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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 Morningstar.com. 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.

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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
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Results for AmerisourceBergen, Enbridge, Uber, and More
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Please see new analyst notes and updates below from Morningstar Research Services for AmerisourceBergen ABC, Berkshire Hathaway BRK.B, Booking Holdings BKNG, CarMax KMX, Enbridge ENB, Enterprise Products Partners EPD, Fidelity National Information Services FIS, Ionis Pharmaceuticals IONS, Lyft LYFT, Tencent TCEHY, and Uber Technologies UBER.

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David Harrell,
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AmerisourceBergen Posts Slowed Second-Quarter Revenue Growth but Exceeds Our Margin Estimates
by Karen Andersen, CFA | Morningstar Research Services LLC | 05-06-21

We maintain our $135 fair value estimate on narrow-moat AmerisourceBergen Corp as second-quarter results supported our forecasts. Although revenue fell short of both our expectation and Factset consensus, gross margins exceeded our estimate. The pharmaceutical and distribution services segment underperformed with 3% sales growth year over year, despite solid performance of specialty products such as oncology supply and biosimilars. We interpret this lower growth as a natural correction following last year's swell in drug volume across the pharmaceutical industry. Other revenue outperformed at 12% growth, which was credited to continued traction of the direct to patient business among manufacturers as well as the recent rise in pet ownership. Gross margins decreased by 4%, which we mainly attribute to generic pricing pressures. Adjusted operating expenses remained stable.

We expect the company to maintain its current margins while growing revenue at low to midsingle digits. Despite ongoing deflation in generic drug prices, the company will be able to partially offset price declines through its high specialty drug mix relative to competitors. Management raised its 2021 EPS guidance to $8.45-$8.60 from $8.40-$8.60. This quarter's guidance does not include effects of the acquisition of Alliance Healthcare, which we believe will be accretive for the company.

Berkshire Naming Buffett's Successor Is a Net Positive for the Company and Its Shares
by Greggory Warren, CFA | Morningstar Research Services LLC | 05-03-21

We were a little surprised to see wide-moat rated Berkshire Hathaway actually announce today that Greg Abel would be CEO Warren Buffett's successor once he departs the scene. The surprise, though, was in the timing of the announcement (which apparently was forced by a slip-up on Charlie Munger's part during the annual meeting this past weekend) as opposed to the announcement itself, both of which have had a positive impact on the stock, as it removes one of the major uncertainties hanging over the company.

We have long believed that Abel was the most likely successor to Buffett, given his age (59)--which satisfies Buffett's criterion that the company's next "CEO should be relatively young, so that he or she can have a long run in the job"--and his combination of both operational and capital allocation experience during his years at Berkshire Hathaway Energy. With the company's next CEO expected to fill the role of capital-allocator-in-chief, there were two strong candidates in line to take the top job (at least from the time they've spent with the company and their understanding of what Buffett wants the next capital-allocator-in-chief to do): Ajit Jain, who oversees all of Berkshire's insurance operations, and Abel, who has stewardship of the noninsurance businesses.

While we've always thought that Buffett and the board had some deference toward Jain; he's closer to 70 and has not shown much interest in following in Buffett's footsteps (given the pressures of being in that spot once Buffet departs). We've always thought that Berkshire would likely be better served longer term by having Jain to continue to oversee the insurance business (which is really where his passion lies) and have Abel -- who will work closely with Jain, as well as Ted Weschler and Todd Combs -- focus on properly allocating Berkshire's capital. Buffett did note that while Abel would succeed him if he departed tomorrow that Jain would succeed Abel if anything were to happen to him.

Booking Sees Travel Demand Recovering, While It Prudently Invests to Strengthen Its Network Effect
by Dan Wasiolek | Morningstar Research Services LLC | 05-05-21

Booking is benefiting from a rebound in travel demand, with its first-quarter bookings achieving 47% of 2019 levels compared with 35% last quarter, while also investing in its platform, which supports its network advantage (source of its narrow moat). We don't plan a material change to our $2,280 fair value estimate.

Booking's improvement is being led by demand for both hotels and accommodations in the U.S. (estimated around 25% of prepandemic bookings). In fact, Booking noted that the U.S. saw room night growth above 2019 levels in the first quarter, with improvement occurring each month and through April. It remains our view that travel demand will continue to improve over the rest of 2021, as vaccination rates increase across many regions. Therefore, we don't expect to alter our forecast for the company's bookings to reach around 70% of prepandemic levels in 2021, 90% in 2022, and nearly 110% in 2023.

