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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 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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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.

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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 10/23/20 -- Results for American Express, IQvia, Unilever, 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 Alphabet GOOG/GOOGL, American Express AXP, Enbridge ENB, Facebook FB, IQvia IQV, Netflix NFLX, and Unilever UL.

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David Harrell,
Editor, Morningstar StockInvestor

The Department of Justice Is Coming After Alphabet, but Returning Ad Demand Is More Relevant
by Ali Mogharabi | Morningstar Research Services LLC | 10-22-20

The Department of Justice (DOJ) filed an antitrust suit against Alphabet on Oct. 20, claiming that Google has engaged in monopolistic practices, helping it dominate the online search market. This case likely won't be resolved anytime soon and may end up at the U.S. Supreme Court. (See our May 6 note, "Antitrust Flexes Its Anti-Big-Tech Muscle" on Meanwhile, we think Google will continue to benefit from its leadership position in the digital ad market. We believe investors have rightly paid more attention to signs of recovery in ad demand, particularly the strong results rival Snap posted the same day the DOJ unveiled its suit. We expect Alphabet's network effect and intangible asset moat sources to remain intact and are maintaining our wide moat rating.

We still believe a decision to force a breakup of Alphabet is unlikely and that fines, like those imposed in Europe (totaling about $10 billion), are more likely. Some case precedents, such as the 2011 Microsoft Internet Explorer settlement, do not look favorable, but they have created a playbook for tech firms to navigate regulatory scrutiny and prepare for enforcement actions. Also, the consumer welfare interpretation of antitrust law and other past large antitrust cases have set precedent that can benefit Google. We believe perhaps the biggest consequence of regulatory scrutiny is that Google will be hesitant to pursue major acquisitions, which may dampen growth.

Antitrust enforcement and further regulations do pose a threat to Google's use of data. However, increased restrictions on data access and usage would apply to all firms, not just the industry leader. We don't believe that more fines, fierce enforcement of antitrust laws, or the passing of new ones will allow competitors to overcome the network effects Google has created. Even if regulators ultimately succeed in forcing a breakup, we believe Alphabet is at least as valuable based on the sum of its individual parts as it is whole.

Alphabet Fair Value Update
Our fair value estimate is $1,800 per share, up from $1,690 previously, equivalent to a 2021 enterprise value/EBITDA ratio of 15. We expect revenue growth pressure in 2020 due to the COVID-19 pandemic, followed by a return to double-digit revenue growth in 2021-24, helped by greater revenue contribution from YouTube and cloud. While new offerings will pressure gross margin, we look for operating leverage improvement beginning in 2022. Our model represents a five-year compound annual growth rate of 17% for total revenue and a five-year average operating margin of 22%.

Minimal Recovery in Travel and Entertainment Spending Weighs on American Express' Top Line
by Eric Compton, CFA | Morningstar Research Services LLC | 10-23-20

Wide-moat rated American Express reported OK third-quarter results. Earnings per share came in at $1.30, down 38% year over year, versus S&P Global Market Intelligence consensus estimates of $1.35. Credit costs declined as American Express was able to release some reserves, however, the bank's revenue remains challenged.

On the bright side, billings related to the non-travel and entertainment sectors have fully recovered at this point, showing year-over-year growth of 1%. However, travel and entertainment related billings were still down 69%. This combines for a total decline of 20% for Amex as a whole. Unfortunately, it does not look like T&E will recover soon.

With lower payments volumes and a lower average discount rate, discount revenue declined 24% year over year, and with lower rates and balances, net interest income was down 15%. Discount revenue is making a bit of a comeback, now down only 24% compared with 38% last quarter, but with T&E spending stalling out at materially lower levels, revenue will be lower for Amex for the foreseeable future. Fortunately, Amex is not seeing attrition among its consumer card base, despite many of the rewards being tied to travel-related items, and the bank is still growing its card fee line item at a double-digit clip. There is also some offset within the Amex business model on the expense side, with many of them being variable, as expenses dropped 14%, although this simply can't offset the pressure on revenue. We expect a continued recovery in revenue for Amex, albeit a slow one that will be heavily tied to a recovery in T&E spending. This will reset revenue at a lower point for Amex for some time. In the meantime, Amex will continue its pivot toward non-travel-related small business and consumer spending, but it will take time to make up for the fall in T&E. We don't plan to materially change our fair value estimate of $108 as we incorporate these results.

