Investment Strategy
Tortoise Portfolio. The objective of Morningstar, Inc.’s Tortoise Portfolio is to focus on “high-quality” businesses, defined as having both durable competitive advantages and strong balance sheets. These are often well-established market leaders with economic moats (preferably wide). Morningstar’s aim for the portfolio is to generate risk-adjusted returns that outperform the S&P 500 over a full market cycle.

Hare Portfolio. The objective of Morningstar, Inc.’s Hare Portfolio is to seek long-term capital appreciation ahead of the S&P 500 Index, focusing on companies with strong and growing competitive advantages. Morningstar is willing for the Hare to accept greater risk in exchange for higher total return potential.

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.

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
Quarterly Results for Anthem, BNY Mellon, Netflix, and More
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.

I'll be out of the office tomorrow, so this week's update is coming a day early. Any additional analyst updates for the week will be folded into next week's e-mail.

Please see new analyst notes and updates below from Morningstar Research Services for Anthem ANTM, Bank of New York Mellon BK, Ionis Pharmaceuticals IONS, Netflix NFLX, Omnicom OMC, and Unilever UL.

Best wishes,

David Harrell,
Editor, Morningstar StockInvestor

Anthem Shares Fairly Valued After Strong Q3 Results and Slightly Higher 2021 Outlook Than Expected
by Julie Utterback, CFA | Morningstar Research Services LLC | 10-20-21

Anthem turned in strong third-quarter results, and although we have raised our near-term expectations slightly on these trends, our $388 fair value estimate has not changed materially. We are also maintaining our narrow moat rating, which is primarily based on Anthem's local scale leadership that allows it to offer lower premiums than most health insurers. With that competitive advantage, Anthem led the U.S. medical membership landscape with 45.1 million members at the end of September, higher than even UnitedHealth's 44.9 million members.

Anthem's medical membership grew 6% year over year primarily on expanding government plans, which grew 18%, led by 21% growth in Medicaid (including strong uptake in the new North Carolina contract) and 19% growth in Medicare plans, while the firm's employer-sponsored stronghold only grew 1%. Membership at the end of September looked slightly higher than we were anticipating for the entire year, so we've raised our estimates mildly. Also, with those membership trends and slightly lower medical utilization than expected including the surging delta variant, Anthem beat FactSet consensus expectations ($6.37) by turning in adjusted earnings per share of $6.79.

With these stronger-than-anticipated results, Anthem raised its guidance above our expectations for 2021, including adjusted EPS of at least $25.85, near the top end of its long-term goal of 12%-15% growth, and at least $6.0 billion in operating cash flow. Given recent trends, we have raised our expectations for 2021 roughly in line with management's new view. However, investors should realize that management's preliminary 2022 expectations of at least 12% growth is off a lower EPS base ($25.20) than its current estimate for 2021 (at least $25.85) due to alternative investment returns that management does not expect to recur in 2022. Also, we have worked in a potentially higher U.S. corporate tax rate starting in 2022, which does not appear to be considered in guidance either.

Decent Underlying Trends for BNY Mellon and Net Interest Revenue, Fee Waivers Close to a Bottom
by Rajiv Bhatia, CFA | Morningstar Research Services LLC | 10-19-21

Wide-moat rated BNY Mellon reported solid third-quarter financial results with revenue and EPS of $4.04 billion and $1.04, respectively, modestly ahead of the FactSet consensus of $3.95 billion and $1.01. Fee revenue was up 6% or 11% excluding the impact of money market fee waivers. Fee waivers continue to weigh on the firm's financial results. Fee waivers were $233 million net, a modest improvement from $252 million in the second quarter. Looking ahead, fee waivers in the fourth quarter should be flat sequentially. Net interest income was down 1% sequentially and down 9% from the year-ago period. Overall, we believe the firm's underlying trends were solid, and we are increasing our fair value estimate to $57 from $49 as we tweak our out-year revenue and operating leverage estimates higher.

