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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.

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
Alphabet's Founders Step Down

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 Alphabet GOOG/GOOGL, PepsiCo PEP, Tencent TCEHY, Uber Technologies UBER, and UnitedHealth Group UNH. Several holdings were also tagged in note about ESG implications for midstream oil and gas firms. It's also included below.

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David Harrell,
Editor, Morningstar StockInvestor

Sundar Pichai Will Now Steer the Wide-Moat Alphabet Ship
by Ali Mogharabi | Morningstar Research Services LLC | 12-03-19

Alphabet announced Sundar Pichai, current CEO of the holding company's Google, will now also serve as CEO of Alphabet, as the two founders of Google, Larry Page and Sergey Brin, relinquished their respective Alphabet CEO and President roles to Pichai. In our view, such a change will not impact the firm's operations nor its strategy. Page has not been very involved in the company's operations, and under the leadership of Pichai and Ruth Porat, Google (which brings in nearly all of Alphabet's revenue) has continued to operate well. As stated in the letter submitted today by Page and Brin, the two will remain on Alphabet's board and will continue to advise Pichai and his team. Overall, we agree with Pichai's statement that this change in leadership “won't affect the Alphabet structure or the work [the firm does] day to day.”

Our opinion on and projections for wide-moat Alphabet have not changed, and we continue to expect the firm to remain the leader in online advertising, while further monetizing its other apps such as YouTube and Google Maps, and gaining ground in the cloud market. In addition, Other Bets' Verily and Waymo could represent attractive call options. The stock has climbed 16% during the last 12 months (compared with 14.5% and 11% increases in NASDAQ and the S&P 500, respectively) and is now a 3-star stock, trading near our $1,300 fair value estimate. We recommend waiting for a pullback before taking a new long position in the stock.

In our view, today's change may be indicative of the firm's increasing focus on continuing enhancement and expansion Google's products and entire ecosystem, while minimizing possible disruptions and divisions that political and other non-work issues may bring about among the employees. Some steps already taken by Pichai have been indicative of this. For example, as reported by The Verge on Nov. 15, Pichai decided to change Google's weekly meetings (in which all employees could participate) to monthly meetings, as the weekly discussion topics had digressed from technological innovations and products to many outside of work topics, minimizing the benefits from those meetings for the firm and its employees. At the same time, Pichai is encouraging regional offices to hold “social” meetings giving employees opportunities to discuss and possibly address other non-work issues at regional levels.

We also do not anticipate the change in Alphabet's leadership to result in a significant reduction in investments in Other Bets, which has generated around $2.8 billion in operating losses during the first three quarters of 2019. Although Page and Brin will no longer be directly involved in Alphabet's operations such as management of Other Bets' investments, the two will maintain their total 51.3% voting power (26.1% for Page and 25.2% for Brin), which we think may lessen chances of significant changes in Other Bets' strategies.

PepsiCo Augments Snacking Portfolio with BFY Acquisition
by Nicholas Johnson | Morningstar Research Services LLC | 12-03-19

On Dec. 2, wide-moat PepsiCo announced its intention to acquire U.S. snack food maker BFY Brands for an undisclosed sum. While this deal is undoubtedly smaller than some of Pepsi's recent purchases (such as the $1.7 billion paid for Pioneer Foods and the $3.2 billion for SodaStream), the underlying rationale dovetails well with management's goal to strengthen its portfolio with high-growth brands aligning with prevailing consumer trends. From a strategic perspective, we have a favorable view of the deal, but our fair value estimate is unchanged at $133 per share. We continue to see current valuation levels as full, and though multiples are elevated due to hefty short-term reinvestment in the business, we'd be happy buyers on any pullback.

BFY's portfolio is anchored by PopCorners snacks and includes other "better for you" products such as Flex Protein Crisps and Flourish Veggie Crisps. Subsequent to the formal close, BFY will be reported in the Frito-Lay North America division. Though the business is fairly de minimis relative to the segment in aggregate, we think integration into Pepsi's mammoth distribution apparatus should support continued growth and availability for BFY's key brands and bolster FLNA's growth profile. This should bode well for PepsiCo's profits, given that FLNA is far and away the company's highest-margin business

Tencent's Fair Value Estimate Maintained After Forecast Changes
by Chelsey Tam | Morningstar Research Services LLC | 11-29-19

