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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 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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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.

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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 accounts owned by Morningstar, Inc.
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Please see new analyst notes and updates below from Morningstar Research Services for American Express AXP, Comcast CMCSA, Elevance Health ELV, General Dynamics GD, Lockheed Martin LMT, Mastercard MA, Microsoft MSFT, Raytheon Technologies RTX, and Visa V.

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American Express Delivers a Strong End to an Impressive 2022 With Its Fourth-Quarter Results
by Michael Miller | Morningstar Research Services LLC | 1-27-23

Wide-moat-rated American Express reported strong fourth-quarter earnings as the company continues to see strong usage and interest in its premium credit cards. Net revenue increased 17% from last year to $14.2 billion. Earnings per share of $2.08 were down 5% from the prior year's quarter, which translates to a return on equity of 34.1%. The decline in earnings was due to a higher provisioning expense, which increased to $1.03 billion from only $53 million last year. We see this as a return to normal provisioning behavior and not a sign of sudden credit deterioration, as the firm's 2021 results benefited from significant reserve releases. As we incorporate these results, we do not plan to materially alter our $166 fair value estimate for American Express.

American Express continues to fire on all cylinders with discount revenue, net card fees, and net interest income all delivering double-digit growth. Discount revenue increased 14% annually and 4.3% sequentially to $8.2 billion. Growth was driven by a 9.5% increase in American Express' cardholder base to 133.3 million cards-in-force as well as a 4.6% increase in average card spending from last year to $6,087. There are signs that average spending rate growth is normalizing from the blistering pace set through 2021 and most of 2022, and we expect discount revenue to grow in the high single digits to low-teens going forward.

Net card fees and net interest income also increased 21% and 31% from last year, respectively. American Express' card fee income benefited from higher average fees per card, $85 compared with $76 last year, as the firm continues to see strong success in marketing its more expensive luxury cards, with nearly 70% of new card signups in 2022 coming from fee-based products. The firm, traditionally not much of a lender, is also seeing broader usage of its lending services with card member loans increasing 22% from last year to $108 billion, helping drive its impressive net interest growth.

Comcast's Fourth-Quarter Results Won't Turn Heads, but the Stock Remains Undervalued
by Michael Hodel, CFA | Morningstar Research Services LLC | 1-26-23

Comcast's fourth-quarter results won't change the negative narrative around the firm. Broadband customer growth remains anemic, which isn't a surprise. Peacock took a step forward with customers, adding 5 million paying accounts over the last three months of 2022, taking the total to 20 million. But Peacock losses hit nearly $1 billion during the quarter and $2.5 billion for the year, crushing margins at NBC Universal. We still believe that Comcast is well positioned to limit broadband share losses to competitors in the coming years while enjoying solid pricing power. NBCU is more challenged, but we like the effort to expand the theme park business to build around and support key content franchises. Our fair value estimate remains $60, and we believe the stock is significantly undervalued.

The broadband business lost net customers for the first time (26,000), which management telegraphed last quarter that the impact of Hurricane Ian would turn a small gain into a small loss. Average revenue per broadband customer increased 3.5% year over year as competition remains rational. AT&T, which we view as the biggest long-term source of incremental broadband competition, reported a 9% increase in fiber broadband ARPU, nearly closing the gap between it and Comcast. Total cable revenue increased only 1.4%, pressured by the decline of the television business. The cable segment EBITDA margin was roughly flat versus a year ago but would have expanded to a record 45.3% absent higher severance costs.

Consolidated free cash flow took a hit, dropping to $12.6 billion in 2022 from $17.1 billion the year before, primarily on working capital needs tied to the rebound in content production and higher cash taxes. Both items should cease to be headwinds in 2023. Comcast's solid balance sheet has allowed it to aggressively repurchase shares, spending $13 billion to reduce shares outstanding about 7% during 2022, while paying out nearly $5 billion in dividends.

Elevance Health Delivers Strong End to 2022 and Guides to Solid 2023; Shares Fairly Valued
by Julie Utterback, CFA | Morningstar Research Services LLC | 1-25-23

Elevance Health delivered a strong fourth quarter that helped the firm mildly exceed our expectations. Also, the company set initial guidance for 2023 that looks slightly above our expectations. However, at first glance, minor changes to our near-term estimates have not materially changed our $478 fair value estimate. Our narrow moat rating appears intact, too, and although Elevance remains the U.S. market leader, its narrow moat rating is primarily based on the company's local scale leadership that helps it offer lower premiums than most health insurers. The recently announced acquisition of another Blue Cross Blue Shield licensee (in Louisiana) looks likely to bring another local market share leader into the fold, too, if approved by antitrust regulators.