Within the firm's investment servicing division, asset servicing was the strongest grower with 6% revenue growth. Of note, the firm's alternative asset servicing business grew in the double-digit percentages. Some of this growth is from competitive takeaways. The firm mentioned Oak Hill Advisors, and based on the Oak Hill's ADV we believe this was a win from privately held Citco Group. That said, the alternative asset industry is performing well, and BNY Mellon's growth coupled with similar commentary from State Street suggests a positive read-through for some of the other names in our coverage, including SEI Investments and SS&C Technologies.

Pershing revenue grew 5% due to strong underlying growth offsetting increased fee waivers. BNY Mellon is investing in its platform to create PershingX, a multi-custodial platform that we view as BNY Mellon's effort to capture more of an advisor's tech wallet share. Investment and Wealth Management were up 13% and 10%, respectively, as higher asset values increased revenue.

Biogen and Ionis Present Disappointing ALS Data
by Karen Andersen, CFA | Morningstar Research Services LLC | 10-18-21

Biogen and Ionis announced mixed phase 3 data from the Valor study for ALS drug candidate tofersen on Oct. 17, as part of the annual meeting of the American Neurological Association, and we're not expecting to make any significant changes to our fair value estimates for either firm. As it stands, we include a 40% probability of approval for tofersen in 2022 in our valuation models, with probability-adjusted sales of $425 million (to Biogen) and royalties of $52 million (to Ionis) by 2030. While tofersen missed the key primary endpoint in this placebo-controlled study, which used the revised amyotrophic lateral sclerosis functional rating scale, there were trends toward reduced disease progression, particularly among patients who started treatment earlier. In addition, biomarkers appeared to point to the drug's ability to reach its target and plausibly slow neurodegeneration, as measured by reduced SOD1 levels and neurofilament. Biogen plans to expand its access program, which allows ALS patients to access the drug prior to approval, and will continue with the ongoing Atlas trial, which seeks to prevent clinical manifestation of ALS in presymptomatic patients diagnosed using SOD1 and filament levels. While we could see a path to approval for the drug, either with continued follow-up from the Valor study or with data from Atlas, we continue to see failure as slightly more likely. We see Biogen's broad neurology portfolio and pipeline as warranting a wide moat, and Ionis' antisense technology supporting a narrow moat. However, the failure of Ionis's Huntington's disease program and delays with its inhaled drug candidates could signal erosion of the firm's positive moat trend, and we're carefully watching for progress in the key areas of rare diseases and cardiology to find continued support for our trend rating.

Netflix Beats Low Subscriber Guidance; Competition Appears to Be Weighing on Net Adds
by Neil Macker, CFA | Morningstar Research Services LLC | 10-20-21

Netflix reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago. While management expects to add 8.5 million net new customers during the fourth quarter, this mark would only be in line with last year's fourth quarter and below the previous two years. We think the lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. We are maintaining our narrow moat and raising our fair value estimate to $275 from $250 to account for slightly stronger margin expansion expectations due to lower marketing costs.

Netflix posted 4.4 million net subscriber adds during the quarter versus guidance of 3.5 million, ending the quarter with more than 213 million global paid subscribers, up only 2% sequentially and up 9% from 195 million a year ago. Growth was slower in the U.S., with fewer than 100,000 net additions--only the third time below that mark since the start of 2012. Latin America has also seen anemic growth in 2021, with only 330,000 net adds in the quarter and only 1.45 million year to date, which is well below the same periods in 2019 (3.3 million) and 2018 (4.4 million).

Revenue of $7.5 billion, up 16%, was in line with our estimate. U.S. revenue improved by 11% year over year, largely due to the price hike in 2020 as the subscriber base only increased 1% versus last year. Average revenue per customer for the region was up 10% versus a year ago to $14.68, implying that most customers are on the standard HD plan at $14 with a growing share on the 4K plan at $18. The 4K plan remains the most expensive streaming option in the U.S. marketplace right now, potentially capping Netflix's ability to continually raise prices as subscriber growth dwindles.

