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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
Roundup 1/22/21 -- Strong Subscriber Growth for Netflix

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 Bank of New York Mellon BK, Charles Schwab SCHW (two notes), Enbridge ENB, Netflix NFLX, and UnitedHealth Group UNH.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Low Interest Rates a Continued Headwind for BNY Mellon
by Rajiv Bhatia | Morningstar Research Services LLC | 01-20-21

Wide-moat-rated Bank of New York Mellon reported decent financial results for the last quarter of 2020. Operating revenue was $3.90 billion, modestly above the FactSet consensus of $3.83 billion; non-GAAP EPS of $0.96 beat the consensus of $0.88. GAAP EPS, however, came in at $0.79 as the company's notable items included a net $226 million pretax impact consisting of severance, litigation, losses on business sales, and real estate charges. Of note, BNY Mellon plans to reduce its real estate footprint by 8%. We will be tweaking our model, but we don't anticipate changing our fair value estimate of $48 per share.

Revenue, excluding notable items, was down 2% year over year due to low interest rates and money market fee waivers. Money market fee waivers were $149 million (net $134 million) during the fourth quarter. Even though interest rates have risen recently, short-term rates remain low and BNY Mellon expects a net impact of $175 million in the first quarter. Net interest revenue of $680 million was down 3% sequentially and 17% year over year; BNY Mellon expects another 3% sequential decline for the first quarter of 2021. Excluding fee waivers, operating fee revenue was up 5%. Market valuations have boosted asset-based revenue in asset servicing, wealth management, and investment management. Pricing continues to be a headwind, but the company reported some notable wins such as Janus Henderson for data analytics. The firm expects 1.5% organic fee revenue growth in 2021.

Given the macroenvironment, BNY Mellon continues to be focused on keeping a tight lid on expenses. Noninterest expense excluding notable items were down 1% during the quarter, and on a constant-currency basis, BNY Mellon expects these expenses to be flat in 2021. From a capital return perspective, BNY Mellon expects to resume buybacks during the first quarter.

Client Asset Growth Leads to a Strong, Year-End Finish for Charles Schwab
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 01-19-21

Wide-moat Charles Schwab reported a fairly strong finish to a tumultuous 2020, as it closed its merger with TD Ameritrade and equity markets continued to rally. Including the results of Charles Schwab's merger with TD Ameritrade that closed in October 2020, net revenue for the fourth quarter increased 60% to $4.2 billion and net income to common shareholders increased 31% to $1.05 billion from a year ago. Taking into account the shares issued with the TD Ameritrade merger, GAAP earnings per share in the fourth quarter decreased 8% to $0.57, while adjusted earnings per share that excludes acquisition-related costs and acquired intangible amortization increased 17% to $0.74. Client assets ended the year at $6.7 trillion, up about 12% sequentially on a proforma basis. We anticipate that we may increase our current $47 fair value estimate for Charles Schwab upwards of 10% to account for the rally in equity markets over the past couple of months.

We continue to anticipate some downward pressure in interest rate-related revenue and trading volumes, but strong growth in client assets can partially compensate. Net interest income in the fourth quarter was higher than the third quarter run rate for the combined Charles Schwab-TD Ameritrade due to higher margin loan balances. In the fourth quarter, the combined firm had about $54 billion of margin loans compared with $46 billion in the third quarter. Margin loans are also the company's highest yielding interest-earning asset and helped boost the company's overall net interest income. However, the yields of all other interest earning assets were down sequentially. The yield on available-for-sale securities that is the largest contributor to interest income at around 60% of the total decreased to 1.44% from 1.59% in the third quarter. Another significant interest rate-related revenue line is the company's bank deposit agreement with Toronto-Dominion Bank, and it sequentially decreased to $355 million from $381 million.

Increasing Our Fair Value for Charles Schwab to $51 After Recent Strong Growth in Client Assets
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 01-21-21

We're increasing our fair value estimate for Charles Schwab to $51 per share from $47. Our fair value estimate implies a price/2021 earnings multiple of 27.5 times and price/book multiple of about 2.9 times. Of the $4 increase in our fair value estimate, approximately $0.50 is from earnings since our previous valuation update and $3.50 is from higher than expected growth in client assets.

Over the next five years, we project a compound annual growth rate for revenue of over 3%, including the TD Ameritrade merger that should lead to around a 20% increase in revenue in 2021. On an organic basis, excluding TD Ameritrade, we forecast net revenue declining approximately 3% annually from lower net interest income. We're currently modeling interest rates staying near 0% through 2024.

Our across-a-cycle net interest margin forecast for Schwab is nearly 3%, but we don't forecast the company reaching this level until around year 10 in our model. The 3% net interest margin is based on short-term interest rates of 2.75% and a 10-year Treasury of 4.5%.

We project asset-management revenue increasing at about a 3% compound annual growth rate over the next five years. The growth is from the overall increase in client assets and movement of client cash into money market funds, partially offset by pricing cuts.