We were encouraged to hear Booking reiterate its focus to invest into building its alternative accommodation presence in the U.S., as well as a fully connected trip offering on its booking.com platform, as this should support our long-held view that the company should hold the industry's strongest network advantage over the long term. Regarding the connected trip, Booking highlighted its recent partnership with Viator, which should meaningfully increase its supply of experiences content on its platform. Also, Booking said that it has rolled out flight content to 18 countries (which combined represented over half of its 2019 room nights) on its booking.com brand, which appears to be seeing early signs of success, with flight tickets up 62% from last year. Given Booking's leading network, marketing, and technology scale, we expect it to be successful in building out a connected-trip experience. But we expect such investment to hold margins to around low 20s in 2021 (versus high-20s for Visible Alpha consensus), low 30s in 2022 (36.8%), and mid-30s in 2023 (38%).

CarMax's Analyst Day Could Signal the Company Moving Into a Higher Gear
by David Whiston, CFA, CPA, CFE | Morningstar Research Services LLC | 05-06-21

CarMax held a May 6 analyst day to expand on its digital capabilities and introduced a fiscal 2026 revenue target of approximately $33 billion (about 12% compound annual growth from fiscal 2021's approximate $19 billion), growing market share of 0- to 10-year-old vehicles to over 5% by the end of calendar 2025 from 3.5% in 2020, and selling a combined 2 million retail and wholesale vehicles by fiscal 2026 versus nearly 1.2 million in fiscal 2021. We think CarMax has a good chance to achieve these robust growth targets because of the highly fragmented nature of the sector, its already leading position and brand equity, and management's embrace of omnichannel shopping capabilities enabling consumers to shop for a vehicle in any blend of digital or brick and mortar they choose. Also, we feel that an industry-leading 30-day money-back guarantee gives customers a reason to trust CarMax and makes the firm a worthy rival to digital startups like Carvana.

We now model fiscal 2026 revenue of nearly $33 billion, up from $30.8 billion previously, and have raised our midcycle operating margin by 60 basis points to 6.8%. This change, along with a slightly higher long-term return on new invested capital assumption, raises our fair value estimate to $129 from $106. We consider CarMax a top used-vehicle retailer, so we want to give the firm plenty of credit in its ability to scale its overhead costs over time as more business moves to omnichannel, which allows for fewer stores. Management said during the event that after it adds 10 stores in fiscal 2022 that eight to 10 new stores a year is the plan. Less brick and mortar means less commissions and probably less headcount over time, which should enable scaling of costs. More digital capability will come this year with the full rollout of customers able to arrange vehicle transfers from other stores and instant appraisal of trade-ins without interacting with a customer experience center.

Enbridge Reports Decent Q1; Continued Progress on Line 3, 5, Mainline Contracting, and ESG Efforts
by Stephen Ellis | Morningstar Research Services LLC | 05-07-21

Enbridge reported decent first-quarter results, as it continues to make progress on its high-profile projects (Line 3, 5, and its Mainline contracting) as well as its ESG-related efforts. We think all three projects are making material progress as Line 5 is unlikely to be shut down in the near term, and Enbridge's ESG-related efforts offer substantial opportunities to manage through the energy transition. 2021 guidance was unchanged at a midpoint of CAD 14.1 billion. Overall EBITDA was flat compared with last year's levels at CAD 3.7 billion as slightly lower volumes on the Seaway and Bakken systems were offset by higher seasonal storage contributions. We will maintain our fair value estimate and wide moat rating while we incorporate these results into our model. Enbridge increased its dividend 3% to CAD 0.835, which we consider reasonable and easily supportable in the near to medium term. 2021 is an important year for Enbridge in terms of capital projects and contracting. About CAD 10 billion of its CAD 17 billion in backlog is expected to go into service, allowing Enbridge to transition to a lower level of capital spending in the CAD 3 billion to CAD 4 billion range, with an incremental CAD 2 billion available for buybacks, debt reduction, or opportunistic high-return projects. We also expect the Mainline contracting structure to be resolved. These shifts are supportive of a 5%-7% earnings growth annually through 2023.

