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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 Morningstar.com. 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
Roundup 8/16/19 -- Fair Value Adjustment for Tencent

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.

It's been a relatively quiet week. Please see new analyst notes below from Morningstar Research Services for Berkshire Hathaway BRK.B, WPP WPP, and a fair value adjustment for Tencent Holdings TCEHY.


Best wishes,

Peggy Seemann,
Publisher, Morningstar StockInvestor

 

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Reducing Wide-Moat Tencent’s Fair Value Estimate by 10% to HKD 460; Shares Undervalued by Chelsey Tam | Morningstar Research Services LLC | 08-15-19

We have reduced Tencent’s fair value estimate by 10% to HKD 460 per share as the first-half results were weaker than expected--4% of the decline was due to depreciation of Chinese Yuan. We now forecast 10-year revenue CAGR to be 17% (18% previously), driven by 9% growth in value added services, VAS (same as before), 15% growth in advertising (24% previously), and 27% in other businesses (25% previously). Operating profit excluding interest income and net other gains is expected to grow at a 16% CAGR versus 17% previously. We previously expected the income tax rate to be 20% to 22% in the next decade. Nevertheless, several entities of Tencent received a lower tax rate under several preferential tax policies such as high and new technology enterprises and national key software enterprises. We now assume the tax rate to be 9% to 12% from 2019 to 2021 and will rise to 19% afterward, close to the highest historical tax rate in the past.

Second-quarter revenue was up 21% year over year and 4% sequentially. VAS revenue was down 2% sequentially. Gross margin in the quarter was 44.1%, compared with 46.8% in the year-ago period and 46.6% in the first quarter; the year-over-year decline is mainly due to mix shift to lower-margin business that will continue in the long term, in our view. Operating profit excluding interest income and other gains, which is different from the reported operating profit, was CNY 21.8 billion, up 20% year over year and down 10% sequentially, with margin down 10 basis points and 380 basis points sequentially to 24.6%. Net profit to shareholders was up 35% year over year but down 27% sequentially. Excluding one-off items, we estimate net profit to shareholders would have gone up 31% year over year and 25% sequentially. Free cash flow was CNY 20.7 billion, up 27% year on year or down 14% quarter on quarter.

Five Reasons to Consider Buying Berkshire Hathaway by Greggory Warren | Morningstar Research Services LLC | 08-13-19

The equity bull market that bega­n more than a decade ago is likely to end sometime in the near to medium term, and some economic indicators are starting to point to a potential recession in the U.S. economy. We are highlighting w­­ide-moat-rated Berkshire Hathaway as a long-term investment idea that is likely to hold up better than most firms in a downturn, especially given its cache of close to $100 billion in dry powder that could be committed to investments, acquisitions, and share repurchases.

We view Berkshire Hathaway's decentralized business model, broad business diversification, high cash generation capabilities, and unmatched balance sheet strength as providers of opportunities that might elude other firms, as well as of some downside protection in any potential downturn. It is these advantages, in particular, that should allow Berkshire's book value per share to continue to grow at a high-single- to low-double-digit rate in the near to medium term, comfortably above our estimate of the company's cost of capital.

While CEO Warren Buffett laments the dearth of investment opportunities that has allowed a ton of cash to build on Berkshire's balance sheet, it is a natural byproduct of the company's disciplined approach to investing, a lack of a dividend and a limited amount of share repurchase activity over the years. We continue to believe that the firm will eventually have to evolve, though, from a reinvestment machine to one that returns more capital to shareholders.

With Berkshire's shares currently trading at a 20% discount to our $380,000 ($253) per Class A (B) share fair value estimate, and 1.2 times our estimate for end of 2019 book value per share, it's the cheapest we can remember seeing in a number of years, providing a good entry point for long-term investors.

Berkshire Uses USG Sale Proceeds to Fund $1.1 Billion of Additional Stock Purchases During 2Q by Greggory Warren | Morningstar Research Services LLC | 08-14-19

There were few surprises in wide-moat-rated Berkshire Hathaway's second-quarter 13-F filing, with the company utilizing the $1.8 billion in proceeds it garnered from Knauf's acquisition of its 28% ownership stake in USG to fund the purchase of four names--Amazon.com, Bank of America, U.S. Bancorp, and Red Hat--during the period.

CEO Warren Buffett had already mentioned that Berkshire had put more money to work in Amazon.com during the quarter, acquiring another 54,000 shares for an estimated $100 million, but with the stake over the $1 billion mark now it rests more firmly in the Buffett-approved box.

We were also aware of Berkshire taking its stake in Bank of America up over the 10% ownership threshold that Buffett has preferred to keep not only Berkshire's bank holdings under but its other holdings as well, with the insurer buying another 31.1 million shares for an estimate $880 million. Berkshire also raised its stake in U.S. Bancorp, acquiring another 3.2 million shares for $160 million, and picked up an additional 61,400 shares of Red Hat for $11 million.

As for sales, Berkshire sold 284,100 shares of Charter Communications for an estimated $105 million and was paid $1.7 billion for its 39.0 billion shares of USG Corporation during the second quarter.

With the additions to Bank of America and U.S. Bancorp the Financial Services sector accounted for 44.9% of Berkshire's holdings at the end of June, with Technology stocks at 25.7% and Consumer Defensive names at 15.2%. The rest of the $208.1 billion equity portfolio was made up of holdings from the Industrials (7.2%), Consumer Cyclical (3.3%), Communication Services (1.4%), Healthcare (1.3%), Energy (0.4%), Basic Materials (0.3%), and Real Estate (0.3%).

WPP’s Turnaround Is in Sight; Maintaining GBX 1,450 FVE; Shares Undervalued by Ali Mogharabi | Morningstar Research Services LLC | 08-09-19

WPP is making headway toward returning to organic growth in the world’s largest advertising market, the U.S., as it posted first-half 2019 results ahead of consensus expectations. Year-over-year and sequential improvements in net revenue in nearly all regions stood out to us. In addition, the firm continues to maintain most of its large accounts while winning new ones. After the solid quarter, WPP remained conservative and did not adjust its full-year guidance, which we think is mainly due to the impact of last year’s Ford account loss. With that, we still expect organic growth improvements during the next six months, driven by not only account wins but also by increased spending by current accounts. We are maintaining our GBX 1,450 on this narrow-moat name. The firm has strengthened its balance sheet, which keeps the dividend that’s currently yielding 6%, intact. Also, as it was disclosed in July, WPP is in the process of selling a stake in Kantar to Bain Capital after which the firm will deleverage and possibly reward shareholders via buybacks or special dividend. In our view, while the stock went up 7% in reaction to second-quarter results, this 5-star name remains attractive.

First half net revenue was flat year over year as organic decline and currency headwinds were offset by acquisitions. During the second quarter, organic net revenue decline in North America slowed to 5.3% from first quarter’s 8.5% decline mainly due to last year’s client losses. Excluding those losses, we estimate organic net revenue decline would have been around 1.5% as consumer-packaged goods companies continued to control their marketing spending. However, management indicated that a few may begin to spend a bit more. The firm’s integrated agencies and the data investment management business drove the overall improvement in North America.

 

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