We maintain wide-moat Tencent's fair value estimate at HKD 460 after our forecast changes and believe the shares are undervalued for long-term investors. (Editor's note: The fair value estimate for the U.S.-traded shares also remains unchanged at $59.) We forecast 2019 revenue year-over-year growth to be 20%, versus 25% previously; 2019 adjusted operating income margin (excluding interest income and other gains and losses, unlike Tencent's reported operating income) to be 25.4% versus 23.9% previously; 2019 net income year-over-year growth to be 18%; compared with 26% previously, based on year-to-date performance. For 2020, revenue growth will accelerate to 25% on the back of more revenue recognition from Peacekeeper Elite and new games, and video content approval normalization. 2020 adjusted operating margin is forecast to be 25.4% while net income growth is 13%. The ten-year total revenue CAGR is 14% versus 17% previously; operating profit CAGR is 16%, the same as before. We model strong top-line growth of 14% per year for the next 10 years. We assume adjusted operating margin (before net gains and interest income) will increase from 24.4% in 2018 to 28.0% in 2028 as businesses gain scale. Our stage-two earnings before interest growth is now 9% versus 11% previously, while the return on new invested capital is now 31% versus 37% previously. We have updated Tencent's investments and applied a 10% holding discount, these investments account for 16% of Tencent's equity value in our updated model, versus 13% previously.

Uber Becoming More Transparent on the Safety Front; Maintaining $58 FVE
by Ali Mogharabi | Morningstar Research Services LLC | 12-06-19

Based on data presented in Uber's first U.S. safety report, which covered 2017 and 2018 and was published on Dec. 5, we think there was improvement in overall driver and rider safety. In addition, according to the document, the first-half 2019 data is showing further improvement. However, Uber's additional efforts to create reporting incentives for victims of sexual assault could increase the number of cases reported. Overall, our takeaway is that Uber is statistically a safe platform, but it must and can become safer.

In our view, Uber's network effect moat source will not be affected by the data in the firm's published document. We believe continuing growth in Uber riders, trips, and trips per rider, plus the availability of drivers and some stabilization in pricing and take rates during the first nine months of 2019 support our narrow moat rating. Like what we mentioned in our Nov. 25 note, Uber can take additional steps to protect the well-being of its drivers and riders. We also think safety improvements could expand the firm's gross margin, as they could lower insurance costs. The report and Uber's additional safety features might also strengthen the firm's case in London, where regulators have revoked its license over safety concerns.

We have not made any adjustments to our model and are maintaining our $58 fair value estimate on this narrow-moat and very high uncertainty name, which is trading at a 0.49 price/fair value.

While the report, which we thought was comprehensive, indicated that sexual assaults, physical assaults, and fatalities might occur on Uber rides in the U.S., the data showed that 99.9% of rides on the Uber platform have been safe. Plus, the rates of Uber-related assaults and fatalities per trip or per mile have been declining.

UnitedHealth Gives 2020 Outlook Roughly in Line With Our Expectations
by Julie Utterback, CFA | Morningstar Research Services LLC | 12-03-19

At its annual investor day, UnitedHealth Group gave its final outlook for 2019 and initial outlook for 2020, which were roughly in line with our expectations. While we have made minor tweaks to our projections based on recent trends, our fair value estimate has not changed. We continue to view UnitedHealth as advantaged in its diversified healthcare-related operations, including insurance, pharmacy benefit management, services, and analytics, and those advantages are reflected in its narrow moat rating.

At the event, UnitedHealth showcased its near- and long-term objectives, which remain largely unchanged despite some headwinds. For 2019, the company expects revenue of about $242 billion and adjusted earnings per share of close to $15.00, or roughly in line with our expectations. For 2020, the company gave revenue guidance of $260 billion-$262 billion, or slightly above our previous expectations that underestimated recent OptumRx pharmacy benefit management trends. We have revised our near-term expectations for that business upward. However, our previous projection for adjusted earnings per share was already on the high end of its targeted range of $16.25-$16.55 for 2020, and after some adjustments related primarily to the health insurance tax that is being reinstated in 2020, our earnings projection remains near the top of management's outlook range. Our operating cash flow expectation also remains at the high end of the company's targeted range of $19.0 billion-$19.5 billion in 2020.

In the long run, management still expects to increase adjusted earnings per share 13%-16% compounded annually. Of that long-term rate, management expects about 8%-11% of organic growth with the balance associated with capital allocation activities like share repurchases and acquisitions. With this outlook, we have not changed our $304 fair value estimate, which remains above recent share prices.

