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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.

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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 2/26/21 -- Fair Value Increases for Mastercard and Disney

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 Booking Holdings BKNG, Enbridge ENB, Fidelity National Information Services FIS, Fiserv FISV, Home Depot HD, Ionis Pharmaceuticals IONS, Lowe's LOW, Mastercard MA, PepsiCo PEP, Uber Technologies UBER, Walt Disney DIS, and Wells Fargo WFC.

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David Harrell,
Editor, Morningstar StockInvestor

Booking Investing Into Its Network Advantage in Front of an Expected Demand Rebound Later in 2021
by Dan Wasiolek | Morningstar Research Services LLC | 02-24-21

We see little change to our Booking $2,150 fair value estimate, which assumes 2021 sales rebound strongly to around mid-70% of 2019 levels, with a full recovery by 2023. Booking and many other travel names now more than factor in a strong demand return, aided by optimism around high household savings rates and vaccinations, leaving shares overvalued.

As with other travel operators, Booking's fourth quarter was materially impacted by a resurgence in COVID-19 cases, which led to renewed travel restrictions. This is illustrated by its bookings falling 65% versus our estimate for a 54% decline and Expedia's drop of 67%. This marked a downturn from Bookings 47% drop reported in the third quarter, following a strong improvement from the 91% decline in the second quarter. Fourth-quarter results come despite Booking's healthy presence in alternative accommodations (30% of 2020 room nights), as its high exposure to Europe presented challenges, given near-term travel restrictions in the continent during the period. For 2020, sales were down 55%, near our forecast for a 54% decline, with an operating margin loss of 9.3%, worse than our forecast of a negative 5%, driven by higher nonmarketing expense. Encouragingly, Booking noted over 50% of its room nights in 2020 continued to come from direct traffic, implying its competitive standing is intact.

Booking plans to increase its focus on growing supply and awareness of its alternative accommodation offering in the U.S. It also looks to invest further into payments and a connected trip that includes flights and experiences alongside its core accommodations offering. We see these investments as helping the company grow sales and sustain its network advantage (source of its narrow moat). But we expect them to also drive incremental expense and a lower margin mix. As a result, we plan to adjust our outyear operating margin forecast to the high-30s from the low-40s, which should be offset by the time value of money.

Enbridge Announces Calvados Offshore Wind Project
by Joe Gemino, CPA | Morningstar Research Services LLC | 02-22-21

Wide-moat Enbridge, along with its project partners, announced that it will begin construction on the Calvados offshore wind farm off the coast of northern France. The project is expected to generate 448 megawatts of electricity, using 64 wind turbines. Once completed, the Calvados project is expected to generate enough electricity for approximately 630,000 people, or over 90% of the Calvados French department's population.

Enbridge will hold a 42.5% ownership interest in the $2.4 billion (CAD 3.1 billion) project. The project is underpinned by a 20-year power purchase agreement from the French government, locking in attractive project economics. Once fully operational, we expect the project to generate more than CAD 130 million in annual EBITDA, or less than 1% of our 2021 EBTIDA forecast. Construction is expected to take three and a half years, and the project partners expect the wind farm to begin operations in 2024. Despite the lucrative project, we are maintaining our $46 (CAD 59) fair value estimate. Enbridge's renewable energy projects only represent about 3% of the company's operations and hold potential for further long-term growth that meet the company's strategy of pursuing regulated and secured energy infrastructure projects.

A Fair Value Increase for Fidelity National Information Services
by Brett Horn, CFA | Morningstar Research Services LLC | 02-26-21

We are increasing our fair value estimate to $136 from $131 per share, due to time value since our last update and some modest changes to our assumptions. Our fair value estimate equates to 21.2 times our 2021 adjusted earnings estimate. While FIS' legacy business bank technology should hold up relatively well, the acquiring side of the business growth has seen a material impact from the coronavirus pandemic. But a bounceback this year, with industry participants stating that volumes have steadily and significantly improved from April lows, and the pandemic could ultimately accelerate the ongoing shift toward electronic payments. Following 2020, the higher growth Worldpay enjoyed before the merger suggests the merger should lift overall growth. The balance between this and the more mature bank technology segment results in a revenue CAGR of 8% over the next five years. We expect margins to improve significantly over time, and project adjusted EBITDA margins to increase from 42% in 2020 to 44% by 2025. This increase is mostly the result of the sizable synergies from the merger. However, we think the inherent scalability of the business will allow for modest but steady improvement.

