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About the Editor
David Harrell is the editor of the Morningstar StockInvestor, a monthly newsletter that focuses on a wide-moat stock investing strategy. For illustration purposes, issues highlight activities pertaining to Morningstar, Inc. portfolios invested in accordance with a strategy that seeks to focus on companies with stable or growing competitive advantages. David served in several senior research and product development roles and was part of the editorial team that created and launched He was the co-inventor of Morningstar's first investment advice software.

David joined Morningstar in 1994. He holds a bachelor's degree in biology from Skidmore College and a master's degree in biology from the University of Illinois at Springfield.

Our Portfolio Managers

Matthew Coffina, CFA, is the portfolio manager for Morningstar Investment Management LLC’s Hare strategy. Matt was previously a senior healthcare analyst, covering managed care and pharmaceutical services companies. Matt also developed the discounted cash flow model used by Morningstar analysts to assign fair value estimates to most of the companies in its global coverage universe.

Matt joined Morningstar in 2007. He holds a bachelor's degree in economics from Oberlin College and also holds the Chartered Financial Analyst (CFA) designation.

Michael Corty, CFA, is the portfolio manager for Morningstar Investment Management LLC’s Tortoise strategy. Before focusing his attention on the Tortoise, Michael co-managed five equity strategies offered by Morningstar Investment Management LLC and Morningstar Investment Services LLC since December 2013. Michael was previously a senior equity analyst on Morningstar Inc.’s equity research team covering companies in the media, business services, and consumer industries. Michael also spent several years on Morningstar’s moat committee, which assigns economic moat and moat trend ratings to their global coverage.

Prior to joining Morningstar in 2004, Michael worked at a public accounting firm and in the business lending arm of a major commercial bank. He has an undergraduate accounting degree from Loyola Marymount University, an MBA from Cornell University and is a CFA charterholder.

Jul 16, 2018
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David Harrell
Editor, Morningstar StockInvestor
David Harrell is the editor of the Morningstar StockInvestor, a monthly newsletter that focuses on a wide-moat stock investing strategy. For illustration purposes, issues highlight activities pertaining to Morningstar, Inc. portfolios
Featured Posts
Roundup 7/13/2018 -- Second Quarter Results for PepsiCo and Wells Fargo

StockInvestorSM focuses on the activities of portfolios of Morningstar, Inc. that are invested in accordance with the Tortoise and Hare strategies. These portfolios are managed by Morningstar Investment Management LLC, a registered investment adviser, which manages other client portfolios using these strategies.

Please see new analyst notes below from Morningstar Research Services for PepsiCo PEP and Wells Fargo WFC. Comcast CMCSA tagged in three separate notes which are also included below.

Also this week, Hare portfolio manager Matt Coffina established a position in Tencent TCEHY. Please see his trade alert from earlier today for more details.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Pepsi's Shares Pop on Solid 2Q Results; Shares Remain Modestly Undervalued
by Erin Lash, CFA | Morningstar Research Services LLC | 07-10-18

Wide-moat Pepsi's second-quarter results largely tracked in line with our full-year outlook, with net revenue up 2.4% (versus our 3% estimate) and gross margin of nearly 55% (comparable to our estimate). We're pleased both the food and beverage segments experienced organic volume growth (up 1% and 0.5%, respectively), primarily driven by strength in international markets (roughly 40% of consolidated sales). In this context, the Europe Sub-Saharan Africa segment (19% of sales this quarter) posted 7% organic growth and the Asia, Middle East and North Africa segment (10% of sales) posted 6% organic growth. Management claimed developing and emerging markets grew 6% in the quarter, on an organic basis, in line with our view that rising per-capita consumption and new product launches in these regions will fuel sales growth longer term. Given these results, we aren't expecting material changes to our $123 fair value estimate and continue to view shares as attractive, despite a mid-single-digit uptick following results.

We think performance in the firm's North American beverage business, which has averaged roughly 3% declines the last 12 months, seems to be trending in the right direction as the firm's investments behind its core beverage brands (such as increased media spending for trademark Pepsi) begin to take hold. As evidence, volumes in this business were down just 2%, versus a 3% decline in the first quarter, even though pricing within this segment remains solid (up 1% during the quarter). Further product innovation, including recently launched Gatorade Zero and the return of seasonal brand Mountain Dew Baja Blast, should help to sustain positive momentum across its largest beverage brands over the remainder of the year. Overall, we posit its enviable portfolio of beverage and food brands (with 22 brands that each generate $1 billion in annual sales) has helped it ingrain itself in retailers' supply chains and secure valuable shelf space, supporting its edge.

Wells Fargo Still Looking to Regain Its Footing, Better Days Likely in the Future
by Eric Compton | Morningstar Research Services LLC | 07-13-18

Wide-moat Wells Fargo's second quarter results were not the best, as net income per diluted share was down almost 9% year over year, largely due to weak noninterest income and increasing noninterest expenses. There were losses of $619 million during the quarter due to a multitude of factors, including $171 million related to the foreign exchange business and $114 million related to fee calculations in fiduciary and custody accounts. This was better than last quarter's operating losses of nearly $1.5 billion and over $3.5 billion in the fourth quarter of 2017. While the bank is headed in the right direction, it isn't quite out of the woods yet. There was another lawsuit filed against the bank in late June regarding its financing practices with merchants. Needless to say, the bank is still sorting through a number of issues.

