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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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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.

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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
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Results for Schwab, JPMorgan Chase, Wells Fargo, and More

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Please see new analyst notes below from Morningstar Research Services for AMZN, Bank of New York Mellon BK, Charles Schwab SCHW, Comcast CMCSA, JPMorgan Chase JPM, McKesson MCK, Tencent TCEHY, UnitedHealth Group UNH, Visa V, Wells Fargo WFC, and WPP WPP.

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David Harrell,
Editor, Morningstar StockInvestor

We Expect Amazon Fresh to Be E-Commerce's Breakthrough Story for 2020
by R.J. Hottovy, CFA | Morningstar Research Services LLC | 01-15-20

After years of promise but uneven results, Amazon's online grocery efforts reached an important inflection point in late 2019 following the removal of Amazon Fresh's $15 monthly service fee and the introduction of one- and two-hour delivery window options for Prime members. In our view, this decision removed two of the key barriers preventing Prime members from fully embracing online grocery--cost and convenience--and has triggered widespread interest in markets where the service is offered. Our analysis suggests not only a meaningful uptick in consumer awareness of Amazon's grocery delivery capabilities, but also a 30%-plus increase in consumer adoption and order frequency rates based on website traffic and physical activity at Amazon Fresh fulfillment centers.

Why should investors find this information significant? One, it plays directly into our thesis that Amazon is pivoting away from customer acquisition and finding creative ways to engage with consumers, enhancing the network effect that underpins our wide moat rating. Two, it should reassure investors that the heavy investments that Amazon made in 2019 and will continue to make in 2020 are driving revenue higher. Three, because grocery is a high-frequency category, continued consumer adoption in 2020 could set the company up for revenue upside surprises in the quarters and years to come. Taken together, we believe the accelerated adoption of Amazon Fresh supports the longer-term revenue growth assumptions that underpin our $2,300 fair value estimate and gives us greater conviction in Amazon as our top pick in e-commerce in 2020.

Decent Quarter for Bank of New York Mellon but Net Interest Income Still Under Pressure
by Rajiv Bhatia | Morningstar Research Services LLC | 01-16-20

Wide-moat Bank of New York Mellon reported fourth-quarter results that were in line with expectations, though net interest income is expected to decline sequentially in the first quarter of 2020. Excluding one-time items, revenue was flat from the year-ago period. Following the release of fourth-quarter financial results, we maintain our fair value estimate of $48 per share.

Total investment servicing fees increased 2% driven by asset-servicing fees and clearing services fees. Asset-servicing fee revenue was flat from the third quarter and up only 2% year over year even though assets under custody or administration rose 4% sequentially and 12% year over year to $37.1 trillion, which suggests continued fee pressure. Investment management and performance fees were flat while more market-sensitive foreign exchange and trading revenue declined. Total assets under management finished the year at $1.9 trillion, up 11% from the end of 2018, as market gains and currency impacts more than offset modest outflows.

Net interest income was down 8% from the year-ago period. Net interest margin, or NIM, was 1.09%, and though improved from the 1.00% reported last quarter, was down from the 1.24% in the year-ago period. Average interest-earning assets were 4% higher. Driven by lower investment yields and the fact that fourth-quarter net interest revenue benefited from elevated deposits in December, BNY Mellon expects net interest revenue to decline 5% sequentially in the first quarter. This implies an approximately 8% decline from first-quarter 2019. Management then expects net interest revenue to stabilize as the forward yield curve remains stable.

Schwab's Fourth-Quarter Results Show Downward Pressure on Revenue; Mergers Will Bolster 2020 Revenue
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 01-16-20

Wide-moat-rated Charles Schwab reported fairly strong fourth-quarter and yearly results, but pressure in net interest income has already started. That said, 2020 earnings will be bolstered by Schwab's pending acquisition of USAA's brokerage business, as well as the recently announced merger with TD Ameritrade. The company reported fourth-quarter net income to common shareholders of $801 million, or $0.62 per diluted share, on $2.6 billion of net revenue during the period. Net revenue was down 2% year over year and down 4% sequentially, as trading revenue was cut  approximately in half from the firm enacting $0-commissions on multiple types of online trades, and Schwab's net interest margin compressed as the Fed started cutting short-term interest rates. While the $801 million of quarterly net income was the lowest seen by the firm since the first quarter of 2018, we don't anticipate making a material change to our $49 fair value estimate for Schwab (as much of this was already built into our valuation) and we assess shares to be fairly valued.