Boosting Fiserv's Fair Value Estimate
by Brett Horn, CFA | Morningstar Research Services LLC | 02-26-21

We're increasing our fair value estimate to $114 per share from $108, due to time value since of money our last update as well as some modest changes in our assumptions. Our fair value estimate equates to 21.2 times our 2021 adjusted earnings estimate. While Fiserv's legacy business is relatively resilient, the acquiring side of the business growth has seen a material impact from the coronavirus pandemic. But the trend in this segment appears to be improving, with Fiserv and other industry participants stating that volume has steadily and significantly improved from April lows. We expect this area to see some bounceback in 2021.

2021 Comp Growth at Home Depot Contingent on Continued COVID-19 Behaviors
by Jaime M. Katz, CFA | Morningstar Research Services LLC | 02-23-21

Home Depot reported banner performance, banking 25% comp and sales growth in its fiscal fourth quarter. The print offered above-22% comps for all three months and balanced comp improvement, with ticket rising 10.8% and transactions up 12.6%. The firm continues to take share of the building materials and garden supply industry, which grew at a high-teens pace over the same period, indicating merchandising success at Home Depot, and supporting our wide-moat rating. However, costs rose faster than expected, leading to an operating margin decline of 50 basis points, to 12.7%, hurt by a plethora of exacerbated costs across the cost of goods sold and the operating expense lines (mix, shrink, logistics, COVID-19 spend). We believe some of these headwinds could persist in the year ahead. As such, while we plan to raise our $210 per share fair value estimate by a mid-single-digit rate, we still view shares as rich even after declining post report.

The company noted that if the demand cadence that was captured late in 2020 continued through 2021, Home Depot would likely see flat to slightly positive comp sales growth and an operating margin of more than 14%. While the full-year 2021 comp outlook is lower than our mid-single-digit forecast, the operating margin is better than the roughly 13.5% we estimated, and as such, we don't plan much change to our $12.36 2021 EPS estimate. However, given the still strong read on first-quarter demand, we believe this implies negative comp potential over the latter three quarters of 2021 as COVID-19-related demand recedes (assuming the vaccine is largely rolled out nationally in the first half). The Feb. 23 update doesn't offer us any impetus to alter our long-term outlook that calls for 3% comp and 4% sales growth (on average) along with operating margins that normalize around 15% over the next decade, as long-term operating margin gains are bound by strategic investments to keep Home Depot the most-favored home improvement retailer.

Maintaining Our $66 Ionis FVE Following Q4; Neurology and Respiratory Data Key in 2021
by Karen Andersen, CFA | Morningstar Research Services LLC | 02-24-21

We're maintaining our $66 per share fair value estimate for Ionis following solid fourth-quarter 2020 results that slightly beat our expectations on a non-GAAP basis, but 2021 guidance that reflects lower R&D revenue and higher R&D costs than we had anticipated, as Ionis aggressively invests in its diverse and advancing pipeline that is increasingly wholly-owned.

The 2020 acquisition of cardiovascular subsidiary Akcea was a $545 million cash outlay, but Ionis gained strategically and financially from the deal. Full ownership of Akcea fits with Ionis' strategy to drive a pipeline in cardiometabolic and rare neurological diseases. In addition, Ionis no longer feeds a portion of potential profits to minority interests, and it gains potentially significant tax benefits from Akcea's history of net operating losses. We think the Ionis portfolio and pipeline of antisense drugs across a diverse set of indications support a stable narrow moat. We continue to see Ionis' technology as competitively best-positioned in neurology, due to the potential for strong long-term competition from RNA interference players in cardiology, although Ionis is also rapidly progressing toward oral delivery that could differentiate its liver-targeted therapies. In addition, progress in respiratory diseases -- data for cystic fibrosis drug IONIS-ENAC-2.5Rx is due in May -- looks ahead of the competition.

