Investment Strategy
Tortoise Portfolio. The objective of Morningstar, Inc.’s Tortoise Portfolio is to focus on “high-quality” businesses, defined as having both durable competitive advantages and strong balance sheets. These are often well-established market leaders with economic moats (preferably wide). Morningstar’s aim for the portfolio is to generate risk-adjusted returns that outperform the S&P 500 over a full market cycle.

Hare Portfolio. The objective of Morningstar, Inc.’s Hare Portfolio is to seek long-term capital appreciation ahead of the S&P 500 Index, focusing on companies with strong and growing competitive advantages. Morningstar is willing for the Hare to accept greater risk in exchange for higher total return potential.

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.

About the Editor David Photo
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 7/23/21 -- Quarterly Results for Amex, Netflix, Novartis, and More
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 and updates below from Morningstar Research Services for American Express AXP, Anthem ANTM, Fiserv FISV, Fidelity National Information Services FIS, Netflix NFLX, Novartis NVX, Omnicom OMC, and Unilever UL.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Strong Credit Performance and Travel Spending Drive a Strong Quarter for American Express
by Michael Miller | Morningstar Research Services LLC | 07-23-21

Wide-moat American Express reported a strong second quarter, with results driven by excellent credit results and a recovery in U.S. spending patterns. American Express recorded EPS of $2.80 easily beating the FactSet consensus of $1.63. Top-line results were also strong with revenue increasing 13% from last quarter and 33% year over year. The company's performance during the quarter was supported by an $866 million release of credit reserves. With an allowance for bad loans at 5.1%, there is still room for additional reserve releases, but the majority should be behind us and the timing will be difficult to predict. As we incorporate these results, we are raising our fair value estimate for American Express to $148 from $133, which includes our projections of a corporate tax rate hike to 26% in 2022.

Credit card issuers industrywide have experienced unusually high repayment rates on credit cards in 2021, which has led to low net charge-offs and slow receivable growth. Unlike its peers, America Express generates only a small portion of its total revenue through net interest income and stagnate receivable balances have had a minor impact on results. Credit card loan net charge-offs were 1% of total loans and with a 30+ day delinquency rate of 0.6%, American Express will likely enjoy low credit costs for the remainder of the year.

A recovery in travel and entertainment (T&E) spending has begun in earnest, with U.S. T&E spending volumes leading the way. U.S. consumer T&E spending reached 98% of prepandemic levels in June, though travel spending from its business card holders remains depressed. As a result, total spending in the U.S. is now 3% above prepandemic levels. We still expect a recovery in international travel to take time but it is clear that consumer demand remains healthy. As vaccine distributions continue and travel restrictions are removed, we see travel spending as providing American Express' growth with a tailwind for the second half of 2021 and 2022.

Anthem Beats Second-Quarter Estimates and Raises 2021 Guidance; Shares Fairly Valued
by Julie Utterback, CFA | Morningstar Research Services LLC | 07-21-21

Narrow-moat Anthem reported second-quarter operating results that beat consensus, and the firm raised its 2021 guidance for the second time this year. At first glance, those trends do not look significant enough to offset a potential increase in the U.S. corporate tax rate, which we plan to start modeling in 2022 and beyond. Therefore, we may trim our fair value estimate slightly, but any change appears likely to be limited to the low single digits on a percentage basis. In the quarter, Anthem turned in $7.03 of adjusted EPS, or well above FactSet consensus of $6.34 on lower-than-expected medical utilization. While lower than management expected, medical utilization appeared slightly higher than normal, pre-COVID-19 levels, which represents a turning point since the pandemic began. Also, these results reflected medical membership increasing 4% year over year on the strength of Anthem's government programs (17% growth primarily in Medicaid and Medicare Advantage) offset by weakness in commercial membership (1% decline). In total after the acquisition of MMM (a leading provider of Medicare Advantage and Medicaid plans in Puerto Rico), Anthem's medical membership stood at 44.3 million members at the end of June, overtaking UnitedHealth (44.1 million) as the largest health insurer on a U.S. medical membership basis this quarter.

With these stronger-than-anticipated results, Anthem now expects adjusted EPS to exceed $25.50, up from at least $25.10 previously and $24.50 originally. We plan to raise our expectations for 2021 given these trends. However, two major headwinds for 2022 may not be fully baked into expectations: 1) a potentially higher U.S. corporate tax rate and 2) dilutive effects of recent contract wins in Group Medicare Advantage (New York City retirees) and Medicaid (Ohio). Those factors may cut into our fair value estimate slightly, even when considering the potential long-term benefits that U.S. healthcare policy changes could have on membership rolls.

A Fair Value Bump for Fiserv
by Brett Horn, CFA | Morningstar Research Services LLC | 07-23-21

We are increasing our fair value estimate for Fiserv to $119 per share from $114, primarily due to time value since of money our last update. Our fair value estimate equates to 21.8 times our 2021 adjusted earnings estimate. While Fiserv's legacy business is relatively resilient, the acquiring side of the business growth has seen a material impact from the coronavirus pandemic. But the trend in this segment appears to be improving, and we expect this area to see some bounceback in 2021.

