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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
United Technologies is Now Raytheon Technologies

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.

The long-planned of United Technologies and Raytheon (following spin-offs of Carrier and Otis) took effect today. The merged entity now trades as Raytheon Technologies RTX. Owners of the former United Technologies also received one share of Carrier CARR and a half share of Otis OTIS. (No fractional shares of Carrier or Otis will be issued in the distribution. Shareowners will instead receive cash in lieu of any fractional shares.) Tortoise portfolio manager Michael Corty plans to hold all three stocks for now. The online Tortoise portfolio will be updated as soon as possible. Morningstar analysts will commence coverage of Raytheon Technologies next week.

Please see new analyst notes and updates below from Morningstar Research Services for AmerisourceBergen ABC and McKesson MCK, Alphabet GOOG/GOOGL, CarMax KMX, Facebook FB, IQvia IQV, and WPP WPP. Several portfolio holdings are discussed in a note about Permian oil differentials that is also included below.

Also this week, Morningstar equity analysts published their Q2 Equity Market Outlook overview. You can download it here.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Upcoming Quarterly Estimates Underestimate Short-Term COVID-19 Supply Chain Pulls and Takes
by Soo Romanoff | Morningstar Research Services LLC | 03-29-20

Based on all accounts, healthcare providers remain stretched in addressing the unprecedented COVID-19 volumes and gross charges in hospital settings could be as high as $1.5 billion with the associated with the pandemic and other influenza costs according Fair Health. Although regional double counting may inflate this estimate, we agree with the directional surge and expect the unusually high volumes will translate into short-term gains for the distributors. We anticipate an adverse mix shift toward commodity items and hoarded supplies and an increase in other charges/fees associated with special handling of highly demanded products will be net neutral to revenues. As performance penalties will likely be waived, we expect these volumes to fall to the bottom line as the distributor models scale. Longer term, we anticipate mix and volumes to return to historical norms as providers focus on negotiating reimbursements.

We anticipate AmerisourceBergen, Cardinal Health and McKesson will realize increased profitability for the near term but maintain our longer-term outlook and fair value estimates. For Cardinal Health, we have raised our normalized 2020 EPS to $5.39 from $5.33. For AmerisourceBergen, we have raised our normalized 2020 EPS to $7.75 from $7.68. For McKesson we raised our normalized 2020 EPS to $14.80 from $14.70.

Conversely, we do not believe Walgreens will be able to scale as efficiently and the roll out of its strategic partnerships will likely be slower than expected. As a consumer brick and mortar, the company will likely incur higher staffing and shrinkage overhead (store theft) more than offsetting higher gross margins from the flux of more profitable front end. After the hoarded items have worked through the system, foot traffic will likely be strained with increasing consumer confidence in online options. As a result, we have trimmed fiscal estimates and fair value estimate to $60. The company maintains an attractive dividend yield of 4.1%.

After the Recent Decline, Alphabet Has Become Attractive
by Ali Mogharabi | Morningstar Research Services LLC | 03-30-20

Wide-moat Alphabet has become attractive given the recent COVID-19-driven downturn. Google's ad revenue will take a hit from the coronavirus in 2020, but the firm will maintain its dominance in the online advertising market, which will recover quickly after the pandemic eases and companies look to quickly regain consumers' attention. In the short- to medium term, any indication of a slowdown in the spread of COVID-19 could initiate a recovery in the Alphabet stock and push it toward our $1,400 fair value estimate. Long-term catalysts include the return of strong subscription and ad revenue growth in YouTube, and further traction gained by the firm in the cloud market. The Waymo and Verily call options represent additional upside to our fair value estimate. Verily's recent efforts to work with government agencies and create sites for coronavirus testing and screening may create commercialization opportunities in the long-run.

As the pandemic continues to spread around the world, we believe it will further impact ad spending negatively. We expect total Alphabet revenue to increase by only 1% this year as decline in ad revenue is expected to be offset by further growth in cloud. We have assumed continuing growth in cloud and a recovery in advertising to push top-line growth to 27% in 2021.

