sell directly into China--multinational kinds of companies. But in those cases, I'd say their exposure is pretty limited. It's hard to see a material impact on fair value estimates. Maybe it lowers the growth rate for a company like Unilever (UN) or another multinational consumer-products company. It can lower the growth rate by a point or two here or there, but there are other factors going on in the fair value estimate that usually renders that immaterial.

The biggest impact you're going to see is on companies that are in China, and wholly focused on the Chinese consumer. An especially prominent impact recently was Alibaba (BABA). We lowered our fair value estimate to $76 per share from $84. This really started with some comments by management that indicated that the consumer is more cautious than they used to be, and that's really hurting their e-commerce sales. So, it looks like e-commerce sales growth for Alibaba is going to slow to maybe the mid-20% range this year, versus the 40% range just a couple of quarters ago. So, it's a really dramatic slowdown. I think there could be some other factors at play here as well.

For one thing, Alibaba is a very large part of the Chinese e-commerce market. They have something like 85% market share, and e-commerce penetration in China is also much higher than it is even in the U.S. Something like 10% of retail sales are already going through e-commerce, so there could be some aspect of them just sort of having tapped out the opportunity. Now, I wouldn't want to say a 20% growth rate is anything to [turn your nose up at]; it's still pretty good in an absolute sense. But it's possible that a lot of the categories that were going to transition to e-commerce--things like maybe food or auto sales--are less conducive to e-commerce. Those categories that were easy to move to e-commerce have already done so at this point, and it's likely that they're going to see slower growth going forward.

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Glaser: Matt, thanks for the update on what's going on in our equity research.

Coffina: Thanks for having me, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.