While fourth-quarter results were a step back for the firm, and the current macro environment with lower interest rates will make it tougher for the company to grow revenue organically in the near term, Schwab remains highly profitable and in a strong competitive position. The $3.5 billion of net income to common shareholders reported for 2019 was an annual record for the firm.

Comcast Underwhelms With Peacock Projections, but Optionality Remains Key
by Michael Hodel, CFA | Morningstar Research Services LLC | 01-17-20

Comcast fleshed out NBC Universal's planned Peacock streaming service at an analyst event, outlining offerings and financial expectations. We continue to view Peacock primarily as a defensive product, designed to protect NBCU's television distribution and advertising revenue streams as consumer habits evolve. Like AT&T's HBO Max, Peacock is designed to provide a platform to develop new types of relationships with consumers and provide an avenue to maintain audience sizes should the decline in the traditional pay-TV ecosystem accelerate. In exchange for this optionality, NBCU says it will make more content available to consumers, an investment it believes will cost a relatively modest $2 billion over the next two years. While management expects Peacock to break even by 2024, we expect margins in the television business to decline permanently over the next few years as more firms chase top-tier content. We believe Comcast warrants a wide moat based on the strength of its core cable business and we view shares as roughly fairly valued.

Unlike HBO Max, Peacock will lead with a free ad-supported tier with limited content designed to minimize barriers to adoption and help build a following for new shows. Peacock Premium, which will include the full slate of programming, will cost $5 per month, or $10 without ads. Surprisingly, NBCU only expects to hit 30 million-35 million active accounts by the end of 2024, despite making the ad-supported premium service available for free to 24 million Comcast and Cox cable customers at launch, with plans to add more distribution partners. AT&T, in contrast, expects to approach 50 million HBO Max customers by 2024, building on a larger base of 34 million subscribers but at a far more expensive $15 price. At this point, we believe these firms are lobbing out forecasts to manage expectations, knowing that their offerings will evolve with consumer demand and competition.

Interestingly, NBCU says it will make the ad-supported version of Peacock Premium available for free to Comcast's Internet-only customers using its Flex streaming box. NBCU indicated it may also make the service available to other cable companies to offer to their broadband-only customers. This move is at odds with notion that Comcast would use Peacock to support the traditional television bundle and seems strange to us. Comcast doesn't need help competitively in the Internet-access business, given the strength of its network relative to its phone rivals in most locations. While we understand the desire to build a wide audience for Peacock, NBCU still needs to maintain the relative attractiveness of the core traditional television offering while adequately monetizing those customers who want its entertainment content but don't value marquee news and sports enough to take the big cable bundle.

NBCU expects Peacock will generate $2.5 billion in 2024, a very modest amount relative to the roughly $18 billion it brought in during 2019 from cable and broadcast advertising and affiliate and retransmission fees. As with the customer forecast, we suspect the 2024 projection has a large margin for error and is subject to change. Still, the dramatic difference in size between the two businesses illustrates the fine line that NBCU and its television bundle peers are walking. The challenges facing the traditional cable bundle are complex and encompass factors outside of the firms' control, including the paths that major sports leagues take with their rights offerings. Creating and preserving optionality is critical for NBCU even if the cost is high.

JPMorgan Reports Impressive Fourth-Quarter Earnings Supported by Fixed-Income Markets Revenue
by Eric Compton, CFA| Morningstar Research Services LLC | 01-14-20

Wide-moat JPMorgan Chase reported stellar fourth-quarter results that were well-above consensus, with net income coming in at $8.5 billion, or $2.57 per diluted share, largely driven by fixed-income markets related revenue. Return on tangible common equity was 17%, which was in line with the bank's through-the-cycle target. Revenue increased 9% while expenses came in at 4%, leading to excellent operating leverage for the quarter and positive operating leverage for the year. JPMorgan Chase stayed on course with its share repurchase program, average diluted shares fell 58.7 million (approximately 2%) compared with the previous quarter, and year-over-year EPS grew an impressive 30%. The bank reported $14.3 billion in managed net interest income, leading to a total of $57.8 billion for the year, above last quarter's management outlook of below $57.5 billion. Meanwhile, expenses came in at $65.5 billion, which was in line with guidance. On the back of these results, we plan to raise our fair value estimate by a low- to mid-single-digit amount as we incorporate the latest results into our projections.

The managed overhead ratio was roughly steady at 56% as the bank continues to reiterate its commitment to technological development and expansion, reflected by an increase in technology, communications and equipment expenses. Average core loans remained roughly flat; however, with the exclusion of some sales in home lending, loan growth came in at 3%. This was supported by a year-over-year increase in average deposits of 7% caused by client acquisition and strong organic growth. Credit costs remained roughly stable, even as we continue to see some normalization within certain loan portfolios. JPMorgan reported an advanced common equity Tier 1 ratio of 13.4%, up roughly 30 basis points from the previous quarter.

