Best ideas report

New Zealand infant milk formula company The A2 Milk Co (ATM) has joined Murata Manufacturing Co and Blackrock Inc as new entrants in Morningstar’s list of Global Equity Best Ideas.

A2 Milk is currently trading at NZ$10.76, a 26 per cent per cent discount to its NZ$14.60 fair value estimate.

The company is a New Zealand licensor and marketer of fresh milk, infant formula and other dairy products that lack the A1 beta-casein protein. (Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2. A2 milk is produced by cows that naturally produce milk only containing the A2 protein and A2 Milk Co asserts that milk with only the A2 protein may positively affect digestive function.)

Morningstar assigns the company a four-star, narrow-moat rating.
Morningstar regional director Adam Fleck estimates China makes up more than 80 per cent of A2's earnings, given strong consumer appetite for foreign infant formula brands and their high margins.

Fleck says, "We think A2 can continue to increase market share in China, supporting our forecast for 20 per cent annual EPS growth over the next 10 years and justifying the lofty 40.6 price/forward earnings multiple our valuation implies."

Morningstar assigns a high uncertainty rating to A2. This factors in a heavy exposure to Chinese infant formula demand, the potential for unfavourable scientific developments, reliance on a small number of suppliers, and intense competition from global dairy majors with vastly deeper pockets.

With its shares trading at a significant discount to the Morningstar valuation, this suggests the market is more than compensating for these concerns.

Murata to shine on 5G smartphone sales

Japanese radio frequency chipmaker Murata Manufacturing Co Ltd (6981) is a new entrant to the Global Best Equity Ideas list.

Murata is given a narrow moat rating by Morningstar. It is currently trading at JPY17,740 which is a 26 per cent discount to its fair value estimate of JPY24,000.

Morningstar sector director Brian Colello says: “We remain confident in our JPY 24,000 fair value estimate for narrow-moat Murata Manufacturing and consider it to be one of our Best Ideas in technology.”

Radio frequency chipmakers have prospered in recent years because of increased complexity, integration, and filtering needs associated with 4G LTE networks and devices.

“As 5G networks are nearly upon us,” Colello says, “we foresee an even greater need for RF content and design expertise to address new spectrum bands and technologies. In our view, 5G should prevent commoditisation in the RF space and allow each chipmaker to provide unique solutions that will prevent device makers from playing off each other on price.

Morningstar has therefore raised its long-term revenue growth assumptions for a couple of radio frequency leaders including Murata Manufacturing.

In the near term, Morningstar recognises concerns about US-China trade war tariffs and the quantities of Apple's iPhone units to be sold, as Apple is a key buyer of RF content. “Yet in the longer term,” Colello says, “we think these Murata Manufacturing will grow stronger, not weaker, as it addresses its customers’ greatest challenges of supporting 5G networks.”

RF firms should also benefit as a wider array of smart devices are connected to the internet.

BlackRock differentiators to pay off

American asset manager BlackRock Inc has been added to the Global Best Ideas List. It is trading at US$474.37 – a 17 per cent discount to its fair value estimate of US$570.

With US$6.3 trillion in total assets under management at the end of June 2018, BlackRock is the largest asset manager in the world.

At its core the firm is a passive investor. Through its iShares exchange-traded fund platform and institutional index fund offerings, the wide-moat firm sources close to two-thirds of its managed assets (and nearly half its annual revenue) from passive products.

The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands and reasonable fees.

Morningstar analyst Greggory Warren says, "We believe that the iShares ETF platform – as well as technology that provides risk-management and product/portfolio construction tools directly to end users, which makes them stickier in the long run – should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers over the next five years."

Unlike many of its peers, the firm is generating solid organic growth with its operations. Its iShares platform, which is the leading domestic and global provider of ETFs, is riding a secular trend toward passively managed products that began more than two decades ago.

Warren says, "As we expect the headwinds for the asset managers to be stiffer as we move forward (even incorporating a major equity market decline midway through our five-year forecast) we envision BlackRock generating 3 to 5 per cent average annual organic AUM growth, with slightly better levels of revenue growth but relatively flattish margins on average during 2018-22."

Invesco bids farewell to best ideas list

US-based asset manager Invesco Ltd (IVZ) has been removed from the Global Equity Best Ideas list.

It is currently trading at US$23.06, a 34 per cent discount to its fair value estimate of US$35 a share.

Analyst Greggory Warren said on 11 September, “We maintained our narrow moat rating but took the trend rating (which is being influenced more by industry events) to negative and lowered our fair value estimate to US$35 per share.”

Two weeks later, on September 24 he said, "We're not sure what to make of the rumour that emerged late this week that narrow-moat Invesco is looking to buy OppenheimerFunds. On the one hand, it fits with our long-term consolidation thesis for the US-based asset managers … but [it] would also increase its exposure to active equities and the retail channel, the two areas of the market we expect to be pressured more by an increased focus on fees and investment performance in the near to medium term."


More from Morningstar

Global Market Report - 4 October

AMP faces triple threat from banking probe

Make better investment decisions with Morningstar Premium | Free 4-week trial


Roger Balch is a Morningstar contributor

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.