Heather E. Brilliant, CFA, Co-Chief Executive Officer, Morningstar AustralasiaPrior to assuming her current role, Brilliant led Morningstar's global equity and corporate credit research teams, consisting of more than 120 analysts, strategists, and directors. Brilliant is a member of the CFA Institute Board of Governors and is a past chair of the CFA Society of Chicago.Elizabeth Collins, CFA, Director of Equity Research, North America, MorningstarCollins is responsible for leading Morningstar's team of North American-based equity research analysts. She has served as chair of Morningstar's Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar.Morningstar 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.To find out more about Morningstar’s approach to stock investing and receive a free trial of our research, visit: www.global.morningstar.com/whymoatsmatter

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• Preface ixAcknowledgments xiChapter 1 Guiding Principles of Morningstar’s Equity Research 1Question 1: How Can We Identify Which Businesses Are Great? 2Question 2: When Is the Best Time to Invest in Great Businesses? 6Chapter 2 What Makes a Moat? 11Moat Sources 13Notes 33Chapter 3 Why Moat Trends Matter 35Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at MorningstarMoat Trends and Fundamental Performance 37Five Key Considerations for Moat Trends 38Intangibles 41Cost Advantage 44Switching Costs 47Network Effect 51Efficient Scale 54Best Practices for Moat Trend Analysis 57Chapter 4 How Stewardship Affects Economic Moats 61Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodologyMeet Our Stewardship Methodology 62Drilling Down 63Chapter 5 Applying Moats to Dividend Investing 81Contributed by Josh Peters, director of equity-income strategy for Morningstar and editor of the Morningstar® DividendInvestorSM newsletterWhy Dividends Matter 83Which Dividends? 87Chapter 6 The Importance of Valuation 93Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodologyValuation Concepts 95Cost of Capital and Returns on Capital 96Morningstar’s Valuation Approach 97Example: Calculating ROIC 99Forecasting Future Free Cash Flows 102The Morningstar RatingTM for Stocks 106Fair Value Uncertainty and Cost of Equity 107Notes 111Chapter 7 Do Moat Ratings Predict Stock Returns? 113Contributed by Warren Miller, head of quantitative research at MorningstarChapter 8 Putting Moat and Valuation to Work: Portfolio Strategies 121Wide Moat Focus Index 121The Tortoise and Hare Portfolios 124Chapter 9 Basic Materials 129Commodity Manufacturers 130Commodity Processors 133Metals and Mining 135Chapter 10 Consumer 139Beverages 140Consumer Products 141Tobacco 143Restaurants 144Retail Defensive 146Specialty Retail 148Lodging 149Notes 151Chapter 11 Energy 153Oil and Gas Drilling 154Oil and Gas Exploration and Production 156Oil and Gas Midstream 158Refining 159Oil and Gas Integrateds 161Engineering Services 163Chapter 12 Financial Services 167Banks 168Capital Markets 170Credit Services 172Financial Exchanges 173Insurance 174Chapter 13 Healthcare 177Pharmaceuticals 178Biotechnology 180Medical Devices 182Medical Instruments and Supplies 184Diagnostics and Research 185Chapter 14 Industrials 187Railroads 188Airport Operators 190Aerospace and Defense 191Trucking and Marine Shipping 192Waste Management 193Heavy Equipment 195Diversified Industrials 197Chapter 15 Technology 199Consumer Technology 200Enterprise Hardware Systems 202IT Services 203Semiconductors 205Software 207Telecom Services 209Chapter 16 Utilities 211Regulated and Diversified Utilities 212Independent Power Producers 214About the Authors 217Index 221

Heather E. Brilliant, CFA, Co-Chief Executive Officer, Morningstar AustralasiaPrior to assuming her current role, Brilliant led Morningstar's global equity and corporate credit research teams, consisting of more than 120 analysts, strategists, and directors. Brilliant is a member of the CFA Institute Board of Governors and is a past chair of the CFA Society of Chicago.Elizabeth Collins, CFA, Director of Equity Research, North America, MorningstarCollins is responsible for leading Morningstar's team of North American-based equity research analysts. She has served as chair of Morningstar's Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar.Morningstar 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.To find out more about Morningstar’s approach to stock investing and receive a free trial of our research, visit: www.global.morningstar.com/whymoatsmatter