Elevance delivered strong top and bottom lines in the fourth quarter, allowing the firm to exceed expectations slightly for the full year. Fourth-quarter revenue grew 13% year over year on solid membership growth, acquisitions, and continued government-sponsored plan expansion. Medical membership grew 5% year over year, including 9% Medicaid growth and 6% Medicare Advantage growth, while its commercial (primarily employer based) stronghold grew 4%. In recent years, Medicaid membership growth has been helped by a lack of redeterminations during the public health emergency, and as redeterminations resume exiting the pandemic, those activities will likely represent a headwind for the Medicaid business, assuming the labor environment does not change significantly.

With this strong end to the year, Elevance was able to increase its adjusted EPS by 12% in 2023, or near the bottom end of its long-term target of 12%-15% annually. In 2023, management's target of at least $32.60 of adjusted EPS would represent another year of at least 12% growth., if achieved. That goal is slightly higher than our current expectations, but raising our near-term assumptions does not change our valuation, significantly.

Near-Term Headwinds Weigh on 2023 Outlook, but General Dynamics' Orders Remain Strong
by Dawit Woldemariam | Morningstar Research Services LLC | 1-26-23

Wide-moat-rated General Dynamics delivered solid fourth-quarter results, driven by strength in its combat systems and aerospace segments. For the full year, it posted sales of $39.4 billion (up 2% year over year) and generated a segment operating margin of 10.7% (down 10 basis points). Management issued 2023 sales guidance that fell short of our forecast due to ongoing supply bottlenecks for defense programs. The company's expectations for mid-single-digit top-line growth and modest margin expansion are driven by an expected uptick in commercial aircraft deliveries.

We are lowering our fair value estimate by 2% to $226 per share to reflect the lower 2023 guidance. Nonetheless, we remain encouraged by the company's growing backlog and expect defense programs to return to growth in 2024.

Full-year sales in the aerospace segment increased 5% to $8.6 billion and operating margin expanded 50 basis points to 13.2%, due to robust aircraft services revenue. General Dynamics delivered 120 Gulfstream aircraft during 2022, slightly below its target for 123 deliveries. The delivery of three aircraft slipped into early 2023, driving the miss. Demand remains strong as backlog grew by 20% during the year to $19.5 billion. Management expects to deliver 145 Gulfstream aircraft in 2023.

Defense sales in 2022 were led by a 5% increase in marine systems. Backlog increased to $45.7 billion, driven by a $5.1 billion contract modification related to the Columbia-class submarine. Segment growth in 2023 is expected to be constrained by supply headwinds in the Virginia-class submarine program, though management was optimistic in marine systems' return to mid-single-digit growth in 2024 and 2025.

Sales in the combat systems and technologies segments were mostly flat during 2022. However, in the fourth quarter, combat systems saw a strong sequential increase in sales, driven by an uptick in orders for combat vehicles, such as the Abrams battle tank and munitions from Europe.

Lockheed Martin's Growing Backlog Enables Strong Revenue Visibility Despite a Few Headwinds
by Nicolas Owens | Morningstar Research Services LLC | 1-25-23

Wide-moat-rated Lockheed Martin reported solid fourth-quarter results as the company continues to navigate through supply chain headwinds and rising demand amid geopolitical turmoil. Lockheed Martin reported $66 billion in 2022 sales (down 2% year over year) and generated a business segment operating margin of 10.9% (down 10 basis points year over year). Management offered 2023 guidance, implying flat sales and modestly lower segment operating margin due to ongoing production bottlenecks and changes in portfolio mix. Nonetheless, geopolitical turmoil stoked an increase in backlog during the year, providing strong order visibility as management expects to return to top-line growth in 2024. We do not anticipate materially changing our $437 per share fair value estimate, though we'll revisit our modeling assumptions after Lockheed Martin's 10-K is filed.

Sales in the aeronautics segment increased 1% to nearly $27 billion for the full year. Regarding the F-35 program, Lockheed posted full-year deliveries of 141, below the company's target of 148. An engine mishap in December caused a temporary suspension of deliveries. Management expressed optimism regarding the company's ability to meet growing demand and deliver 156 F-35s per year by 2025. Lockheed Martin and the Joint Program Office finalized agreement for the delivery of 398 aircraft (lots 15 and 16) worth $30 billion, with an option for lot 17 production. We are encouraged by the F-35 program due to its continued entrenchment into both domestic and international fleets.