Enbridge: Line 3 Receives Two Key Permits
by Joe Gemino, CPA | Morningstar Research Services LLC | 10-20-20

On Monday, Oct. 19, Minnesota's Department of Natural Resources issued two of the 10 required permits for the Line 3 replacement project. The permit approvals signal that the DNR believes that the pipeline meets Minnesota's environmental and regulatory requirements. The approvals indicate that the project is moving toward completion. We still expect the probability that Line 3 is built and fully operational is 80% and Line 3 is protected by its integrity replacement status is 20%. The remaining eight DNR permit applications are still outstanding, but we don't foresee any issues with the pipeline receiving the permits.

The DNR permits were approved on the heels of favorable news regarding the state 401 draft water permit. Last week, Minnesota Administrative Law Judge James LaFave confirmed that the draft 401 water permit issued by the Minnesota Pollution Control Agency for the Line 3 replacement project was done so correctly. The judge determined that the MPCA and Enbridge identified by the best method of each of the water crossings, identified the entire acreage of wetlands that will be impacted, and determined the best methods of protection for each body of water and wetland that will be impacted by the pipeline. The judge also determined that the opposition failed to prove that Line 3 would permanently impact the state's water quality and wetlands. The ruling clears the way for the MPCA to issue the 401 water quality permits within the next 30 days.

Enbridge is trading in 4-star territory and remains one of our top picks in the Canadian energy sector. We think the market is mistaken to price Enbridge as if oil prices will remain weak forever. However, we do not expect the market's concerns will be fully addressed for some time, which can lead to volatile swings in the stock.

A Fair Value Boost for Facebook
by Ali Mogharabi | Morningstar Research Services LLC | 10-22-20

Our fair value estimate is $285 per share, up from $265 previously, representing a 2021 enterprise value/adjusted EBITDA multiple of 15 times. We model 15% revenue growth in 2020 versus 13% previously, as early indications are that ad spending has bounced back from the pandemic more quickly than we had expected during the third quarter. The boycott by some large brands early in the third quarter tempers our expectations for Facebook, however. We then expect 20%-30% growth through 2024, compared with the 37% three-year historical average. The firm plans to further invest in R&D and content creation, in addition to data security, which will pressure the operating margin. Our projections represent a five-year compound annual growth rate of 21% for total revenue and a five-year average operating margin of 34%.

We expect Facebook's monthly active users will grow about 7% annually, mainly due to strong growth in Asia and other regions. We continue to view Facebook as the main beneficiary (among social platforms) of higher digital and direct-response ad spending and the accelerated shift toward e-commerce. However, we also assume ad revenue per customer grows only 13% per year during the next five years (which includes a negative impact from the coronavirus) versus 25%-plus during the past five years, as a larger percentage of the customer base resides in emerging markets.

Raising IQVIA's Fair Value Estimate to $157 After Strong Quarter and Positive 2021 Outlook
by Anna Baran | Morningstar Research Services LLC | 10-20-20

We are increasing our fair value estimate for IQvia to $157 per share following strong third-quarter results and a better-than-expected outlook for next year. The vast majority of COVID-19-related challenges to the contract research business seem to be in the rearview mirror, with the company now poised to continue benefiting from catch-up trial work and new business. We're maintaining our narrow moat rating for IQvia, which is supported by the intangible assets and high customer switching costs associated with IQvia's expertise in clinical trials and the company's proprietary data and analytics capabilities.

Third-quarter revenue of $2.79 billion was within our expectations, but margins recovered quicker than we expected, resulting in adjusted EBITDA of $604 million. In research and development, CEO Ari Bousbib noted that IQvia is roughly back to baseline levels of site initiation visits, with patient recruitment and startup activity continuing to recover. Quarterly revenue of $1.4 billion was down 4.5% from last year, but given the pace of improvement, we anticipate mid-single-digit growth in the fourth quarter in the clinical trials business. In the tech segment, revenue growth accelerated nicely, bringing in $1.2 billion, up 10% from last year. We expect continued double-digit growth through the end of the year, offsetting the weaker first half.