ESG Implications for the Midstream Oil and Gas Industry
by Stephen Ellis | Morningstar Research Services LLC | 12-05-19

Investors are increasingly paying attention to environmental, social, and governance, or ESG, factors, and for midstream companies, environmental concerns are paramount. Pipeline companies are "enablers" that encourage downstream consumption of fossil fuels, making them partially accountable for the greenhouse gas emissions that follow. Most midstream firms also emit waste gasses directly, and the regular occurrence of pipeline spills creates a negative buzz around the industry, inviting further ESG scrutiny. The direct financial burden associated with these issues is generally modest, as pipeline spill costs account for only a sliver of industry spending. If increased regulatory pressure eventually leads to a carbon tax, we would not expect major valuation changes as firms would pass most of these costs to end consumers. However, the resulting reputational damage threatens relationships with stakeholders on pipeline projects, including local communities, indigenous populations, and government regulators. This often leads to lengthy project delays and increased construction costs, and these can be meaningful. Our top picks are Cheniere and Plains All American Pipeline, which rank favorably on ESG issues and are attractively priced. Enbridge also looks undervalued and should see concerns start to recede because of the emergence of lower-emission solvent-assisted technologies in the oil sands. Energy Transfer is one of the cheapest midstream firms we cover, but that could be related to its relatively high exposure to ESG-related factors.

Carbon taxes would modestly reduce midstream fair values. Our analysis of the impact of a what-if scenario where carbon taxes are a reality indicates a minor impact to our coverage. We estimate that about $3 billion in taxes would be paid in 2022 by our midstream coverage universe, based on a $23 per ton net charge. The impact ranges from 1% to 12% of our current fair value estimates. Energy Transfer would be paying the largest tax, at $551 million because of its size, but its fair value estimate would shrink only by about 7%. DCP Midstream would see the largest fair value estimate impact (a 12% reduction), as well as an uncertainty rating increase to very high from high, indicating it has work to do to improve its carbon efficiency. In total, the fair value estimate impact across our midstream coverage would total $22 billion.

Pipeline spills damage reputations, but not pocketbooks. These incidents are notorious for creating negative buzz for the oil and gas industry. Despite the notoriety, spill-related costs have a minimal impact on pipeline operators' cash flow. According to the Pipeline and Hazardous Materials Safety Administration, or PHMSA, there have been 5,711 pipeline incidents in the 20 years from 1999 through 2018, averaging 286 incidents per year. The total reported spill costs were $8.1 billion, the median spill cost was $196,000, and the average spill cost around $1.6 million. With a typical midstream entity experiencing fewer than 10 reported spills per year, the typical impact to expenses is well under $10 million. Further, pipeline spills that cost more than $100 million represent only 0.1% of our data set (and insurance often covers a significant portion of the headline costs--Enbridge's widely reported $1.2 billion in costs for the Line 6B spill was only $650 million after insurance).

Pipelines near indigenous communities face a higher chance of protests and delays. Some of the firms that have the least amount of exposure in this area are Cheniere Energy/Partners, DCP Midstream, Enterprise Products Partners, Williams, and Pembina Pipeline because of the locations of their assets. In contrast, Kinder Morgan, Enbridge, TC Energy, MPLX, and Energy Transfer have all seen recent protests against new investments by indigenous tribes against major assets due to the pipe's pathway of operation. About 30% of our coverage is vulnerable to "not-in-my-back-yard" pressure, or NIMBY pressure, either through exposure to indigenous land or via poor relationships with other concerned parties such as politicians, landowners, and regulators. In short, we think management teams struggle to accurately provide in-service dates because of the uncertainty around the scope and timing of legal and permitting challenges.

Community relations threaten future projects. First, Equitrans' Mountain Valley Pipeline experienced years of delays due to environmental-based legal challenges over permits and community complaints over construction approaches and right-of-way issues. The pipeline is expected to cost around $5.4 billion versus its original midpoint of $3 billion in costs, and come on line in late 2020, two years later than its original 2018 date. The increased costs not only reduce expected returns on the pipeline but also reduce our confidence level around returns on future projects because of damaged relationships, increasing uncertainty, and reflection on management in terms of poor stewardship. Second, Williams has nearly $400 million in capitalized costs relating to the Constitution pipeline -- which has struggled with regulatory approvals -- that it could write off if it cannot build the pipeline. Third, Kinder Morgan's proposed its Trans Mountain pipeline in 2013, initially got approval in 2016, then faced legal challenges and protests that led to it being sold to the Canadian government in 2018. It still faces additional legal challenges to be completed in late 2019.


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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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