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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.

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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.

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
Results for Amex, BlackRock, and UnitedHealth

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 American Express AXP, Analog Devices ADI, Bank of New York Mellon BK, BlackRock BLK, Charles Schwab SCHW, Comcast CMCSA, UnitedHealth UNH, and Wells Fargo WFC.

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David Harrell,
Editor, Morningstar StockInvestor

Rewards Expense Continues to Weigh on Amex's Earnings
by Colin Plunkett, CFA | Morningstar Research Services LLC | 01-18-19

Wide-moat American Express finished 2018 at a modestly slower pace than we had expected, generating revenue of less than $10.5 billion. Throughout the year, it generated year-over-year growth in billed business ranging from the upper single to low double digits. In the fourth quarter, Amex saw some deceleration in year-over-year growth in billed business, to 6%. Some of this is attributable to Amex facing tougher comparisons. Nevertheless, growth in average card member spending has slowed. For the quarter, average card spending increased only 2.2% from the previous year, a 300-basis-point decrease from growth achieved during the same period in 2017. This is largely the reason for the modest underperformance. For the quarter, the company earned $2.32 per share, benefiting significantly from a favorable tax gain. Had Amex paid a more normal 22% tax rate, it would have earned about $1.85 per share, a $0.03 decrease from the previous quarter. For now, we're maintaining our fair value estimate of $110 per share. We will update our model to include full-year results but do not expect any material changes to our fair value estimate.

This quarter's performance and guidance demonstrate the toll that rewards and marketing expense are taking on American Express. Though fourth-quarter revenue increased 8% during the quarter, pretax income climbed only 2%. In addition, Amex guided for revenue to increase 8%-10% in 2019 while earnings per share will increase 13%. This suggests to us that the company will buy back a lot of shares, because we think it will be hard for American Express to expand margins while still making the investments it needs to improve its technology while matching the rewards offerings of rivals.

Though JPMorgan's Chase Sapphire Preferred no longer offers the 100,000-point signup bonus for new cardholders that it did when the card was launched, Amex's rival did increase its signup bonus to 60,000 points from 50,000 in the fourth quarter. In addition, Capital One's Spark card for businesses offering 200,000 miles appears to be a direct attack on American Express' valuable commercial franchise. To us, Capital One's Spark represents an additional front in the war for credit card wallet share. American Express maintains that its valuable network of Centurion Lounges will allow it to weather this threat. We don't doubt business travelers love these lounges. However, we suspect Capital One's card will have some success and force American Express to continue spending. Should Amex's rivals increase rewards in 2019, Amex's earnings forecast of $7.85-$8.35 per share may be hard to achieve.

Analog Devices Still Has the Pieces to Put Together Strong Automotive Revenue Growth; FVE Intact
by Brian Colello, CPA | Morningstar Research Services LLC | 01-15-19

We met with wide-moat Analog Devices at CES 2019 in Las Vegas and came away from the company's product demonstrations with ongoing confidence that the firm can return to high-single-digit automotive chip revenue growth in the long term (barring any near-term macroeconomic or trade headwinds). Across CES and at Analog, we continue to see strong secular tailwinds around the rising tide of additional chip content per automobile, as the push for safer, greener, and smarter vehicles is being met by a wide variety of semiconductor-related content. Analog's car-related content in radar, audio cables, battery management systems, biometrics, and other areas bode well for the firm's ability to maintain, if not grow, share of the automotive chip pie in the long term. We will maintain our $96 fair value estimate for Analog and view the firm as modestly undervalued. We like this high-quality name in the event of any pullbacks.

Analog's automotive chip growth has lagged peers in recent years. The main culprit of its relative shortfall is a decline in legacy MEMS sensors used in airbags, where Analog has stated that the business became a bit more commoditized and the firm walked away rather than succumb to lower pricing. Linear Tech's battery management system (BMS) also conceded some market share as competitors were aggressive on price and were able to win new designs.

More recently, Analog has been bullish on automotive and expects these legacy headwinds to subside, in order to drive high-single-digit automotive growth in the long term. We still see no reason to believe that the firm is suffering in terms of automotive chip innovation. Although fiscal 2019 might be sluggish if light vehicle unit sales stagnate or decline, we project high-single-digit sales growth (7% per year) for the firm in the long term on a midcycle basis.