Enterprise's Natural Gas Operations See Benefit From Uri in Q1
by Stephen Ellis | Morningstar Research Services LLC | 05-03-21

Enterprise's first-quarter results broadly met our expectations, and we will hold our $25.50 fair value estimate and wide moat rating intact while we incorporate these results into our model. Winter storm Uri contributed an estimated $250 million in net gross operating margin, as similar to peers, Enterprise was able to benefit from selling natural gas out of storage, but some of these profits were offset by lost volumes from assets that were shutdown. Stripping out the Uri benefit, which we see as one-time in nature and not material enough to move our fair value estimate, results were close to flat, as Enterprise expects more of a recovery in 2022 and 2023 as U.S. volumes pick up with the economy's re-opening. At this stage, volumes still remain well below last year's levels across Enterprise's portfolio, though Uri certainly contributed. Overall gross operating margin was $2.3 billion compared with $2 billion last year, and the partnership generated over $350 million in free cash flow after capital spending and distributions. Enterprise also disclosed that it has been studying energy "evolution" opportunities across hydrogen, carbon capture, and plastics recycling for the past two years. The effort is organization wide -- more specifically, hydrogen transportation and storage, carbon capture, and storing and upgrading the byproducts of recycled plastics. We agree with this approach as we expect it to yield new investment opportunities, and as Enterprise also pointed out, leads to a natural extension of its overall value chain.

FIS Shows Signs of Recovery in Q1
by Brett Horn, CFA | Morningstar Research Services LLC | 05-06-21

Like its peers, narrow-moat FIS reported first-quarter results that showed signs of recovery, although growth continues to be negatively affected by the pandemic. We expect this headwind to ease as the company moves through the year. We will maintain our $136 fair value estimate.

The merchant segment was up 1% year over year on an organic basis, a significant improvement from the 9% decline in the December quarter. To some extent, this is simply the result of starting to lap the beginning of the pandemic at the end of the March quarter last year. However, we've also seen data from the networks that suggests an underlying trend in the industry of a gradual but steady return to more normalized volume, which suggests to us that growth for the acquirers should continue to improve as we move through the year. FIS' growth this quarter did trail peers', but this appears to be a mix issue, as management said its travel, airline, and U.K. exposure amounted to a 5% headwind.

The banking and capital markets segments saw 6% and 3% year-over-year growth on an organic basis, respectively. FIS appears to be outperforming its peers a bit on the bank tech side at the moment, and these segments have provided some ballast through the pandemic, but we continue to see the merchant segment as the primary growth driver over time.

Despite the acceleration in growth and cost synergies from the Worldpay acquisition, margin improvement in the quarter was modest, with adjusted EBITDA margins increasing to 40.6% from 40.5% last year. Management attributed this to normalization in spending and a return to fully funding employee bonuses. Management said the company remains on track to achieve its target of $500 million of annual cost synergies by the end of 2021. We think this, along with the inherent scalability of the business, will allow FIS to achieve solid margin improvement over time.

Maintaining Our $62 Ionis FVE Following CF Termination
by Karen Andersen, CFA | Morningstar Research Services LLC | 05-05-21

Ionis reported $112 million in total revenue in the first quarter, and despite $60 million in Spinraza royalties from partner Biogen (in line with our estimates), the firm's research and development revenue, including milestone payments from partners, was lower than we had anticipated. We expect this revenue to pick up in the second half of the year, and we're not making any changes to our $62 fair value estimate. We are disappointed in the termination of clinical studies of Enac-2.5Rx in cystic fibrosis and look forward to more clarity on the preclinical safety signal and confirmation that future pulmonary programs will avoid this fate, as Ionis management expects. That said, we had not explicitly modeled Enac-2.5Rx or other pulmonary programs, and our fair value already incorporates the recent failure of Huntington's disease drug candidate tominersen in a pivotal trial. Despite these two disappointments, we think Ionis' broad pipeline still looks strong in rare neurological disorders and broader cardiology indications, supporting a narrow moat and extending cash flows beyond the firm's first blockbuster therapy Spinraza.

In the pipeline, investment in cardiology (led by APOCIII) and rare diseases (led by TTR) is increasing, with the APOCIII program poised to enter a second phase 3 trial this year in the large hypertriglyceridemia market, and the next-generation TTR program poised to generate phase 3 data in polyneuropathy in 2022. However, Ionis has a full pipeline beyond these programs. Ionis recently reported positive phase 2 top-line data in hereditary angioedema and is moving into phase 3 later this year. Ionis has also started pivotal studies in FUS-ALS and Alexander disease, two rare neurological diseases that have an accelerated path to market. Turning to Biogen-partnered programs, we expect phase 3 tofersen data in ALS this fall, as well as phase 1 data for the second ALS program in the partnership, BIIB078 targeting C9Orf, in early 2022.

