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Morningstar runs the numbers

Lex Hall  |  13 Jan 2020Text size  Decrease  Increase  |  
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We take a numerical look through this week's Morningstar research. Plus, our most popular articles and videos for the week ended 10 January.



That’s the number of times a week Warren Buffett is said to eat at McDonald’s. Whether that’s true or not, the world’s biggest and most famous burger joint is nevertheless a favourite stock of the Oracle of Omaha. It’s also liked by Morningstar, which sees it trading at a 10 per cent discount to fair value. In a new report on the “golden arches”, Morningstar analyst RJ Hottovy outlines ten key reasons why the restaurant franchise is set for good things. Among them: its new leadership team, led by Chris Kempczinki; its investment in new technology, including drive-thru and delivery; new menu items such as fried chicken sandwiches and planted-based meal; and new restaurant formats. Oh, and it’s also “recession-resistant”, says Hottovy - not that he’s predicting a US recession.


The number of big pharma and biotech companies in North America cited by Morningstar for their ability to withstand ESG risks. Sustainable or responsible investing has become shorthand for the increasingly ubiquitous initialism “ESG”, which refers to a company’s ability to address environmental, social and governance concerns. It is becoming a hallmark of what it means to be a quality company in the 21st century, and a new Morningstar report identifies which big name health companies are inoculated against ESG risks. According to Morningstar’s January 2020 Healthcare Observer, Roche, BioMarin, Gilead Sciences, Sanofi and Pfizer are both undervalued and less exposed to ESG risk.


There are seven utilities under Morningstar’s Australian coverage, and the most undervalued name is Spark Infrastructure (ASX: SKI). “Companies that provide basic amenities such as electricity, water, sewage services and natural gas are usually described as defensive because they're heavily regulated and deal in long-term contracts that help them ride out volatility,” writes Morningstar's Glenn Freeman. “And like other 'defensives' including property trusts and infrastructure stocks – which are sometimes also known as bond proxies because of their fixed income-like characteristics – they usually provide a reliable income stream.” While most income stocks screen as expensive, no-moat Spark Infrastructure is relatively good value at present, trading at a 13 per cent discount to the fair value estimate set by Morningstar analyst Adrian Atkins.

23 per cent

That’s the discount to fair value estimate for Rolls-Royce. The British engine maker leads a group of global aerospace and defence companies that boast competitive advantages and compelling value, according to Morningstar analysts. “Rolls-Royce's defence and power systems businesses provide for steady profit and cashflow generation. The civilian aerospace segment is a key driver of the investment outlook," says Morningstar analyst Joachim Kotze. Morningstar is bullish on the sector, with seven of the nine large-cap companies within the category holding wide moats, among them jet maker General Dynamics and France’s commercial passenger powerhouse Airbus.

75 per cent

That’s the proportion of stocks on Morningstar’s Best Ideas list that outperformed the ASX 200 Total Return Index over the past year. Nineteen of the 26 names under coverage beat the index, notes Morningstar's Emma Rapaport. The top performer was funeral home business InvoCare (ASX: IVC), delivering 36.02 per cent above index returns. In second place was Iluka Resources (ASX: ILU), outperforming by 28.35 per cent between August and November. However, superannuation administration service provider Link Administration Holdings (ASX: LNK) underperformed by -34.48 per cent. The company's share price was affected in May 2019 by a negatively received trading update. Childcare operator G8 Education (ASX: GEM) also underperformed by -27.11 per cent since being placed on the list, after a profit guidance downgrade in November. But keep in mind, one year is a mere snapshot and not indicative of overall performance. "We view the Best Ideas list, in its purest sense, as highlighting the best opportunities for long-term investment across our coverage list of 4 and 5-star (or undervalued) stocks," says Morningstar director of equity research for Australia and New Zealand Adam Fleck. “Therefore, to measure the success of the list, you'd need to consider over a longer term than one year".

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is senior editor for Morningstar Australia

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