We forecast Charles Schwab's transaction revenue remaining flat and TD Ameritrade's revenue declining about 30%. The commission pricing cut in late 2019 has led to an upsurge in trading volume. Recent transaction revenue has been elevated by $0 commission trades and market volatility caused by COVID-19's effect on the economy. We model almost no growth in trading revenue going forward though, as gradual pricing pressures offsets trading volume increases, and Schwab shifts revenue from former revenue trades into other lines, such as its commission-free trading platforms, where the revenue shows up in asset management.

Biden Revokes Keystone XL Permit
by Joe Gemino, CPA | Morningstar Research Services LLC | 01-21-21

In a highly anticipated move, newly inducted President Joe Biden revoked the Keystone XL's presidential permit on his first day in office. The president cited climate change issues as the underlying reason for revoking the project's permit. The move comes as no surprise to us, as we expected Biden to oppose the project.

The cancelation of the Keystone XL comes as good news to wide-moat Enbridge. It appears that investors are mistakenly worried about underutilization of the Mainline pipeline system due to the construction of competing pipeline expansions. Even if the Trans Mountain Expansion is placed into service in 2023 (our base case), we expect only minor underutilization of the Mainline until Canadian crude supply ramps to fill all available pipelines. With the stock trading near $35 (CAD 44), we see almost 30% upside in the stock coupled with a 7.5% yield.

Netflix Beats Fourth-Quarter Subscriber Guidance; EMEA Driving Growth for Now
by Neil Macker, CFA | Morningstar Research Services LLC | 01-20-21

Netflix ended an impressive 2020 with strong subscriber growth, beating our estimate and relatively conservative management guidance provided a quarter ago. Despite the subscriber beat, revenue was in line with our projections for the quarter. We still believe that the global rollout of Disney+ and the launches of Peacock and HBO Max will increase churn and pressure gross adds for Netflix over the near future. However, Netflix is tracking ahead of our previous expectations on free cash burn and margin expansion. As a result, we are raising our fair value estimate to $250 from $200. We continue to believe Netflix's share price assumes unrealistic long-term growth and profitability.

Netflix posted stronger-than-expected subscriber growth (8.5 million net additions, with 0.9 million in the U.S. and Canada, or UCAN, versus guidance of 6.0 million). The company no longer provides guidance for domestic and international net additions. Netflix ended the quarter with more than 203 million global paid subscribers, up 22% from 167 million a year ago. Europe, Middle East and Africa, or EMEA, was the strongest segment, accounting for over half of the net additions for the quarter and over 40% of net additions for the year.

Revenue increased 22% versus a year ago to $6.6 billion during the quarter. UCAN revenue improved by 12% year over year as the firm benefited from the price hike in 2019 and a larger subscriber base. ARPU was up 2% versus a year ago to $13.51, which implies the majority of customers are on the standard HD plan ($13 during most of the quarter), with a growing share on the 4K plan (at $16). Netflix announced a price hike in November 2020 with most subscribers likely seeing the $1 increase on the HD plan or a $2 increase on the 4K plan on their December bills.

UnitedHealth Maintains Earnings Guidance for 2021; No Change to Narrow Moat or Fair Value Estimate
by Julie Utterback, CFA | Morningstar Research Services LLC | 01-20-21

Narrow-moat UnitedHealth released its operating results for 2020 that beat our expectations slightly in terms of adjusted EPS and significantly in terms of cash flow due to timing issues. However, the firm maintained its guidance for 2021 that was given at its December investor day. While there appears to be further upside in those 2021 earnings goals if COVID-related constraints are more modest that currently anticipated, we expect to keep our near-term expectations and recently raised $329 fair value estimate roughly intact for now.

In 2020, the company beat our expectations and its own recently raised guidance for the year, turning in $257 billion in revenue for the year (in line with expectations) and adjusted earnings per share of $16.88 (higher than its previous guidance of $16.50-$16.75). That mild outperformance on the bottom line does not change UnitedHealth's fair value. We would note, though, that the firm's cash flows were stronger in 2020 than we anticipated, with free cash flow coming in at $20 billion for the year (versus our $17 billion expectation). Management highlighted that early customer receipts led to that outperformance. At its analyst day, the company guided to $20 billion-$21 billion of operating cash flow in 2021 (which could lead to free cash flow of around $19 billion), but it did not back that guidance during this call, suggesting that the better-than-expected cash flows in 2020 may reverse in 2021, as timing issues normalize. Therefore, we may trim our expected 2021 free cash flow assumption moderately.

For 2021, the company maintained its adjusted EPS guidance but continued to highlight potential constraints of $1.80 based on the COVID-related health and economic effects. So while our estimate for adjusted EPS will likely remain within the company's target range for 2021 ($17.75-$18.25), we recognize that there may be upside potential if those effects are not as severe as currently expected.


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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.

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.

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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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