Morningstar Advisor - December/January 2012 - (Page 69)

uncertainty tend to be larger, more established, less cyclical, and generally safer investments than those firms with high uncertainty. They are firms that we believe are the least susceptible to political instability. This may restrict us from getting home-run returns, but it will help protect our downside. And Moat 5 Narrow or Wide major blockbuster drugs as well as strong international demand for generic drugs. Further, the company’s strategy of targeting unmet medical needs with its drug pipeline should yield several drugs with strong pricing power. Considering the company’s relatively modest patent exposure, Novartis should see a fairly stable growth over the upcoming years relative to its competitors. Diageo PLC DEO Unilever PLC UL We also limited our search to companies that Morningstar has assigned a narrow or wide moat. The firm’s moat is an indication of the firm’s sustainable competitive advantage, meaning they are likely to keep competitors at bay. And Star Rating . QQ We restricted our search to only stocks that Morningstar’s equity analysts rate 3 stars or higher. Morningstar’s ratings are calculated based on analysts’ estimate of the business’ intrinsic value in relation to the current stock price, with the most undervalued stocks receiving 5 stars and the most overvalued stocks receiving 1 star. By eliminating the 1- and 2-star stocks, we avoid firms that Morningstar’s analysts believe are currently overvalued. We ran this screen in October. Here are some of the results: Novartis AG NVS Diageo’s long-term financial performance looks bright because its vast distribution network, including some exclusive distribution agreements in the United States, would be very difficult and expensive for rivals to replicate. The firm’s beer portfolio should position Diageo well to exploit migration to branded alcohol in emerging markets such as Asia and Africa, while its unmatched spirits portfolio should allow it to benefit from premiumization across the globe. In our opinion, these competitive advantages and growth opportunities justify an earnings multiple valuation slightly above the market average. With around one third of its volume derived from maturing products, it will be many years before rising input costs affect the income statement, making Diageo somewhat protected from today’s cost inflation. Nestle SA NSRGY Unilever soared through fiscal 2010 relatively unscathed. We have been particularly encouraged that investments in research and development are yielding measurable results, as management estimates that about one third of its consolidated sales were generated from products launched in the past two years. However, Unilever’s current strategy of extending the distribution of these new offerings to multiple markets in quick succession may not be a wise move, in our view. Consumers around the world possess different tastes and preferences, and as a result, we believe that tailoring offerings to meet consumers’ varying needs is more appropriate. Given the competitive nature of the categories in which the firm competes (like fabric care), a “one-size fits-all” strategy could ultimately backfire on Unilever. Enbridge Inc ENB Within the big pharma industry, Novartis is one of the best-positioned companies for growth. Novartis is in front of all the positive tailwinds moving the group over the next decade. In particular, Novartis holds an industry-leading position in emerging markets, which should help the company capture strong future demand from these fast-growing countries. The company’s entrenched vaccine platform should benefit as pricing power has returned to new vaccines. Novartis’ generic division, Sandoz, should benefit from patent losses on We regard Nestle as a proxy for the consumer staples industry, not as a health food company. Its vast geographical footprint and diverse product portfolio spanning packaged food, beverages, pet care, and nutritional and pharmaceutical products mean that new product launches will barely move the needle on Nestle’s top line, and the firm’s equity is unlikely to be a home-run investment, particularly as it is currently trading at our fair value estimate. For investors wishing to gain broad exposure to the consumer staples industry, however, Nestle could be an appropriate holding. Enbridge offers a rare combination of size, diversified low-risk cash flows, strategically positioned assets, and attractive growth prospects. We think management’s expected 10%-plus earnings per share growth for at least the next five years is reasonable thanks to a history of execution and abundant opportunities in oil, natural gas, and green energy. Visible growth opportunities and the stable nature of Enbridge’s cash flows command a premium valuation relative to peers with more commodity exposure, in our view. Beyond CAD 6 billion of projects secured for after 2012, we see significant growth opportunities in the oil sands, the Bakken, a potential crude oil line from Cushing to the Gulf of Mexico, natural gas infrastructure in BC shale plays, and international acquisitions. Despite recent media hype and protests, we still think Northern Gateway will be approved based on sound economics and the new conservative majority. David Krempa is a stock analyst with Morningstar. MorningstarAdvisor.com 69 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012