McKesson Full-Year Raise Provides Boost to Industry Shares; Maintaining Fair Value Estimate of $150
by Soo Romanoff| Morningstar Research Services LLC | 01-15-20

Narrow-moat McKesson raised fiscal 2020 guidance $0.40 from the previous guidance midpoint, boosting share prices for all three distributors--AmerisourceBergen, Cardinal Health, and McKesson--toward 52-week highs. Key drivers of the guidance raise resonated with market growth trend comments from healthcare peers, suggesting a stabilization of generic pricing, mid-single-digit brand inflation, continued strength in specialty, and the expanding role of the pharmaceutical distributors. The stronger-than-expected positive market reaction is a departure from the overall investor pessimism for the segment, which had been further fueled by continued opioid litigation and drug policy overhangs.

McKesson increased fiscal 2020 normalized EPS guidance to $14.60 to $14.80 from $14.00 to $14.60 to reflect the strength in the core pharmaceutical market, including continued double-digit growth of the specialty subsegment. We are increasing our fiscal 2020 normalized EPS estimate from $14.50 to $14.70 to reflect stronger than initially expected top-line growth in the back half of the fiscal year, generally aided by better-than-expected cost savings benefits. We maintain our longer-term growth rates and slim profitability for the group and our $150 fair value estimate on McKesson shares. Although McKesson is the best positioned distributor providing the initial steps to improving coordinated care with the evolution of value-based reimbursement, we remain cautious on the distributor group as a whole.

Tencent's WeChat Will Place More Emphasis on Short-Form Content, Which Could Enhance Time Spent
by Chelsey Tam | Morningstar Research Services LLC | 01-13-20

The key takeaways from Tencent's WeChat conference were that WeChat will be better equipped amid rising popularity of short-form content in China, and its wide moat and network effect moat source continues to empower its ecosystem such as miniprograms and WeChat Pay. We maintain our fair value estimate of HKD 460 and the shares are undervalued. Encouragingly, WeChat will focus more on short-form content that encompasses not only words but also pictures, videos and livestreaming. Currently, WeChat official accounts puts more focus on content in the form of articles, a format that not everyone can create easily and prefer to consume any time in a day, especially during fragmented free time such as waiting for a bus. Empowering WeChat with short-form content so that everyone can substantially reduce the hurdles in creating, sharing and consuming WeChat's content should be able to mitigate the threat from increasing competition. Miniprograms will also allow livestreaming, a popular form of broadcasting content in China. We think these efforts should lead to an increase in mobile time spent on WeChat, which can bode well for advertising revenue.

We believe miniprograms' monetization capabilities will be enhanced in future. The number of miniprograms' daily active users has exceeded 300 million. The average amount of miniprograms used by users was up 98% in 2019 versus 2018. Forty-one per cent of the enterprises think miniprograms reduce online development and operation costs, according to a joint report by Tsinghua University and Tencent. The total transaction value in miniprograms last year was CNY 800 billion, up 160%, highlighting miniprograms' monetization potential. This is comparable with Pinduoduo's gross merchandise value of CNY 840 billion in the 12 months ended Sept. 30.

UnitedHealth Turns in Strong Q4 and Reiterates 2020 Outlook; No Fair Value Estimate Change Expected
by Julie Utterback, CFA | Morningstar Research Services LLC | 01-15-20

We expect to maintain our fair value estimate for UnitedHealth Group after it delivered fourth-quarter results that were modestly above our expectations and maintained its outlook for 2020. Shares remain about fairly valued in our view. From a moat perspective, UnitedHealth appears advantaged in its diversified healthcare-related operations, including insurance, pharmacy benefit management, services, and analytics, and those advantages are reflected in its narrow moat rating.

For the fourth quarter, UnitedHealth delivered slightly higher operating results than expected even at its investor day in December, highlighted by momentum in its Medicare Advantage and Optum franchises, especially OptumRx and OptumHealth. In the quarter, the top line grew 4% with 4% growth in its insurance operations and 8% growth from Optum. Its earnings per share grew 19%, helped by margin expansion in both major businesses and share repurchases.

With those strong fourth-quarter results, the company met its 2019 revenue goal of $242 billion (7% growth) and slightly beat its earnings per share goal of around $15.00 by delivering adjusted EPS of $15.11 (17% growth). The firm's strong 2019 results also included higher operating cash flow (18.5 billion) than we were expecting ($17.6 billion), but management stated those cash flows were inflated due a timing issue. Therefore, we do not expect to materially increase our cash flow expectations for future years, despite this performance.   