Regarding Google's ad revenue, we have modeled a 4% decline this year, followed by a 28% growth in 2021. While pressure on overall digital ad spending will be less than on traditional, we expect online ad spending to decline between 5% and 10% in 2020, but come back with a vengeance driven mainly by overall economic recovery and the Summer Olympics, which have been delayed for 12 months. We have modeled a double-digit decline in Google search ad revenue in 2020 mainly due to the pandemic and the devastating hit that the travel industry has and will continue to take during the pandemic. However, we foresee impact of the travel industry on Google to be partially offset by growth (although lower than our initial assumption) in YouTube revenue.

CarMax Finished Fiscal 2020 Strong; Health Looks Solid to Deal With Coronavirus
by David Whiston, CFA, CPA, CFE | Morningstar Research Services LLC | 04-02-20

We expected a good fiscal 2020 fourth quarter for CarMax due its fiscal year ending Feb. 29 before the coronavirus hit the U.S. economy. Diluted EPS, aided by $113.6 million of share repurchases, rose 15% year over year to $1.30, easily beating the Refinitiv consensus of $1.13. We calculate EPS of $1.26 excluding buybacks, but repurchases won't impact fiscal 2021 because they are paused due to the virus, as are 12 of the 13 new stores planned for fiscal 2021. One new store in Tampa did open in March. Comparable store unit sales growth was strong at 11.0% and was 7.7% for all of fiscal 2020, while CarMax Auto Finance, CAF, grew fourth-quarter profits by 7.9%. The coronavirus impact on CarMax is severe, but for now we see no reason to change our midcycle income statement which, when also factoring in time value of money since fiscal third quarter, merits no change to our valuation. We will reassess all valuation inputs after the 10-K is filed in late April.

The pandemic has forced closure of about 70 of the firm's 217 stores and another 25 are open but are appointment only, while other stores have social distancing restrictions such as no more than 10 customers in the store at once. These measures are likely to last through at least April, in our view, but we are not worried about CarMax's financial health. The company has about $700 million of cash at March 31 due to borrowing about $675 million on the revolver since the end of fiscal 2020. The credit line now has $1.1 billion outstanding, matures in June 2024, and has over $300 million left to borrow. CarMax also owns real estate for over 140 of its stores that has a book value of $1.8 billion. We assume market value is higher than book value so unencumbered real estate is likely over $2 billion. There are no debt maturities until $100 million of senior notes mature in April 2023, so we believe CarMax has time to ride out the pandemic and we consider the stock a good value at current levels.

Facebook Attracting Users During COVID-19 and We Think Investors Should Follow
by Ali Mogharabi| Morningstar Research Services LLC | 04-03-20

We are maintaining our Facebook $215 fair value estimate and view the 4-star wide-moat name as attractive at current levels. While we expect COVID-19 to lower Facebook revenue in 2020, we also foresee the pandemic strengthening the firm's network effect. The firm has already pointed out significantly higher usage of its various apps during this crisis. We expect a return to double-digit revenue growth in 2021 as higher interaction and usage after the pandemic will attract rebounding ad dollars.

As the pandemic continues to spread around the world, we believe it will further impact ad spending negatively, especially among small- and medium-sized businesses that advertise frequently on Facebook. The coronavirus has also forced the International Olympic Committee to delay the Summer Olympics to next year, which also reduces 2020 ad budgets. The COVID-19 pressure on overall digital ad spending should be less than on traditional, so expect online ad spending to decline between 5% and 10% in 2020 but come back with a vengeance, driven mainly by economic recovery and the Summer Olympics. While companies have begun to reduce ad spending, we think the firm's nearly 2.5 billion Facebook app-only monthly users and the 2.9 billion that use at least one of the firm's apps (Facebook, Instagram, Messenger, or WhatsApp) once a month will attract a larger percentage of businesses' social network ad dollars than they had in the past. We estimate a 2% decline in total Facebook revenue in 2020, followed by a 34% increase in 2021.

COVID-19 Affecting Clinical Trial Starts and Patient Recruitment
by Anna Baran | Morningstar Research Services LLC | 03-31-20

We are lowering our fair value estimate for IQvia to $129 per share from $135 after adjusting our model for the impact of COVID-19 on clinical trial starts and enrollment. We assume an impact of roughly 380 basis points on 2020 contract research organization revenue growth due to trial start delays and slower recruitment as well as an impact of roughly 400 basis points in 2021 from lower demand from small biotechs as the pandemic impacts the global economy and funding. Additionally, we model slightly lower demand in the technology segment in late 2020 and 2021 as well as flattish margins. Overall, we model low- to mid-single-digit revenue growth in 2020 and 2021 before high-single-digit growth in 2022.