Lyft Reported Strong Q1 Results As Ridehailing Demand Continues To Improve; Raising FVE to $61
by Ali Mogharabi | Morningstar Research Services LLC | 05-04-21

Lyft's first-quarter top- and bottom-line results came in better than the FactSet consensus estimates as demand for its ridehailing service continues to improve, indicated by a strong sequential increase in and steady monetization of riders. Combined with a slower recovery in supply, the increase in demand pushed prices much higher, further contributing to better-than-expected first-quarter net revenue. We think as supply increases prices likely will stabilize and come down in the second half of this year. Until then, Lyft and likely its peer, Uber, will continue to benefit from higher prices. Lyft management's second-quarter net revenue guidance was higher than our internal projections. The firm also guided for adjusted EBITDA profitability beginning in the third quarter. We still expect full-year adjusted EBITDA profit in 2022 and GAAP profitability in 2024.

After adjusting our model, we have increased our fair value estimate slightly to $61 from $59. This narrow-moat stock continues to trade in 3-star territory. In our view, Uber is a more attractive investment as it is trading at a 21% discount to our $67 fair value estimate. We think Lyft's strong numbers, especially on the demand side, also bode well for Uber.

Raising Tencent's FVE by 16% on Lower WACC
by Chelsey Tam | Morningstar Research Services LLC | 05-04-21

We have raised Tencent's fair value estimate by 16% to HKD 800 per share or USD 103 and think the shares are undervalued. The upgrade is due to us lowering our weighted average cost of capital to 8.4% from 9.8% as we upgrade its average systematic risk to equity (cyclicality) from average to below average, mitigated by the 7 percentage points lower fintech revenue five-year CAGR amid new regulatory measures. We conservatively assume the anti-trust fine by the government to be CNY 18 billion this year, this would reduce operating profit for this year by 12%. We think these changes are not significant enough to threaten its wide moat and stable moat trend, as Tencent's network effect -- the strongest moat source that tends to be self-reinforcing as per our methodology--remains strong with its Weixin user base of 1.2 billion.

The financial regulators requested for a reform of the fintech businesses of Tencent, Baidu, JD.com and Trip.com, among others. This is well expected after Ant Financial was requested to conduct a reform, in our view. Fintech businesses will be regulated as other financial institutions in China. We think the financial products of these companies will need to be separated from their main apps, reducing the conversion rate. This should bode well for bank apps. Fintech business is much more important for Tencent compared to the rest of these four companies we cover. We expect the base case valuation impact of the new fintech regulations on Tencent to reduce our fintech revenue CAGR estimate from 2019 to 2024 to 14% from 21% previously, same as the reduction for Ant Financial.

Demand for Uber's Delivery Continues to Grow and Mobility Is Recovering
by Ali Mogharabi | Morningstar Research Services LLC | 05-06-21

Uber reported first-quarter results with the top and bottom line beating the FactSet consensus estimates. Gross bookings displayed strong growth driven by continuing strength in the delivery business and demand improvement in mobility. Adjusted EBITDA loss in delivery improved from a year ago, while the mobility segment continued to generate positive adjusted EBITDA. Like its peer Lyft, Uber is experiencing limited supply in mobility and expects higher driver acquisition costs in the second quarter which will pressure mobility take rates and the segment's bottom line, but we expect it to remain adjusted EBITDA profitable. As we have mentioned before, we think Uber can more easily cross sell mobility to its existing delivery drivers. In our view, the firm's revenue diversification strategy is paying off as mobility is showing signs of recovery, while the delivery business continues to display impressive organic and overall growth.

In our view, Uber's network effect in both mobility and delivery segments remain intact. We are confident that the strong demand side of Uber's mobility network effect will reignite the supply side and attract drivers back to the platform. We have not made any significant adjustments to our model and expect Uber to generate full-year positive adjusted EBITDA in 2022 and become GAAP profitable in 2024. While the stock faces public policy risks, we think they are more than priced in at current levels. We are maintaining our $67 fair value estimates and view the stock as attractive.

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