BNY Mellon's Investment Management Under Pressure in 4Q, as Expected; Servicing Fees OK
by Eric Compton | Morningstar Research Services LLC | 01-17-19

Wide-moat-rated Bank of New York Mellon reported OK fourth-quarter results. Adjusting for notable items, earnings per share were up 9% quarter over quarter to $0.99; however, this was exclusively due to net interest income growth and tax reform. Underlying fee revenue growth in the fourth quarter was down 1% on an adjusted basis, while it was 3% for the full year. As expected, a tougher market environment in the fourth quarter weighed on results.

We take some solace in the fact that the investment services business segment did relatively fine, while (as expected) the investment management segment was hit the hardest. This fits broadly within our thesis on the space: that the trust banks are still primarily asset servicers (these segments make up roughly 80% of the business), and the servicing business should be better insulated than the more exposed areas of the investment services landscape. The asset managers are more exposed, particularly those with concentrations in active equity strategies.

After incorporating these results, and largely due to more conservatism along the asset management side, we are lowering our fair value estimate to $51 per share. We see a challenging road ahead for fee growth in investment management and low-single-digit fee growth overall for the firm. This, combined with less of a headwind from rising rates, makes for a lower-growth environment going forward. The bank will be more dependent on cost control, which we do think it will make progress on.

Record ETF Inflows Keep BlackRock's 4Q from Falling Too Short; Lowering FVE to $475
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-16-19

While the fourth quarter of 2018 was disruptive for wide-moat-rated BlackRock (and the rest of the U.S.-based asset managers), we're not altering our long-term view but do expect to reduce our fair value estimate to $475 per share. BlackRock closed out the December quarter with $5.976 trillion in managed assets, down 7.3% sequentially and 5.0% year over year, as market losses and adverse currency exchange in the fourth quarter more than offset the positive contribution from $43.6 billion in inflows. While this was only slightly worse than our expectations for $6.035 trillion in assets under management for the end of 2018, management fee rates came in lower than we were envisioning, which affected not only 2018 revenue and earnings but our expectation for future results.

Net long-term inflows of $43.6 billion during the fourth quarter (driven by a record $81.4 billion in iShares exchange-traded funds inflows) were impressive, given all the volatility in the markets, but were still off the $62.2 billion quarterly run rate we'd seen from BlackRock the prior eight calendar quarters. That said, absent several large outflows the firm saw from institutional index investors, inflows would have been closer to that quarterly run rate. Full-year organic growth of 2.1% came in at the lower end of our forecast range of 2%-3% for 2018 and represented the firm's weakest year of organic growth since 2012.

Average long-term AUM growth of 0.8% during the fourth quarter translated into a 4.1% decline in base fee revenue growth, as mix shift and fee compression weighed on results. Total revenue was down 8.8% when compared with the prior year's quarter but increased 4.4% on a full-year basis (at the lower end of our forecast for mid-single-digit revenue growth). BlackRock posted a 30-basis-point increase in full-year operating margins to 38.9% on an adjusted basis when compared with the year-ago period, leaving it just below our 39%-40% target for 2018.

Schwab Reports Strong 4Q Earnings; a Share Price in the $40s Compensates Investors for a Recession
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 01-16-19

Despite the increased uncertainty regarding the economic environment in 2019 and beyond, wide-moat-rated Charles Schwab posted strong fourth-quarter earnings, and we believe that shares are moderately undervalued. Schwab reported $885 million of net income to common shareholders, or $0.65 per diluted share, on $2.67 billion of net revenue for the December quarter. Compared with the year-ago period, net revenue grew 19%, operating income grew 27%, and net income grew 61%. The large increase in net income was due to tax reform, but the strong revenue and operating income growth were due to positive trends in the company's business model and expense discipline. That said, we anticipate that our current $57 per share fair value estimate for Schwab will decrease $1 to $2 as we incorporate a longer time horizon to reach a normalized level of interest rates, as well as to adjust for the decline in equity markets in the fourth quarter. Even so, we still believe the shares are undervalued, estimating that a share price in the low $40s would adequately compensate long-term investors for a near-term recession and a dip in interest rates. We should also note that the firm is likely to significantly increase its dividend in the coming year.

Changes in interest rates continue to be primary drivers of Schwab's earnings, so with the outlook for interest-rate increases becoming more uncertain of late it becomes more difficult to project earnings growth. As we saw last year, when $544 million in net interest income more than made up for a $108 million decline in asset management revenue, rising rates have been a net positive for Schwab. During 2018, interest earning assets increased 20% to $268 billion and Schwab's net interest margin expanding to 2.39% from 2.03% during the year ago period. Interest-earning asset growth was primarily driven by an increase in bank deposits, aided by the company's movement of money market fund balances into its bank.