Longer term, we expect the payments side to be the strongest engine of growth for Fiserv and expect First Data to maintain the momentum it had built before the merger. We expect more modest growth for the bank technology side of the business, given Fiserv's strong market position and the mature nature of the banking industry. The net effect is a revenue compound annual growth rate of 7% over the next five years. We expect operating margins to improve significantly over time, increasing from 9% in 2020 to 28% by 2025. This is partially due to depressed margins in 2020, but also the result of the sizable synergies from the First Data merger and a falloff in amortization expense over time. Excluding those factors, we don't expect much underlying margin improvement, as we believe the reinvestment needs of the business will offset its inherent scalability for the foreseeable future. We use a cost of equity of 7.5%.

Increasing Fidelity National Information Services' Fair Value Estimate
by Brett Horn, CFA | Morningstar Research Services LLC | 07-23-21

We are increasing our fair value estimate for Fidelity National Information Services to $142 from $136 per share, due to time value since our last update and some modest changes to our assumptions. Our fair value estimate equates to 21.9 times our 2021 adjusted earnings estimate. While FIS' legacy business bank technology held up relatively well, the acquiring side of the business growth has seen a material impact from the coronavirus pandemic. But we've seen a bounceback this year, with industry participants stating that volumes have steadily and significantly improved, and the pandemic could ultimately accelerate the ongoing shift toward electronic payments. Following 2020, the higher growth Worldpay enjoyed before the merger suggests the merger should lift overall growth. The balance between this and the more mature bank technology segment results in a revenue CAGR of 8% over the next five years. We expect margins to improve significantly over time, and project EBITDA margins to increase from 34% in 2020 to 43% by 2025. This increase is mostly the result of the sizable synergies from the merger. However, we think the inherent scalability of the business will allow for modest but steady improvement. We use a cost of equity of 7.5%.

Netflix Posts Slowing Subscriber Growth; Video Game Efforts Appear To Be a Distraction
by Neil Macker, CFA | Morningstar Research Services LLC | 07-20-21

Netflix reported a mixed second quarter as subscriber growth remains anemic due to the pull forward in demand during the first half of 2020. Subscriber additions were well ahead of guidance, but revenue was in line with our projections for the quarter. While management expects adds to accelerate to 3.5 million next quarter, this mark is well behind our previous expectation of 6.9 million. We think the firm is experiencing not only saturation in its largest markets but also strong competition in the regions with the most potential growth, as we previously expected, and continue to expect. As a result, we keep our narrow moat and $250 FVE.

Netflix posted subscriber growth (1.5 million net adds, with a net loss of 430,000 in the U.S., versus guidance of 1.0 million). It slowly increased its streaming base, ending the quarter with more than 209 million global paid subscribers, up 8% from 193 million a year ago. Customer net adds posted their lowest quarter since the second quarter of 2013 when the firm only had 35 million paid subscribers globally. Growth in the quarter was slower across the four regions with the U.S. losing subscribers for only the second time since the start of 2012. Europe also experienced a very stark slowdown with only 0.19 million net adds, the first time it has added fewer than 0.75 million since the start of 2018 when Netflix began releasing regional breakdowns.

On the call, management outlined its strategy for entering the video game industry as Netflix recently hired Mike Verdu, a video game executive at Facebook and EA previously. Netflix will offer mobile games as part of its subscriptions starting 2022. We see the effort as a distraction at best from the core business. Much larger firms have struggled to make an impact in the space with very large budgets and their own platforms. Additionally, most major gaming franchises are based on original IP or sports licenses, as the days of movies launching with game tie-ins have largely died off.

Novartis Posts Solid Second Quarter, Led by Cosentyx and Entresto as Pipeline Continues to Advance
by Damien Conover, CFA | Morningstar Research Services LLC | 07-21-21

Novartis reported solid second-quarter results largely in line with our expectations and we don't expect any changes to our fair value estimate. We continue to view Novartis as fairly valued with the market appreciating the steady outlook for the company driven by new innovative drugs offsetting upcoming patent losses. The strong and developing pipeline continues to provide support for the firm's wide moat.

Total sales increased 9% on an operational basis, led by cardiovascular drug Entresto (up 46%) and Cosentyx (up 21%). We expect continued steady growth for the company for the remainder of the year as further growth with key drugs should continue. Entresto still has strong potential to gain more market share in heart failure, especially with the recent Food and Drug Administration approval in a type of preserved heart failure that almost doubles the market potential for the drug. Also, while Cosentyx is facing increasingly strong competition across several indications, the drug's entrenchment should help Novartis retain patients, and new indications in smaller disease settings should help drive continued gains. Beyond the leading drugs, several smaller cancer and rare disease drugs are also well positioned for growth that should help mitigate eventual patent pressure, including the likely major patent loss of multiple sclerosis, or MS, drug Gilenya, which we expect will face generic competition in 2022.