Despite a decline in full-year sales, Lockheed Martin's total backlog increased by 11% in 2022 to $150 billion, with each operating segment contributing to the increase. Due to the long-term nature of the industry, we note that current demand typically takes time before percolating through to financial performance.

Mastercard Holds Up Well in Fourth Quarter
by Brett Horn, CFA | Morningstar Research Services LLC | 1-26-23

We think Mastercard's fourth-quarter results show the wide-moat company holding up relatively well amid a mix of headwinds and tailwinds. As expected, growth is slowing, and uncertainty in the macroenvironment clouds the near-term view. But the company also has some factors working in its favor in the current environment, and the long-term picture remains bright, in our view. We will maintain our $369 fair value estimate and see the shares as fairly valued at the moment.

Management described consumer spending as “resilient” in the quarter. Net revenue was up 12% year over year, or 17% excluding currency impacts. Gross dollar volume (excluding currency impacts) and transactions both increased 8% year over year, which represents modest deceleration from the previous quarter, but we see the level of growth as solid in an absolute sense.

Cross-border transactions have been the biggest swing factor for the business over the past few years, due to the relatively large fees Mastercard collects on these transactions and the pandemic-related decline and subsequent recovery in travel. Constant-currency cross-border volume excluding intra-Europe transactions (which are priced similarly to domestic transactions) grew 38% year over year in the quarter, which marks a significant deceleration from last quarter, although growth remains quite strong. The impact of the rebound in cross-border transactions on overall revenue is likely to diminish going forward as the company runs against more difficult comparisons, and this recovery could be at risk in the near term if the economy takes a negative turn. However, the reopening of China should act as a modest boost.

Strong growth continued to translate into margin improvement, thanks to the scalability of the business, with adjusted operating margins improving to 55.0% from 54.2% last year. But with growth normalizing and margins essentially fully recovered to prepandemic levels, improvement going forward may be modest.

Resilient Azure Helps Microsoft Drive Solid Results; Macro Drives Lower Outlook; FVE Cut to $310
by Dan Romanoff, CPA | Morningstar Research Services LLC | 1-25-23

Microsoft reported solid fiscal second-quarter 2023 results, including generally inline revenue and modest EPS upside after factoring in the $1.17 billion restructuring charge taken to reduce headcount and rationalize facilities. The outlook for March, however, was once again shy of our below-consensus estimates. Azure continues to decelerate but came in slightly better than guidance, while macro pressures seem to be steady or slightly worse. Bulls can highlight Microsoft's good growth in remaining performance obligation and Azure, while bears can point to decelerating revenue growth and light guidance. We are lowering our fair value estimate for wide-moat Microsoft to $310 per share, from $320, and continue to view shares as attractive.

We see results as reinforcing our long-term thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace. We continue to center our growth assumptions around Azure, Office E5 migration, and traction with the Power platform for long-term value creation. That said, we continue to believe that results will remain subdued for the next several quarters.

For the December quarter, revenue grew 2% year over year as reported, or 7% in constant currency, to $52.75 billion, compared with the midpoint of guidance of $52.85 billion and FactSet consensus at $52.97 billion. Compared with the year-ago period (as reported), productivity and business processes, or PBP, grew 7%, intelligent cloud, or IC, grew 16%, and more personal computing, or MPC, declined 19%. Relative to guidance, PBP and IC did well, while MPC lagged. Across the board, renewals were generally steady while standalone solution sales were softer. We were pleased with strong year-over-year growth (in constant currency) in Azure of 38% and Dynamics 365 of 29%, as both are key pillars to our long-term growth estimates.

Raytheon Delivers Solid 2022, Continues Focus on Cash Flow; We Expect to Maintain $106 FVE
by Nicolas Owens | Morningstar Research Services LLC | 1-24-23

We expect to maintain our $106 fair value estimate for Raytheon Technologies in light of solid fourth-quarter and full-year 2022 results, though we'll revisit our detailed valuation assumptions after the 10-K is filed. Despite continued supply chain troubles, the firm is making steady progress toward ambitious cash flow generation goals following its mega-restructuring completed in 2020.