For 2020, the company reiterated its earnings per share goal of $16.25-$16.55, and while we may increase our estimates slightly after further reviewing its full annual results, we expect our EPS projection to remain within management's stated range. We also anticipate keeping our revenue for 2020 within its prior guidance of $260 billion-$262 billion, albeit on the high end of that range. In the long run, management still expects to increase adjusted earnings per share 13%-16% compounded annually.

Visa to Acquire Plaid for $5.3 Billion
by Brett Horn, CFA | Morningstar Research Services LLC | 01-14-20

Visa announced it intends to acquire Plaid in a deal valued at a $5.3 billion. Plaid helps consumers share their financial information with payment providers, such as connecting a bank account to a Venmo account. In our view, as a neutral point of connection, Plaid occupies a position within more nascent payment types that is similar to Visa's position within more traditional electronic payments. From a strategic point of view, we like that this deal gives Visa a toehold in this area. Further, given the strong growth in the area, Plaid should offer some opportunities to boost Visa's growth a bit over time. However, the deal is not large enough to be material to our overall valuation, and we will maintain our $166 fair value estimate and wide-moat rating.

From a financial perspective, the acquisition is less enticing. Visa provided only very limited commentary on Plaid's financials, but did note that the acquisitions are not expected to be accretive to earnings until the third year. While that is partially driven by the accounting for the deal and the investments Visa expects to make to sustain Plaid's growth, this suggests Plaid will not contribute to profitability for some time, making the purchase price a bit of a gamble on Plaid's long-term prospects. Plaid will likely contribute a bit to growth in the near term, however, although the numbers provided by Visa suggest the effect will be modest.

Wells Reports a Tough Fourth Quarter: More Legal Charges, and Future Expense Outlook Is Cloudy
by Eric Compton, CFA | Morningstar Research Services LLC | 01-14-20

Wide-moat Wells Fargo reported poor fourth-quarter results, largely attributable to a $1.5 billion legal charge in the quarter as well as elevated expenses in other parts of the bank. While we hadn't made any predictions about the amounts of future operating losses, we did expect that several outsize legal charges were on their way, which is exactly what happened in both the third and fourth quarters. Given that the bank has not announced a final wave of settlements, we think it is important for investors to brace for more potential charges.

Wells also missed its overall expense guidance, which excludes excess operating losses. Adjusted noninterest expense came in at $53.7 billion compared with a goal of $53 billion. Overall, we think it is important to focus on what information was actually new versus the information that was simply negative, but predictable. Booking more legal charges was somewhat predictable, although the exact amount was a new piece of information. Missing expense guidance was also a new piece of disappointing information, although it seems that the reasons for the miss are arguably transient (outside professional services, impairments and write-downs, and severance charges). We'll be eagerly awaiting a new outlook from management as it completes internal reviews, but in the meantime, besides bumping up our operating loss outlook for the medium term, we don't see much that has fundamentally changed.

We think it is clear that Wells is still a work in progress, and that progress will takes years, not months. After making several adjustments to our projections, largely related to slightly higher expenses in the future, we are lowering our fair value estimate to $56 per share from $57.

WPP's Focus Remains on Technology and Creativity Integration; Maintaining FVE
by Ali Mogharabi | Morningstar Research Services LLC | 01-15-20

Narrow-moat WPP held its analyst day, during which the firm highlighted its data, technology, and creative capabilities. While the firm has not made aggressive acquisitions on the data and data management front (unlike its peers IPG and Publicis), WPP has access to first- and third-party data through its clients and various partners, including Kantar, which WPP sold to Bain Capital. Regarding technology, WPP management remained confident in the firm's chances of winning accounts when facing consulting firms. WPP also highlighted the enhancement of its creativity by further investing in artificial intelligence, or AI. In our view, that know-how combined with the firm's long-standing leadership in creativity, which has helped strengthen its brand equity moat source, will continue to differentiate WPP. We think WPP is well-positioned to benefit from continuing growth in online ad spending. The firm and its peers may also benefit from the increasing demand for data privacy and security. WPP management did not touch on fourth-quarter results or 2020 guidance as the firm will publish its earnings in late February. We did not make any adjustments to our model and continue to value WPP at GBX 1,450 per share. This 4-star name increased nearly 34% in 2019, above the S&P 500's 29% and the Communication Services Select Sector SPDR Fund's 31%.


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David Harrell may own stocks from the Tortoise and Hare Portfolios in his personal accounts.

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