On innovation, Novartis is making strides with the pipeline. The recent approval of the next-generation MS drug Kesimpta ($66 million in second-quarter sales) looks well positioned to offer a differentiated drug versus older MS drugs and similarly positioned as Roche's leading drug Ocrevus. Looking ahead, we are most bullish on a lung cancer study with canakinumab, with an expected readout in late 2021. However, on the negative side, continued side effects emerging with ophthalmology drug Beovu suggest the drug will not develop into a major new drug for the firm.

Omnicom Reported Strong Q2 Results With Rebound in Ad Spending; Raising FVE to $89
by Ali Mogharabi | Morningstar Research Services LLC | 07-20-21

We are increasing our fair value estimate of Omnicom to $89 from $85 as the firm reported strong second-quarter results with the top- and bottom-lines coming in higher than FactSet consensus estimates due to the recovery from the pandemic, which was accompanied by better-than-expected return to ad spending. Revenue growth was driven by a strong rebound in demand for all services provided by the firm in all regions. In addition, management remained confident that growth will continue throughout 2021, although decelerating in the second half. The firm also expects some margin improvement for the year. While Omnicom posted solid results, reports stating that the NFL will take some of its media ad-spending in-house pushed the stock down 4%. If true, we do not expect such a move by the NFL to significantly impact Omnicom's revenue, nor do we see the risk that other advertisers will follow and bring things in-house increasing.

With stronger second-quarter results, we raised our projections for 2020 and beyond. Our five-year CAGR is now 3.1% versus 2.4% previously, which, when accompanied by margin expansion, will result in an $89 fair value estimate. After today's pullback, the stock is nearing 4-star territory with an attractive 3.8% dividend yield.

Unilever's First-Half Margin Pressure Looks Ominous for Short-Term FMCG Performance
by Philip Gorham, CFA, FRM | Morningstar Research Services LLC | 07-22-21

Unilever reported first-half results that were in line with our forecasts on the top line but missed our forecasts on profitability. With commodity costs still on the rise, management has lowered its guidance on input costs for the year and we have modestly lowered our near-term margin assumptions. The market has reacted negatively to the report, and we believe investors will rightly be concerned about the ability of Unilever to pass through inflation to consumers, given its fairly commoditized and competitive categories. Nevertheless, we still believe a 20% EBIT margin is achievable by 2023, and the short-term margin pressure has no impact on our EUR 50 fair value estimate. There is modest upside to our valuation, but it is difficult to see a swing in sentiment until inflation subsides or it becomes clear that the consumer is willing to absorb some of that cost pressure.

Underlying sales growth of 5.4% in the first half implies a slight sequential slowdown to 5% in the second quarter. Although this was in line with our forecasts, there was some variance to our estimates based on the level of pricing taken in the various regions. Consolidated volume growth of 4% was solid, however, and reasonable given the global rebound from the COVID-19 pandemic. Trends were little changed from the first quarter. Asia was again the standout region, primarily because China has rebounded quicker than other markets, while Foods & Refreshment delivered strong 8% underlying growth thanks to a rebound in ice cream. Interestingly, management commented that demand for hand sanitizer has peaked, implying that category volume is likely to be a headwind over the next year, with readthrough for RB among others.

At the margin, however, the picture looks a lot less rosy, and the first-half underlying EBIT margin of 17.2% was disappointing. Unilever is feeling the pinch from broad-based raw material inflation, with product, packaging, and distribution costs all continuing to spike.


Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2021 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data. There is no assurance that the data will remain the same.

Disclosure: The commentary, analysis, references to, and performance information contained within Morningstar® StockInvestorSM, except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Tortoise and Hare strategies managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. References to "Morningstar" refer to Morningstar, Inc.

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only and has not been tailored to suit any individual.

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information. Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company's business performance, investor perceptions, stock market trends and general economic conditions.

All Morningstar Stock Analyst Notes were published by Morningstar, Inc. The Weekly Roundup contains all Analyst Notes that relate to holdings in Morningstar, Inc.'s Tortoise and Hare Portfolios. Morningstar's analysts are employed by Morningstar, Inc. or its subsidiaries. In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.

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

Customer Support
Product Support
Inquiries regarding your subscription such as address changes, missing/damaged issues, etc.
Phone: 1-800-957-6021 | Mon-Fri 8:30AM-5:00PM
Inquiries regarding technical issues such as logging in or downloading
Phone: 1-312-424-4288 | Mon-Fri 8AM-6PM
Product Sales
Inquiries regarding your subscription renewal, billing or to learn about other Morningstar investment publications and resources
Phone: 1-866-608-9570 | Monday-Friday 8AM-5PM CST
Contact Your Editor