It’s a pop-up world in the winter.
Pop-up stores. Pop-up bars. Pop-up “experiences.” All popping up to capitalize on the holiday season. Here in Chicago, you can have a few drinks at Griswold’s pop-up bar, find gifts at Chicago Fair Trade’s Holiday Pop-Up Shop, and take pictures sitting on that burnt orange couch at the pop-up “Friends” experience.
And as quickly as they popped up, they’ll be gone. The goal of the pop-up isn’t to endure–but rather to catch on to a timely event and then close down.
The short-lived (albeit fun) nature of pop-ups runs counter to what we at Morningstar look for in an investment. We’re seeking investments that can endure. And we identify endurance by looking for competitive advantages that’ll allow a company or fund to thrive over many market cycles.
With stocks, the potential to endure is represented in the Morningstar Economic Moat Rating. This past month, we upgraded the moat rating of one stock. We also significantly increased the fair value estimates of several others.
Economic Moat Rating Upgrade
We upgraded the moat rating of ING Groep NV (ING) to narrow from none last month, thanks to its strong competitive position in Dutch retail banking. The bank has a cost advantage and its customers face switching costs, notes analyst Johann Scholtz.
The stock is trading at 4-star levels as of this writing–attractive by our metrics. Though rate worries may weigh down the stock in the near term, we think there’s much to like here. Explains Scholtz in his latest analysis:
“Low–currently negative–interest rates and their impact on ING’s earnings are likely to weigh on the minds of investors for the foreseeable future. While understandable, as net interest income contributed 77% of revenue for 2018, this is unfortunate. We believe ING is much more than merely a play on European interest rates. In our opinion, the highly concentrated Dutch banking system is one of the most attractive banking jurisdictions in Europe. The top three Dutch banks hold upwards of 90% of current accounts between them. This level of concentration is in sharp contrast to the fragmented banking systems that typify much of the eurozone. ING is the market leader in Dutch personal current accounts with a 40% market share. ING’s market leadership translated into a return on equity of 16% for ING’s Dutch banking operations in the first nine months of 2019, which is substantially ahead of the 6% return on equity of the consolidated eurozone banking system as calculated by the ECB. ING’s other operations, outside of its German business, do detract somewhat from overall profitability, ING has generated a consolidated average ROE of 11% over the past three years. This still makes ING the third most profitable bank in the eurozone that we cover.”
Significant Fair-Value Boosts
A trio of stocks are among those enjoying fair value increases of more than 20% last month. Remember that a fair value increase isn’t a buy signal: In fact, all of these stocks are fairly valued to overvalued today in our eyes, despite their recent fair value hikes. (For more about how we determine our fair value estimates, watch here.)
Nevertheless, we think stocks that have seen significant fair value increases are worth noting. After all, some bit of good news or positive insight–a meaningful change in revenue expectations, improving margins, or other new information–triggered the change. And sometimes, the change indicates that a company’s prospects are brighter than we’d previously thought.
Accenture (ACN)
Fair value increase: 26%
Current rating (as of Dec. 2, 2019): 3-stars
“We are raising our fair value estimate for Accenture to $187 from $148 while maintaining our wide moat and stable moat trend ratings for this global consultant and IT services company. While Accenture is still modestly overvalued, with shares trading near $196, we’ve adjusted our outlook for a rosier future in Accenture’s cards given its steady strength in leading enterprise digital initiatives and our confidence that this will be long lasting.
“Accenture is one of the largest IT services companies in the world, providing both consulting and outsourcing capabilities. We think Accenture’s growth will remain at a healthy and gradual pace, rather than experience a massive uptick. Still, with its prominent reputation, which we believe to be crucial to the consulting business, and its proven ability to bring expertise to a gamut of enterprise issues, we are confident Accenture will maintain its wide-moat business.
“In both the company’s consulting and outsourcing divisions, Accenture has stressed the increasing portion of its business as “the New.” This includes the firm’s digital marketing agency, Accenture Interactive, as well as its Applied Intelligence, supply chain, cloud, and security services. In our opinion, however, there is always something new in the realm of enterprise technology to keep Accenture relevant and engaged with its most important customers.”
Julie Bhusal Sharma, analyst
Nvidia (NVDA)
Fair value increase: 21%
Current rating (as of Dec. 2, 2019): 2-stars
“Narrow-moat Nvidia is the undisputed king of the GPU hill and has been diversifying its GPU business into new arenas, such as artificial intelligence and autonomous vehicles. We are raising our fair value estimate to $145 per share from $120, as we refine our assumptions for near-term gaming growth, particularly in 2020. We assume Nvidia’s gaming business grows an average of 9% from fiscal 2021 (calendar 2020) through fiscal 2024, though we suspect this is below the assumptions implied in Nvidia’s recent stock prices.
“We foresee greater competition from Advanced Micro Devices (AMD) that could limit Nvidia’s ability to raise GPU prices, while the absence of major crypto-mining demand for GPUs also curbs our unit growth assumptions. Granted, we still forecast a 15% total revenue CAGR for Nvidia from fiscal 2021 through 2024, though most of this growth is driven by the data center and automotive segments. However, despite Nvidia’s favorable prospects in AI, self-driving, and gaming, we still don’t see an adequate margin of safety: Even with the stock down about 30% over the past 13 months from its all-time high of $293 in October 2018, we still view the shares as overvalued today.”
Abhinav Davuluri, strategist
United States Steel (X)
Fair value increase: 24%
Current rating (as of Dec. 2, 2019): 3-stars
“Having updated our valuation model to reflect U.S. Steel’s third-quarter results, our profit outlook is largely unchanged. However, we’ve trimmed our capital expenditure forecast to reflect management’s updated guidance. The ongoing asset-revitalization program remains a massive drain on cash flows. However, compared with prior projections, management has optimized its future spending to focus solely on a small number of key initiatives that offer the highest return on investment while also trimming the reinvestment necessary for those projects. Accordingly, we’ve raised our fair value estimate to $13 per share from $10.50. Although a capital expenditures reduction without a material change to our profit outlook wouldn’t normally lead to such a sizable fair value estimate change, U.S. Steel’s elevated financial leverage means that even a small change to free cash flows has an outsize impact on the company’s equity value. Our no-moat rating is unchanged.
“We’d characterize the company’s asset revitalization as a necessary evil if the company is to make any progress improving its position on the global cost curve for steelmaking. Indeed, as the company’s reinvestment bears fruit, it is the only U.S. steelmaker we cover for which we forecast materially higher operating margins over our explicit forecast period. Additionally, with sizable debt maturities down the road, it is critical that U.S. Steel restore consistent free cash flow generation.”
Andrew Lane, strategist