Pandemic Demand Remains Robust for Wide-Moat Lowe's
by Jaime M. Katz, CFA | Morningstar Research Services LLC | 02-24-21

We plan to raise our $145 per share fair value estimate for Lowe's by a high-single-digit rate, due to fourth-quarter outperformance and sales momentum that has persisted into fiscal 2021. Even with this increase, shares should remain modestly overvalued. The first quarter could see double-digit comp store sales again, before lapping the onset of pandemic-related demand, when we expect performance to normalize. This would carry on fourth-quarter strength, which delivered 28.1% comp sales (ahead of our 19% estimate) and $20.3 billion in total revenue (a 27% increase). Fourth-quarter results offered consistent performance across the business, with growth above 16% in all merchandising departments, higher than 19% in all U.S. regions and more than 120% in the e-commerce channel. Such robust demand supported operating margin leverage, with Lowe's delivering a 40-basis-point improvement in the fourth quarter, to 7.6%.

However, near-term strength doesn't alter our long-term outlook for Lowe's, which calls for 3% comp and 4% sales growth and a more than 11% average operating margin over the next decade. We surmise that once the pandemic recedes, discretionary spending will shift back to categories that have been less accessible during the past year, including restaurants and travel, and away from the home (which has been materially invested in during the pandemic, with home furnishing industry sales rising an average of 6% over the last six months). For 2021, Lowe's restated its December investor day guidance, which offered a $84 billion in sales and 11.6% operating margin in 2021 in a moderate environment. Our forecast tilts a bit more favorably on the revenue side, given the continued category strength, which could lead Lowe's to generate sales of around $86 billion in 2021 and adjusted operating income of $9.9 billion (11.4% margin, marking around a roughly 60 basis point improvement over 2020).

A Fair Value Increase for Mastercard
by Brett Horn, CFA | Morningstar Research Services LLC | 02-24-21

We are increasing our fair value estimate for Mastercard to $320 per share from $312, primarily due to time value since our last update. Our fair value estimate equates to 39.7 times projected 2021 earnings, adjusted for one-time expenses. While revenue declined in the 2020 due to the coronavirus and that issue will bleed into the first quarter of 2021, secular trends and improving share should allow Mastercard to maintain strong growth rates over the next five years, and we project net revenue to grow at a 16% CAGR. In part, this growth rate hinges on depressed revenue in 2020, and the bounceback that we expect to occur over time. But we believe Mastercard can maintain low-double-digit growth even in the back half of our projection period. We think growth will be increasingly fueled by international markets, and Mastercard's mix leaves it relatively well positioned.

Increasing Pepsi's Fair Value Estimate
by Nicholas Johnson, CFA | Morningstar Research Services LLC | 02-22-21

We're raising our fair value estimate for Pepsi to $145 from $140 after rolling our model to 2021. The firm's snack portfolio continues to allow it to navigate COVID-19 better than peers, and near-term weakness in on-premises sales (affecting the beverage business disproportionately), as well as heightened supply chain costs, should moderate throughout 2021. 2020 performance belied the volatile operating environment, and we expect more of the same in 2021. Longer term, its trajectory should remain supported by innovation, revenue growth management, and investments in system capacity/efficiency. Our valuation implies a 2021 adjusted earnings multiple of 24.

U.K. Supreme Court Rejects Uber Appeal; Impact May Not Be Significant; Maintaining $67 FVE
by Ali Mogharabi | Morningstar Research Services LLC | 02-22-21

In our view, the U.K.'s Supreme Court decision regarding classification of certain Uber drivers as workers from a 2016 case will not significantly impact Uber in the short or long term. The decision is applicable only to the 25 drivers that sued the firm. In addition, since 2016, the firm has taken steps to provide more transparency and give more say to its drivers, which we think could weaken the decision as a precedent that would lead to drivers generally being classified as workers and/or employees. Plus, the additional cost from the ruling could create a barrier to entry for potential competitors, which would keep Uber's network effect intact and possibly allow the firm to pass most of the cost on to consumers. While this narrow-moat and very high uncertainty rated name is trading at a discount to our $67 fair value estimate, it remains a 3-star stock, and we recommend investors wait for a wider margin of safety.

