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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
Fair Value Increases for CarMax, Oracle, and IQvia

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 Facebook FB,  IQvia IQV,  Oracle ORCL, and UnitedHealth UNH, along with general notes about this week's Fed meeting and the impact of Facebook's proposed digital currency.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

CarMax Keeps Rolling Along While Transforming Itself for the Digital Shopper
by David Whiston | Morningstar Research Services LLC | 06-21-2019

CarMax reported a great quarter to start fiscal 2020, and we are raising our fair value estimate to $71 per share from $69 on slightly higher revenue expectations for fiscal 2020 than previously modeled as well as higher long-term returns modeled after our five-year explicit forecast period. Fiscal first-quarter diluted earnings per share rose 19.5% (12% excluding buybacks) to $1.59, easily beating consensus of $1.47. Revenue grew 12% to $5.37 billion, also beating consensus of $5.12 billion. Most impressive to us is the 9.5% growth in comparable-store unit sales. During fiscal 2019, this metric never exceeded 2.8% in any single quarter, and 9.5% is the highest level by our records since 10% in the third quarter of fiscal 2014.

We expect sales to moderate from first-quarter levels because CarMax's results are generally better in the first half of the fiscal year and the tax refund tailwind this quarter is not a full-year phenomenon. We calculate that adjusted free cash flow fell 32% year over year, mostly due to growth in inventory versus inventory reductions in the prior year's quarter.

Comments on the earnings call indicated that several factors came together well to drive the performance, including healthy credit availability from CarMax's lending partners for Tier 2 and Tier 3 customers, solid execution at the store level to convert traffic to sales, good inventory selection due to more auction supply, and some tax refund business this quarter that normally is in the fiscal fourth quarter. Used-vehicle supply should continue to be favorable for CarMax as U.S. off-lease volume is expected to peak this year and J.D. Power data has auction volume up 5.4% year over year in the first five months of 2019.

Facebook's Network-Effect Moat Source May Benefit From Libra and Calibra Long Term; Fairly Valued
by Ali Mogharabi | Morningstar Research Services LLC | 06-19-19

Facebook announced that with various investors, a new cryptocurrency, Libra, will be launched in 2020. The company will also make its own digital wallet, Calibra, available in 2020. While these announcements may strengthen the wide-moat firm's network-effect moat source because Facebook's 2.4 billion users, and apps such as WhatsApp and Messenger, could be more effectively monetized, in our view neither the cryptocurrency nor the digital wallet will drive the firm's top- or bottom-line meaningfully during the next few years. We are maintaining our $200 per share fair value estimate and recommend that new investors wait for a wider margin of safety before allocating capital to this wide-moat and high uncertainty brand. The stock is up 44% this year and trading at only a 6% discount to our fair value estimate.

Libra will be the digital currency that Facebook and other members of the Libra Association (which will monitor the development of Libra, and technically align and maintain nodes and open-source platforms) launch early in 2020. According to the white paper published by the association, the currency is likely to be less volatile than other cryptocurrencies such as Bitcoin, because Libra will be backed by bank deposits and short-term government securities held in the Libra Reserve, and which will be managed by the association. While the association currently has 28 “founding members”, this is likely to rise to 100 by early 2020. Investments made by the 28 founding members include at least $10 million each and some may become node operators for the currency's blockchain. In addition, each member is limited to one vote or 1% of total votes. Current members include MasterCard, Visa, Uber, Lyft, Spotify, Andreessen Horowitz, Coinbase, Booking Holdings, Women's World Banking, and more. Facebook also hopes its digital wallet Calibra will be able to be used anywhere and also by non-Facebook users.

IQvia's Life Sciences Cloud Business Continues to Soar; Raising FVE to $131 Following Investor Day
by Anna Baran | Morningstar Research Services LLC | 06-19-19

We are raising our fair value estimate for IQvia to $131 per share following its investor day on June 18, where management laid out its strategy for growth through 2022 as well as plans for additional cost savings and deleveraging. The company continues to fire on all cylinders, with strong growth in both of its key segments, technology and analytics and research and development. We continue to believe shares look rich, but we believe that the narrow-moat company is competitively well positioned in life sciences technology and in the contract research space.

The company unveiled its midterm guidance, guiding a three-year revenue CAGR of 7% to 10% and 2022 adjusted EBITDA growth to be between 8% and 11%, both higher than we had previously modeled. Management also reviewed the goals laid out at the outset of the Quintiles and IMS Health merger in late 2016, including mid-single-digit revenue growth, adjusted EBITDA growth of 6% to 9%, reducing net leverage to 4 to 4.5 times adjusted EBITDA, and $200 million in merger cost synergies. All these goals were met, which is a testament to both management's execution and the robust operating environment within the biopharma space, driven by innovation and new drugs as well as solid funding for biotechs.

Our new valuation is largely driven by faster revenue growth in both technology and analytics and research and development. As one of the top contract research organizations in the world, we expect that the research and development segment will continue to grow slightly faster than the industry as IQvia takes share from smaller CROs. For this segment, we model a 7.8% revenue CAGR from 2019 through 2022, within management's guidance of 7% to 10%.

We believe that IQvia's solutions in CRM solutions, data analytics, and real-world evidence are underpenetrated and model a 9.1% revenue CAGR from 2019 through 2022, near the midpoint of management's midterm guidance.