In the long term, we believe IQvia will gain share in the CRO space with its research and development segment growing at a slightly higher clip than the industry, implying over $7.8 billion in revenue in 2024. We believe the technology and analytics segment will grow at a faster rate as life sciences data and analytics play a larger role in clinical trials and other mission-critical processes for the biopharma industry. We model over $6.3 billion in revenue in 2024.

WPP Withdraws 2020 Guidance and Suspends Share Buyback and Dividends
by Ali Mogharabi | Morningstar Research Services LLC | 03-31-20

On March 31, WPP withdrew its original 2020 organic growth guidance and announced it was taking various steps to reduce operating costs to further strengthen its balance sheet, including suspending share repurchase and dividends. While we were confident that the firm's operations and balance sheet could withstand the COVID-19 pandemic, we applaud management for taking these additional steps, given the extreme uncertainty regarding the pandemic and its duration. We are not adjusting our top- or bottom-line projections as our assumptions of a 15% decline in 2020 organic revenue and no change in operating margin (both mentioned in our March 30 note) already take into account pressure on overall ad spending brought forth by COVID-19, which we think will linger for at least 12 months. We continue to value WPP at GBX 1,300 per share ($81 for U.S. shares). While the stock no longer offers a high dividend yield, improvement in the firm's liquidity and overall balance sheet has increased our confidence that the stock will steadily move toward our fair value estimate post the current pandemic and the economic downturn.

According to the firm, suspending share buyback and dividends will save around GBP 1.1 billion of cash. This move improves the firm's working capital cushion, which we think is necessary during the ongoing pandemic. In our view, such a move may also improve the WPP brand, which may help the firm grab more new clients after the downturn. It provides WPP's current and potential clients with a bit more flexibility when it comes to the timing of and/or unexpected changes in media buying during the pandemic.

Permian Oil Differentials Have Blown Out Again; The Situation Does Not Rhyme with 2018
by Stephen Ellis | Morningstar Research Services LLC | 04-01-20

Permian oil differentials have blown out again as the Midland and Houston corridors are trading about $7 and $5 per barrel below WTI (West Texas intermediate), and spreads have been as wide as $10 a barrel recently. This means that some producers are getting as low as $10 a barrel for oil, a far cry from the current $20 trading levels. However, the situation is not like 2018, where Permian differentials blew out temporarily due to a short-term mismatch between a lack of pipeline capacity and ramping supply at much higher oil price levels, which was resolved with new pipeline capacity. The current environment is a combination of a demand and supply shock, to the extent that midstream firms such as Plains have been requesting that Permian producers scale back production as well as prove they have a ready buyer for their barrels as local Permian storage is being overwhelmed. We do not see any fair value or moat impacts to our coverage universe, but this does demonstrate the industry shake-out is occurring and investors should be aligned with quality operators on both the midstream and E&P side.

We think there are several takeaways. Owners of oil storage such as Plains, Enterprise Products Partners, and Magellan are likely to reap substantially higher profits as storage rates and volumes increase. Also, like in 2018, we broadly expect our E&P coverage to be largely insulated from wider spreads, given the focus on long-term fixed fee transportation agreements. Diamondback, for example, has less than 10% of its production exposed to wider differentials and is nearly fully hedged.

We also see negatives. The challenge will be for the non-investment-grade producers, private equity-backed E&Ps, and other private E&Ps that largely took the brunt of wider spreads in 2018 and are exposed again now due to the lack of long-term pipeline agreements to survive with even weaker pricing and unknown, but likely questionable liquidity. Finally, with the shake-out in process, we think this speaks to the substantial uncertainty around volumes and fees for gathering and processing entities such as Targa and DCP. We reiterate our extremely uncertainty ratings for both stocks.


Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2020 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data.  There is no assurance that the data will remain the same.

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.

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only and has not been tailored to suit any individual.

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information. Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company's business performance,
investor perceptions, stock market trends and general economic conditions.

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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