Omnicom's Q3 Results Display Growing Demand for Ad Holding Firms' Services; Raising FVE to $90
by Ali Mogharabi | Morningstar Research Services LLC | 10-20-21

Omnicom reported mixed third-quarter results as revenue slightly missed the FactSet consensus estimates while the firm beat bottom-line expectations. With strong double-digit organic revenue growth, the revenue miss was mainly due to Omnicom's disposition of ICON in June. The firm saw strong demand for all of its services including media, creativity, digital marketing, and digital and brand consulting. In our view, the macro environment remains accommodative for Omnicom and its peers within the overall advertising space, as the well-known agency brands have come to the forefront again. After including third-quarter results in our model, we have increased our fair value estimate to $90 per share from $89. We continue to view narrow-moat- and 4-star-rated Omnicom as an attractive investment, especially with a 3%-plus dividend yield at current price levels.

Third-quarter total revenue of $3.44 billion was up 7.1% from last year as recovery from the pandemic continues to drive economic growth, which provides confidence for advertisers to further increase their ad and marketing spending. Solid organic growth of 11.5% and favorable foreign currency exchange rates were only partially offset by the negative impact from agency divestitures (negative 5.9%).

U.S. revenue (50% of total revenue) increased 7.7% organically from last year as demand for advertising, precision marketing, public relations, and healthcare-related services remained strong. Organic revenue from the U.K. and European markets (30% of total revenue) increased 31% from last year with strength mainly in Germany. Strong organic growth in Australia drove the 19.6% year-over-year organic growth in Asia-Pacific revenue (13% of total revenue). Other regions such as Latin America and Middle East/Africa posted organic top-line growth of 15.9% and 24.3%, respectively.

Unilever Raises Prices in Q3 Fiscal 2021 in Response to Inflationary Pressures, but Volume Stagnates
by Philip Gorham, CFA, FRM | Morningstar Research Services LLC | 10-21-21

The challenges of growing volume when raising prices in fairly commodified categories were evident in Unilever's third-quarter sales. Overall, revenue growth was in line with our expectations, and we are making no changes to our estimates and reiterate our wide moat rating and EUR 50 fair value estimate. No margin information was released this quarter, but we believe there are better ways to defend investment portfolios against ongoing inflationary pressures, and we recommend investors look at businesses in distilling, prestige cosmetics and consumer health for superior pricing power.

Underlying sales growth of 2.5% was a significant slowdown from the 5.4% achieved in the first half of the year, but this was primarily due to the comparables becoming more difficult in the third quarter. Underlying sales growth was notable for its composition. Price/mix of 4.1% was the largest step-up in pricing for several years, driven by commodity price inflation hitting Unilever's cost of goods sold. Consumers appear to have accepted the price hikes, but volume fell by 1.5%. Homecare was particularly weak, with volume down 3.20% on 4.80% price/mix, but this might be explained by fading demand for sanitizers and detergents rather than by sticker shock at the price increases. These results show that reigniting Unilever's volume growth is going to be very difficult while it faces double-digit inflation in its input costs.

Worse may be to come in the inflationary environment, with the oil price having spiked again this quarter, and there remains risk to our 2022 gross margin assumption. Our base case remains that inflation will ease in the second half of next year, and we assume a gross margin of 42.6% this year, down 90 basis points from 2020, and a further 10 basis points of gross margin degradation in 2022. If Unilever's 4% price increases can be maintained, this still looks achievable, but if inflation lingers there could be downside to our margin estimates over the next 18 months.

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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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Contact Your Editor
 
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.


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.

Investment Strategy



Tortoise Portfolio. The objective of Morningstar, Inc.’s Tortoise Portfolio is to focus on “high-quality” businesses, defined as having both durable competitive advantages and strong balance sheets. These are often well-established market leaders with economic moats (preferably wide). Morningstar’s aim for the portfolio is to generate risk-adjusted returns that outperform the S&P 500 over a full market cycle.

Hare Portfolio. The objective of Morningstar, Inc.’s Hare Portfolio is to seek long-term capital appreciation ahead of the S&P 500 Index, focusing on companies with strong and growing competitive advantages. Morningstar is willing for the Hare to accept greater risk in exchange for higher total return potential.