Database Rebounds Improves Oracle's Long-Term Outlook; Raising FVE to $50
by John Barrett | Morningstar Research Services LLC | 06-19-19

Wide-moat Oracle's fourth quarter earnings report was largely in line with our expectations and slightly exceeded management guidance. The major highlight was re-acceleration of Oracle's core database business, driven in part by customer adoption of Autonomous database. The rebound in databases confirms our belief that Oracle warrants a wide moat. We are raising our fair value estimate to $50 per share from $46, mostly due to the time value of money as we roll our valuation model. Shares appear modestly overvalued to us today.

Infrastructure ecosystem revenue was $21.1 billion for the fiscal year and up 7% in the fourth quarter. Database license was a major contributor with growth in the mid-teens. Autonomous database introduced less than two years ago, is showing early signs of contribution with Autonomous related license growth at 21%. Autonomous trials in the quarter increased to 1,666 from 1,333 last quarter, indicating continued developer interest in the new offering. Database growth from new and existing customers contributed to the strong performance. 20% of customers signing up for Autonomous database were brand new to Oracle, while 40% of the workload running on Autonomous are net new to Oracle.

Strong growth in Oracle's SaaS and application offerings continued to offset its shrinking business lines. Full year revenue grew 3% in constant currency and was down less than 1% in USD. SaaS ERP and HCM reached nearly $3 billion for the year, up from $2.2 billion last year, while Fusion apps were up 32% for the year after growing 62% last year. NetSuite (up 28% for the quarter), Fusion HCM (up 25% in the quarter), and Fusion ERP (up 44% for the quarter) continued to grow strong. Meanwhile, hardware and services segments declined by 7% and 5% year over year, respectively. We believe the growth in database and cloud is an early indication that Oracle is not fated for secular declines in revenue growth long term.

DMG Sale Receives FTC Approval With Conditions; DaVita and United Undervalued
by Jake Strole, CFA | Morningstar Research Services LLC | 06-19-19

After market close on June 19, the Federal Trade Commission released the details of its complaint and the agreed-to settlement between DaVita and UnitedHealth Group satisfying antitrust concerns stemming from United's purchase of DaVita Medical Group. This announcement brings the roughly year-and-a-half transaction process to a close, with DaVita receiving a reported sale price of $4.34 billion for the assets. We anticipate this cash infusion will go toward debt reduction and share repurchases over the near term—actions we applaud given the steep discount versus our $79 per share fair value estimate. We don't intend to alter our valuation or narrow- and wide-moat ratings for either DaVita or United, respectively, as a result of the deal's completion.

The FTC's objection was based on concentrated market power in Nevada, where United has a particularly strong insurance presence. Specifically, United's purchase of DMG's Las Vegas-area medical practices would have put OptumCare in a position to cover roughly 80% of Medicare Advantage members in the region and create incentives for anticompetitive actions when contracting with the area's second-largest Medicare Advantage insurance carrier, Humana. The parties have agreed to divest these practices to Intermountain Healthcare within the next 40 days to remedy these alleged effects.

The conclusion to this process marks the first bit of positive news for Best Idea DaVita in some time. With the transaction finalized and management given the flexibility to shore up the firm's balance sheet, the path toward operational improvement has been derisked from a capital structure perspective. We continue to see sizable upside in shares from current levels and believe shares represent one of the most compelling opportunities in the healthcare sector for long-term investors.

Fed Maintains Policy Rate, but Rate Cut Drama Is Increasing
by Eric Compton | Morningstar Research Services LLC | 06-19-19

This was perhaps the first Federal Open Market Committee (FOMC) meeting of the year that carried with it an element of uncertainty. With the futures market pricing in an ever-increasing chance of multiple cuts in 2019, there were serious questions about whether the Fed would stick to the same script as it has before--no cuts, staying patient, and we are currently at neutral--or whether it would signal a rate cut for its next meeting in July (which the futures market had already priced in ahead of the meeting) or potentially cut rates during this month's meeting.

Previously, it had been a relative certitude that no rate cuts were on the table, nor was there the same level of anticipation around the potential for future cuts. With the conclusion of its June meeting, the FOMC voted to maintain its target rate range at 2.25%-2.50% and also signaled that rate cuts could be coming in the very near future. For the first time under Jerome Powell's tenure, the vote for keeping rates stable was not unanimous, as James Bullard voted to lower the target range by 25 basis points. This overall sentiment was mirrored in the dot plot, which became much more dovish--signaling that rate cuts could very well be around the corner.

Libra's Implications for Our Financial Services Coverage: We're Not Worried Just Yet
by Eric Compton | Morningstar Research Services LLC | 06-20-19

Facebook has announced plans for Libra, its new digital currency set to launch in 2020, making it the first major company to attempt to bring cryptocurrency into the retail mainstream. Overall, we are not yet worried about a negative impact on economic moats in financial services.

Libra is a cryptocurrency that will be built using blockchain technology. It will be run by a consortium, with Facebook as the lead until the end of 2019, at which point all members will have equal power. It will start out as a "permissioned blockchain," with the ambition to move toward "permissionless" over time. Libra will be backed by a reserve, which Facebook says will consist of "a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks." This is in contrast to a cryptocurrency like Bitcoin, where there is no fiat currency backing, which leads to wild price swings. Facebook believes this will keep Libra relatively stable in value, although not 100% stable. Facebook's initial goal is to target the unbanked market. The project also has a focus on cross-border payments, an area that has historically been more difficult to handle from a processing standpoint.

Any prognostications concerning Libra are quite speculative at this point. It is very hard to tell exactly how this will evolve over the next 5-10 years; a lot will depend on how popular it becomes, what the initial uptake is, and if it can reach a critical mass of users and transactions. The initial stages of trying to develop a network effect are inherently uncertain, although Facebook's existing network effect in its social media platform may help.

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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.

©2019 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.

Disclosure:
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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