The outlook for 2021 looks quite strong, due to new client wins in the tech segment and the pace of backlog growth in research and development. In the third quarter, backlog grew an impressive 18.5% from last year, closing at $21.7 billion, which sets up IQvia well for the next year. We've raised our 2021 revenue expectations to 12% growth year over year, with adjusted EBITDA growing 17% after COVID-19-related pressures to fixed costs fall off this year.

Netflix Misses on Q3 Customer Adds; Positive Cash Flow Due to Production Shutdowns
by Neil Macker, CFA | Morningstar Research Services LLC | 10-20-20

Subscriber growth at Netflix in third quarter came in below our estimate and management's forecast. The firm likely pulled some growth forward during the first half of 2020, though we suspect increased competition in the U.S. also played a role. Despite the miss on subscriber additions, revenue was in line with our projections for the quarter. We still expect the global rollout of Disney+ and the recent launches of Peacock and HBO Max to increase churn and pressure customer growth over the next year. We are maintaining our narrow moat rating and $200 fair value estimate.

Netflix added 2.2 million net new customers, including only 180,000 in the U.S. and Canada (UCAN), versus guidance of 2.5 million. The firm no longer provides expectations for both domestic and international net additions. Netflix ended the quarter with more than 195 million global paid subscribers, up from 158 million a year ago. The growth slowdown in the quarter was spread across the four global regions, with each well behind their numbers from a year ago. Asia-Pacific was the only region to post more than 1 million customer additions in the quarter as the region remains least penetrated for Netflix.

Revenue of $6.4 billion was in line with our estimate considering the firm's increasing overseas presence exposes it to currency fluctuations. UCAN revenue improved 12% year over year as the firm benefited from the 2019 price hike and a larger subscriber base. Monthly revenue per customer was up 2% versus a year ago to $13.40 which implies that the majority of the customer base is on the standard HD plan at $12.99, with a growing share on the 4K plan at $15.99. While Netflix did recently push through a price hike in Canada, we don't see much room for price increases in the U.S. in the near term with increased competition at lower prices. However, given the weak net adds in the quarter and continual content cost increases, Netflix may be tempted to increase prices despite potential churn impact.

Strong Third Quarter for Unilever Shows Resilience of Business During Coronavirus
by Philip Gorham, CFA, FRM | Morningstar Research Services LLC | 10-22-20

Unilever's solid performance in 2020 continued in the third quarter, with underlying sales growth of 4.4%, which is a full percentage point above our medium-term growth estimate. We are tweaking our near-term estimates to reflect a strengthening currency headwind, but this has no impact on our EUR 50 fair value estimate of the Amsterdam-traded share class or our wide economic moat rating. It reported a solid first-half 2020, all things considered, with flat sales and impressive margin expansion. We are making minor alterations to our forecasts but reiterate our EUR 50 fair value estimate for the Amsterdam-traded share class and wide moat rating. Unilever is now trading at our fair value estimate, and we see greater value in other categories such as brewing and tobacco. Having said that, the company owns a number of brands that have benefitted from the changes in consumer behavior during the coronavirus pandemic, and the stock has been relatively defensive this year. Investors fearful of a second wave may regard Unilever as being a relatively safe haven over the next 12 months.

Many of Unilever's markets recovered in the third quarter, with mid-single-digit sales growth a sequential improvement from the first half of the year. The Americas posted an impressive 8% growth, while Europe was soft, with underlying sales down 0.8% on negative pricing. The region is likely to remain weak until at least the end of 2020, as lockdown measures are being reintroduced in several European countries.

The portfolio is naturally performing in bifurcating ways. On the positive side, brands such as Seventh Generation, Domestos and Olly are playing well as the consumer is becoming more alert to personal health and hygiene issues. These behaviors may become engrained, leading to structurally higher growth in the medium term. A modestly higher growth rate is reflected in our current medium-term assumptions, but we recognize this is a potential source of upside to our forecasts.


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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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