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3 global wide moat stocks going cheap

Lex Hall  |  23 Jun 2020Text size  Decrease  Increase  |  
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Among the wide moat stocks under Morningstar coverage that boast exemplary stewardship, a few global names stand out because of the compelling discount to fair value.

Energy companies Core Laboratories and Enterprise Partners have been buffeted by the covid-19 downturn but are undervalued by almost 60 per cent, according to Morningstar analysts Preston Caldwell and Stephen Ellis.

And global brewing giant Anheuser-Busch AB InBev has received a cash injection from the recent sale of its Australian asset Carlton United Breweries and has monopolistic advantages in Africa and Latin America.

Another trait these three names have in common is leadership. A Morningstar stock screen reveals Core Lab, Enterprise Partners and AB InBev carry a Morningstar stewardship rating of Exemplary. This rating chiefly reflects the ability of management to efficiently allocate capital to achieve optimal returns.

Following is a snapshot of each name, with commentary from Morningstar analysts. The list is in order of biggest discount to Morningstar’s fair value estimate.

Core Laboratories (CLB)

Core Laboratories is trading at a 56 per cent discount to the fair value estimate of US$44 set by Morningstar equity analyst Preston Caldwell.

Known as the “scientists of the oilfield”, Core Laboratories helps oil and gas companies better understand how to improve production levels and economics with core and reservoir analysis.

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It also sells products that help customers to maximise production levels from their oil and gas assets. It comprises two segments: its core Reservoir Description service and its Production Enhancement service.

The company’s share price has fallen 50 per cent this year largely because the coronavirus has curbed activity and consequently demand for oil and gas.

However, in Caldwell’s words, Core Laboratories is “one of the highest-quality oilfield-service companies” and has the strongest moat across Morningstar’s entire oilfield-service coverage.  

“The company’s foundational core analysis business in the reservoir description segment, in particular, has been virtually unchallenged over the past three decades,” Caldwell says.

“The business passes the Warren Buffett quality test, whereby even an ‘idiot’ could likely run the business with some profitability.”

But there are risks. In late April Caldwell lowered his FVE from US$54 to US$44 to reflect what he predicts will be two tough years for the oil market, with a forecast 24 per cent fall in capital spending through to 2021.

Caldwell sees things beginning to turn a few years thereafter. “By 2024, we forecast capital expenditures 15 per cent higher than 2019 levels. By contrast, market expectations for oilfield-services companies are pricing in a large permanent decrease in spending versus 2019 levels, implying a large long-run impact from covid-19.”

The company is in good shape financially and while it has sufficient cash flow it does present some liquidity risk because of the disruption of oil markets.

The company doesn't have extreme leverage, as net debt stood at about 2.5 times adjusted EBITDA as of year-end 2019. It faces just US$75 million ($108 million) in debt coming due through 2021, and Caldwell expects it to generate enough free cash flow in the next two years to cover that debt.

Core Lab’s Exemplary stewardship stems from the fact over the past two decades it has averaged the best returns on invested capital among the oilfield-service companies under Morningstar coverage.

After 25 years as chief executive, David Demshur will step down at the end of the year to be replaced by current chief operating officer Larry Bruno, who has spent more than two decades at the company.

“We think the quality of Core Lab's management is consistently strong, and we expect little disruption as a result of the transition,” Caldwell says.


Anheuser-Busch InBev (BUD)

Consumer defensive beverage powerhouse AB InBev is the leading global brewer. Eighteen of its brands, which include its flagship beerhouse Budweiser, each generate more than US$1 billion per year in sales.

AB InBev has leading share in the US, Belgium, and Ukraine. It also has a 62 per cent economic stake in Ambev, which has dominant share in several key markets, including Brazil, Argentina and Canada.

The stock was punished in the covid-19 sell-off, falling by more than 50 per between 20 February and 18 March. However, Morningstar director Phillip Gorham sees this as a “major overreaction” for a stock that in his eyes was already cheap.

AB InBev is trading at a 47 per cent discount to Gorham's fair value estimate of US$96.

Gorham says concerns over its balance sheet are probably spooking the market, particularly in light of coronavirus-induced lockdowns.

But he thinks such concerns are overblown and is buoyed by the sale earlier this month of its Australian asset—Carlton United Breweries—to Japanese brewer Asahi for US$11 billion ($16 billion). Gorham expects the deal to offset short-term liquidity concerns.  

barman pulling a beer

Concerns over AB InBev's balance sheet are probably spooking the market, particularly in light of coronavirus-induced lockdowns, Morningstar says.

In the longer term, Gorham says AB InBev’s wide moat ensures it a cost advantage in other world markets including Africa and Latin America.

Risk remains however, particularly in developed markets where tastes are shifting to wine and higher-quality craft beer.

“Any slowdown in craft growth could stabilise volume in mainstream price segments and act as a catalyst for the stock,” Gorham says.


Enterprise Products Partners (EPD)

Enterprise Products Partners is a leading integrated provider of processing and transportation services of natural gas liquids and consumers of NGL products.

It dominates the NGL market and is one of the few master limited partners that provide midstream services across the full hydrocarbon value chain.

A master limited partner combines elements of a partnership and a corporation. They are required to distribute all cash to investors, and do not pay income tax, a setup that can help lower the costs of capital.  

According to Morningstar sector strategist Stephen Ellis, Enterprise Products Partners is well placed to deal with the industry downturn over the next one to two years and is trading at a 25 per cent discount to his fair value estimate of US$25.50.

“While many other midstream operators are playing checkers, Enterprise Products Partners is a chess master,” says Ellis. “It is the pre-eminent midstream infrastructure company, vertically integrated with best-in-class assets at nearly every point in the midstream value chain.

“It can aggregate supply of every type of hydrocarbon from multiple sources in major producing basins and deliver it to multiple end markets (refiners, petrochemicals, exports). These assets are the lynchpins for both shippers and end users.”

The company is led by chief executive Jim Teague, who has more than 40 years’ experience in the midstream and petrochemicals arena and is seen as one of the best managers in the sector.

Another key figure in the leadership structure is board chair Randa Duncan Williams whose father Dan Duncan co-founded the company in 1968.

Ellis expects the partnership's storage, petrochemicals, and natural gas pipelines businesses to help offset expected weakness in the oil and natural gas liquids side.

Capital growth spending should halve by next year, which Ellis says will leave the company in the enviable position of having excess cash.

“The diversity of Enterprise’s asset base, its ability to take advantage of just about any profitable opportunity that appears in US midstream, and its largely fee-based earnings stream all support healthy single-digit growth prospects over the next few years.”

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is senior editor for Morningstar Australia

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