The firm's prospects for revenue and margin growth stem from rebounding demand for commercial aircraft systems (provided by Collins Aerospace) and engines (Pratt & Whitney) and will outpace other areas, in our view. On its current trajectory, Collins Aerospace will provide nearly one third of the company's overall revenue by 2025, and we expect it to drive upward of 40% of operating profits. Pratt & Whitney is working out kinks in its new geared turbofan engine and promises that upgrades and a follow-on model, GTF Advantage, will deliver airline clients more "time on wing," which is what they want and what Pratt & Whitney gets paid for in modern service contracts.

In the company's defense-related businesses, last year was more of a mixed bag, with lingering supply issues hampering productivity in some areas. The fourth quarter saw Raytheon Intelligence & Space and Raytheon Missiles & Defense post a year-on-year revenue decline of 5% (excluding divestiture of a training business) and revenue growth of 6%, respectively. Though we expect delivery constraints to clear up eventually, management confirmed they are likely to persist well into 2023, as with many other manufacturing and technology firms. Raytheon's defense backlog shows healthy growth in areas important to future defense spending, so we still see the current operating conditions as likely delaying, not destroying, opportunity for the company. In line with our moderate defense spending growth forecast, we continue to expect Raytheon to garner low-single-digit growth in its military business overall.

Visa Holds Up Relatively Well in Fiscal Q1 2023
by Brett Horn, CFA | Morningstar Research Services LLC | 1-27-23

Visa's fiscal first-quarter results largely mirrored what we saw from its peer Mastercard. Both companies are still enjoying a bit of a boost from the recovery in travel spending, but the impact is fading. Although there have been concerns about a potential macroeconomic downturn and the impact on consumer spending, we think volume has been holding up reasonably well. We will maintain our $229 per share fair value estimate for the wide-moat firm, and we view the shares as being fairly valued at this point.

Net revenue increased 12% year over year, or 15% excluding currency impacts, during the quarter. Payment volume increased 7% when excluding currency impacts, while transactions grew 10%. Like Mastercard, Visa is seeing volume growth slow, but, in our view, the growth rate remains solid.

Coming out of the pandemic, cross-border volume has been the biggest driver for the business, due to the outsize fees Visa collects on these transactions, and the exposure to travel spending. Constant-currency cross-border volume excluding intra-Europe transactions—which are priced similarly to domestic transactions—grew 31% year over year in the firm's fiscal first quarter.

This represents a significant comedown from recent quarters, but that was expected as we moved deeper into the recovery in travel. The cross-border rebound has been a material tailwind for Visa, and that tailwind would eventually diminish. Further, a negative turn in the economy could put the recovery in travel at risk. On the positive side, the reopening of China's borders could be a significant positive on this front.

Excluding one-time charges, operating margins (based on net revenue) declined modestly to 68.4% from 69.8% last year. Management pointed to increased personnel expenses as the culprit, with the company making some investments for growth.

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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 accounts owned by Morningstar, Inc. 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.


Our Portfolio Managers

Michael Corty, CFA, is the Head of U.S. Equity Strategies and a Portfolio Manager for Morningstar Investment Management LLC. Michael joined the group as a portfolio manager in December 2013.

Previously, he was a senior equity analyst in Morningstar, Inc.'s equity research department where he also served as a voting member of the economic moat committee. Michael holds a bachelor's degree from Loyola Marymount University and an MBA from Johnson Graduate School of Management at Cornell University.

Grady Burkett, CFA, is a Portfolio Manager with Morningstar Investment Management LLC. Grady joined the group as a portfolio manager in December 2022.

Prior to joining Morningstar Investment Management, Grady was an analyst and portfolio manager at Diamond Hill, an independent and registered investment adviser. Grady started his investment career in Morningstar, Inc.'s equity research department where he progressed in several roles on the technology sector team as an equity analyst, strategist, and director of the team. Grady received his B.S. and M.S. in Mathematics from Wright State University. He is a member of the CFA Institute and the CFA Society of Columbus, Ohio

Investment Strategy



Tortoise Portfolio. The Tortoise targets undervalued companies that possess durable competitive advantages (as measured by their Morningstar Economic Moat Rating) and strong balance sheets.

Hare Portfolio. The Hare focuses on companies with strong and growing competitive advantages (as measured by their Morningstar Economic Moat Rating). It uses a “growth at a reasonable price” approach, seeking companies with above-average earnings-per-share growth whose shares are trading at reasonable multiples of earnings.