This has all led to some pessimism surrounding Wells Fargo, something that is rare in the banking industry today. While current results are not the best, the bank still managed to generate a 10.6% return on equity during the quarter and a 12.6% return on tangible common equity. This is still well within the range of our current 2018 estimates, and we aren't currently projecting any substantial growth in revenue or expansion in return on equity through the end of 2019. Despite these conservative estimates, the bank is still roughly 15% undervalued compared with our fair value estimate of $65, which we are maintaining. If the company is able to meet its cost-cutting goals by 2020, both efficiency and returns on capital should improve significantly, which would easily justify our fair value estimate of $65 (just under 2.1 times tangible book value). Wells Fargo's dividend yield of around 3% adds to the stock's attractiveness, and the bank's sizable excess capital amounts should encourage even more capital returns from the bank. All of these factors should support the stock's value over the medium term.

The DOJ Files an Appeal to Reverse AT&T's Acquisition of Time Warner; AT&T's Shares Undervalued
by Allan C. Nichols, CFA | Morningstar Research Services LLC | 07-13-18

In a surprise move, the Department of Justice has filed an appeal against Judge Leon's ruling to allow AT&T to acquire Time Warner (now known as WarnerMedia). When the merger was approved, AT&T agreed to keep WarnerMedia separate while the DOJ decided to appeal in order to avoid the DOJ filing for a stay that would have prevented the merger. The DOJ had 60 days to appeal, but when it didn't within the first week, we assumed it wouldn't. Judge Leon's ruling was very thorough, and we think it will be difficult to reverse on appeal. While we haven't been big fans of the deal from the start as we think it is an expensive way for AT&T to gain content that could have been made available from purchasing rights to WarnerMedia's content rather than buying the whole company, we think an appeal is a waste of taxpayers' dollars. The appeal could also dampen other mergers and favor Disney in its attempt to buy Fox over Comcast, as Disney's offer has already received DOJ approval and Comcast didn't make a bid until after Judge Leon's ruling in favor of AT&T. For now, we are maintaining our fair value estimates of $40 per share for AT&T, $46 for Fox, $130 for Disney, and $42 for Comcast. We are also maintaining our narrow moat rating for AT&T and wide moat ratings for the others.

U.K. Regulator Approves Fox's Offer for Sky, but Comcast Tops Fox With GBX 1,475 Offer
by Allan C. Nichols, CFA |Morningstar Research Services LLC | 07-12-18

On July 12, Jeremy Wright, the new U.K. culture secretary, approved Twenty-First Century Fox's offer for Sky, removing the last barrier to taking the bid to a vote. However, Comcast threw a spanner into the works by increasing its bid for Sky to GBX 1,475 per share from GBX 1,250. Comcast reserves the right to reduce its offer by any amount up to the final dividend of roughly GBX 22 per share if the dividend is paid before a deal is closed. We are increasing our fair value estimate for Sky to GBX 1,453 per share, which is equal to Comcast's offer minus the dividend, which we already include in our model. We are keeping our narrow moat rating intact.

The market continues to expect a bidding war, pushing Sky's stock price higher. While this is certainly a possibility, we think Fox only needs to make an offer similar to Comcast's in order to win, as it already controls over 39% of the vote. At this point, we don't believe the higher prices being offered affect our fair value estimates of $42 per share for Comcast, $46 per share for Fox, or $130 per share for Walt Disney (which has bid for some Fox assets, including Sky). We are also maintaining our wide moat ratings on Comcast, Fox, and Disney.

Fox Raises Its Offer for Sky to GBX 1400; We Are Increasing Our Fair Value Estimate to GBX 1378
by Allan C. Nichols, CFA |Morningstar Research Services LLC | 07-11-18

With Fox's original offer for Sky we saw two primary advantages for its bid. First, it already owned 39.1% of Sky's shares, so only needed another 11% of shareholders to vote for it and second, Comcast needed to clear the regulatory process. With the removal of these advantages by making the Fox deal dependent on 50% of the vote not controlled by Fox and quick regulatory approval of Comcast's offer, on July 11 Fox increased its bid for Sky to GBX 1400 per share from GBX 1075. This is higher than Comcast's offer of GBX 1250. This new deal from Fox has been recommended by the independent directors of the board. As part of the agreement with the board, Fox has the right to change the offer from a scheme of arrangement to a contractual offer, removing the requirement of 50% of votes excluding Fox. The independent directors that combined own just over 0.5% of the shares all agreed to vote for this deal. Thus, Fox needs just 10.4% of the votes from other shareholders to close the deal. The deal is still dependent on final U.K. regulatory approval, which we believe is likely. The offer will also be reduced by the final dividend of roughly GBX 22 per share if the deal doesn't close before the dividend is paid. As we already model the dividend being paid, we are raising our fair value estimate to GBX 1378 (the amount of the GBX 1400 per share offer minus the GBX 22 per share dividend). We acknowledge the stock is trading higher than this on the expectation of a higher offer from Comcast. However, we already believe Fox's offer is above Sky's independent fair value, and creating additional synergies to justify continually higher prices is becoming more difficult. So, while a higher bid could happen, we are not betting on it. At this point we don't believe the higher price being offered affects our fair value estimates of $46 per share for Fox or $130 per share for Disney. We are also maintaining our narrow moat rating on Sky and wide moat ratings on Fox and Disney.


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David Harrell may own stocks from the Tortoise and Hare Portfolios in his personal accounts.

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