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• Preface ixAcknowledgments xiChapter 1 Guiding Principles of Morningstar’s Equity Research 1Question 1: How Can We Identify Which Businesses Are Great? 2Question 2: When Is the Best Time to Invest in Great Businesses? 6Chapter 2 What Makes a Moat? 11Moat Sources 13Notes 33Chapter 3 Why Moat Trends Matter 35Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at MorningstarMoat Trends and Fundamental Performance 37Five Key Considerations for Moat Trends 38Intangibles 41Cost Advantage 44Switching Costs 47Network Effect 51Efficient Scale 54Best Practices for Moat Trend Analysis 57Chapter 4 How Stewardship Affects Economic Moats 61Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodologyMeet Our Stewardship Methodology 62Drilling Down 63Chapter 5 Applying Moats to Dividend Investing 81Contributed by Josh Peters, director of equity-income strategy for Morningstar and editor of the Morningstar® DividendInvestorSM newsletterWhy Dividends Matter 83Which Dividends? 87Chapter 6 The Importance of Valuation 93Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodologyValuation Concepts 95Cost of Capital and Returns on Capital 96Morningstar’s Valuation Approach 97Example: Calculating ROIC 99Forecasting Future Free Cash Flows 102The Morningstar RatingTM for Stocks 106Fair Value Uncertainty and Cost of Equity 107Notes 111Chapter 7 Do Moat Ratings Predict Stock Returns? 113Contributed by Warren Miller, head of quantitative research at MorningstarChapter 8 Putting Moat and Valuation to Work: Portfolio Strategies 121Wide Moat Focus Index 121The Tortoise and Hare Portfolios 124Chapter 9 Basic Materials 129Commodity Manufacturers 130Commodity Processors 133Metals and Mining 135Chapter 10 Consumer 139Beverages 140Consumer Products 141Tobacco 143Restaurants 144Retail Defensive 146Specialty Retail 148Lodging 149Notes 151Chapter 11 Energy 153Oil and Gas Drilling 154Oil and Gas Exploration and Production 156Oil and Gas Midstream 158Refining 159Oil and Gas Integrateds 161Engineering Services 163Chapter 12 Financial Services 167Banks 168Capital Markets 170Credit Services 172Financial Exchanges 173Insurance 174Chapter 13 Healthcare 177Pharmaceuticals 178Biotechnology 180Medical Devices 182Medical Instruments and Supplies 184Diagnostics and Research 185Chapter 14 Industrials 187Railroads 188Airport Operators 190Aerospace and Defense 191Trucking and Marine Shipping 192Waste Management 193Heavy Equipment 195Diversified Industrials 197Chapter 15 Technology 199Consumer Technology 200Enterprise Hardware Systems 202IT Services 203Semiconductors 205Software 207Telecom Services 209Chapter 16 Utilities 211Regulated and Diversified Utilities 212Independent Power Producers 214About the Authors 217Index 221

Heather E. Brilliant, CFA, Co-Chief Executive Officer, Morningstar AustralasiaPrior to assuming her current role, Brilliant led Morningstar's global equity and corporate credit research teams, consisting of more than 120 analysts, strategists, and directors. Brilliant is a member of the CFA Institute Board of Governors and is a past chair of the CFA Society of Chicago.Elizabeth Collins, CFA, Director of Equity Research, North America, MorningstarCollins is responsible for leading Morningstar's team of North American-based equity research analysts. She has served as chair of Morningstar's Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar.Morningstar 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.To find out more about Morningstar’s approach to stock investing and receive a free trial of our research, visit: www.global.morningstar.com/whymoatsmatter

Select Guide Rating

• Preface ixAcknowledgments xiChapter 1 Guiding Principles of Morningstar’s Equity Research 1Question 1: How Can We Identify Which Businesses Are Great? 2Question 2: When Is the Best Time to Invest in Great Businesses? 6Chapter 2 What Makes a Moat? 11Moat Sources 13Notes 33Chapter 3 Why Moat Trends Matter 35Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at MorningstarMoat Trends and Fundamental Performance 37Five Key Considerations for Moat Trends 38Intangibles 41Cost Advantage 44Switching Costs 47Network Effect 51Efficient Scale 54Best Practices for Moat Trend Analysis 57Chapter 4 How Stewardship Affects Economic Moats 61Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodologyMeet Our Stewardship Methodology 62Drilling Down 63Chapter 5 Applying Moats to Dividend Investing 81Contributed by Josh Peters, director of equity-income strategy for Morningstar and editor of the Morningstar® DividendInvestorSM newsletterWhy Dividends Matter 83Which Dividends? 87Chapter 6 The Importance of Valuation 93Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodologyValuation Concepts 95Cost of Capital and Returns on Capital 96Morningstar’s Valuation Approach 97Example: Calculating ROIC 99Forecasting Future Free Cash Flows 102The Morningstar RatingTM for Stocks 106Fair Value Uncertainty and Cost of Equity 107Notes 111Chapter 7 Do Moat Ratings Predict Stock Returns? 113Contributed by Warren Miller, head of quantitative research at MorningstarChapter 8 Putting Moat and Valuation to Work: Portfolio Strategies 121Wide Moat Focus Index 121The Tortoise and Hare Portfolios 124Chapter 9 Basic Materials 129Commodity Manufacturers 130Commodity Processors 133Metals and Mining 135Chapter 10 Consumer 139Beverages 140Consumer Products 141Tobacco 143Restaurants 144Retail Defensive 146Specialty Retail 148Lodging 149Notes 151Chapter 11 Energy 153Oil and Gas Drilling 154Oil and Gas Exploration and Production 156Oil and Gas Midstream 158Refining 159Oil and Gas Integrateds 161Engineering Services 163Chapter 12 Financial Services 167Banks 168Capital Markets 170Credit Services 172Financial Exchanges 173Insurance 174Chapter 13 Healthcare 177Pharmaceuticals 178Biotechnology 180Medical Devices 182Medical Instruments and Supplies 184Diagnostics and Research 185Chapter 14 Industrials 187Railroads 188Airport Operators 190Aerospace and Defense 191Trucking and Marine Shipping 192Waste Management 193Heavy Equipment 195Diversified Industrials 197Chapter 15 Technology 199Consumer Technology 200Enterprise Hardware Systems 202IT Services 203Semiconductors 205Software 207Telecom Services 209Chapter 16 Utilities 211Regulated and Diversified Utilities 212Independent Power Producers 214About the Authors 217Index 221