NBCUniversal Joins the Streaming Wars
by Neil Macker, CFA | Morningstar Research Services LLC | 01-15-19

Competition within the subscription video on demand, or SVOD, market in the U.S. continues to increase as Comcast's NBCUniversal announced its plans on Jan. 14 to launch a new streaming service in 2020. Comcast, like other traditional media firms, faces the challenge of establishing direct customer relationships without disrupting the highly-lucrative traditional pay-television ecosystem. However, we believe its SVOD proposed approach is superior to AT&T's plans for WarnerMedia. Unlike Comcast, AT&T's legacy consumer segment remains heavily dependent on profits from traditional television distribution without a strong Internet access business to fall back on. We aren't planning on any changes to our moat ratings or fair value estimates across the media and telecom spaces following Comcast's announcement.

In a unique move, the ad-supported version of Comcast's planned SVOD service will be free to pay-TV subscribers with an option to remove ads for a fee. For non-pay-TV subscribers, the service will reportedly cost $12 per month according to CNBC. Management at NBCU have publicly remarked in the past that the firm does not want to endanger the firm's current business model and that the economics around a streaming service are “challenging.” By tying its product directly to pay-TV subscriptions, NBCU is attempting to solve both problems at once, as the link to pay television subscriptions should help the service quickly gain scale and allow NBCU to generate its target of $5 in ad revenue per month for each subscriber. However, by pricing the non-pay-TV subscriber version at $12, NBCU is effectively ceding the value spot for that market to Disney+, which we expect to launch at a price under $10, while also likely making the NBCU service unattractive to the vast majority of customers.

UnitedHealth Group's Full-Year Results Meet Our Expectations; Maintaining FVE
by Jake Strole | Morningstar Research Services LLC | 01-15-19

UnitedHealth Group reported fourth-quarter and full-year results for 2018 that largely tracked in line with our expectations for the firm. Additionally, the business remains poised to meet our forecasts for 2019, and we don't anticipate making any meaningful changes to our cash flow projections. However, as we contemplate our outlook for the industry following the completed mergers of CVS/Aetna and Cigna/Express Scripts, we may update our fair value estimate as we reassess the competitive landscape. That said, we intend to keep our $218 per share estimate along with our narrow moat and negative trend ratings in place for now.

Overall, United continues to post strong performance with full-year revenue growing 12.5% year over year and operating profitability expanding by nearly 14%, helped by an improving margin profile in each of Optum's three businesses. The medical benefits business also reported stand-out results, adding nearly 2.4 million lives to its insurance book over the course of the year, largely driven by acquisition activity in the international segment. For 2019, the firm is off to a strong start with initial Medicare Advantage membership numbers again outpacing market growth on both a year-over-year basis and sequentially versus enrollment in December. We forecast organic membership growth to continue into 2019 across the enterprise, with medical membership reaching nearly 50 million lives by the end of the coming year.

We continue to view United's competitive advantage as rooted in the cost advantages and network effects afforded its expansive membership base and integrated medical, pharmaceutical, and ambulatory care service model. While competitors have begun to more aggressively build more comparable enterprises via large-scale mergers, we believe United's incumbent position will be difficult to unseat over the medium term.

Wells Fargo Continues To Be Hurt By Low Mortgage Income, Asset Cap Delays Add to Disappointment
by Eric Compton | Morningstar Research Services LLC | 01-15-19

Wide-moat Wells Fargo continued to wade through multiple issues in the quarter. The bank, as expected, recorded another $175 million legal accrual related to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) with regards to many of the already disclosed issues the bank is facing. There were a number of other one-time items in the quarter, making overall numbers somewhat noisy. That being said, net income was down roughly 1.5% compared with the same quarter last year, with share repurchases helping to lift EPS to $1.21, up from $1.16. The return on average tangible common equity did improve to 15.4%, and despite the weaker revenue growth, management was able to get the expense base to the lower end of their target range. We like the improving returns on equity, the strong growth in card and C&I loans, and the decreasing expense base, however, the announcement that the asset cap will stay in place for all of 2019 was a significant negative. We still believe the bank has meaningful room to improve returns on equity with further expense management, and we do not believe the bank needs significant revenue growth to improve its returns, but it will be a bumpy ride to get there as long as the bank remains under the regulatory microscope. We are currently modelling almost no revenue growth through 2021. Based on our updated forecasts, we are lowering our fair value estimate to $65 from $67. The bank was able to repurchase roughly 3% of shares outstanding in the quarter, which we believe is value-accretive, and the bank has a dividend yield of over 3.5%, which should make it a little easier to wait for the story to play out.


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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.

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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.

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