Disney+ Growth Will Drive Disney's Top Line; Raising Fair Value Estimate to $154
by Neil Macker, CFA | Morningstar Research Services LLC | 02-22-21

Our updated $154 fair value estimate for Disney reflects the realigned segments and more muted fiscal 2021 growth. We expect average annual top-line growth of 11% through fiscal 2025 with annual growth of 8% for fiscal 2023-25.

We now project average organic annual sales growth from the linear networks to be 2% from fiscal 2021-25 (2.5% for affiliate fees and 1% for advertising) as our updated projections for U.S. pay-TV penetration assumes a decline to 55% in 2025 from 65% in 2020. The loss of subscribers at ESPN and other pay-TV channels will be offset by per-sub affiliate fee increases domestically. We project that the U.S. and international parks will remain closed or capacity constrained well into 2021. Fiscal 2020 theme park admissions revenue fell over 45% and we expect that fiscal 2021 revenue will remain well below fiscal 2019 and below fiscal 2020 due to the much weaker first quarter versus 2020. We project that merchandise, food, and beverage revenue along with resorts revenue will see similar lower results. The parks and consumer segment suffered a 37% decline in revenue in fiscal 2020, and we expect fiscal 2021 will fall another 14%. Following a strong bounceback in 2022 and 2023, we expect normalized growth of 4% in fiscal 2024-25.

Given the delay of movie premieres and theater closures, we believe that theaters will be largely empty until June 2021 in the U.S. and Europe. As a result, fiscal 2021 theatrical revenue will decline another 15%. For fiscal 2023-25, we forecast the content segment will return to its fiscal 2019 levels and beyond due to the strong slate of Marvel movies and the growth in TV, subscription VOD, and other outlets as Disney+ ramps up.

We estimate 31% annual growth for the DTC segment as we are modeling strong subscriber growth for Disney+ and Hulu. We now project that that Disney-branded services will hit 295 million paid subscribers by the end of fiscal 2025 versus 120 million prior to the December investor day. This growth assumes a strong international rollout and continued low prices for the service in the U.S. and aboard. We project that the segment will break even in fiscal 2024.

We project Disney's overall operating margin will improve to 18.4% in fiscal 2025 from 5.8% in fiscal 2020 as the losses at the DTC segment are offset by margin improvements at the studio and parks segments after recovering from the impact of the COVID-19 pandemic.

Wells Fargo Sells WFAM Unit; Deal Price of $2.3 Billion Not Great but Move Makes Strategic Sense
by Eric Compton, CFA | Morningstar Research Services LLC | 02-23-21

Wide-moat rated Wells Fargo has announced that the firm has entered into an agreement with two private equity firms to sell its asset management arm, Wells Fargo Asset Management (WFAM), for proceeds of $2.1 billion. With Wells retaining a 9.9% equity stake WFAM, the deal values the business at $2.3 billion, lower than the initial rumors from several months ago, which had the unit fetching prices up to $3 billion. In our view, the $2.3 billion valuation is not great and shows that WFAM was not the strongest of franchises in the minds of potential buyers. WFAM is primarily made up of money market funds, so the lower price tag wasn't too surprising, but our initial estimates did have something closer to $3 billion as being possible. Given that WFAM makes up a relatively small proportion of Wells' overall revenue (somewhere around 2% or less potentially), a shortfall of less than $1 billion on the sale of WFAM isn't all that material for a bank that we think is worth closer to $186 billion overall. We also like the strategic path that the bank is choosing to take following the sale of WFAM, thinking it makes sense to streamline and refocus operations on Wells' core strengths and best franchises (feeling that the shedding of WFAM is certainly a step in that direction). We do not plan to adjust our fair value estimate of $45 per share for the bank based on these events.


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