Plus, potential tariff losers and new research on Alphabet, Amazon, and others.
Hello, and welcome to The Morning Filter. Every Monday, Susan Dziubinski sits down with Morningstar Chief U.S. markets strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead.
Key takeaways:
02:28 Tariff Talk
07:32 On Radar: Inflation & Earnings
16:02 New Research on GOOGL, AMZN, AMD, More
32:06 Stocks of the Week
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead. Now a quick programing note before we get started, we will not be streaming a new episode of The Morning Filter next Monday, Feb. 17, due to the Presidents Day holiday, but will be back on Monday, Feb. 24.
All right, good morning, Dave. It’s been a hectic couple of weeks. How are you holding up?
David Sekera: Susan, it just feels like I’ve been living in the Land of Oz for the past two weeks. It’s just, DeepSeek earnings and tariffs. Oh my. But, no, seriously, other than during some of the past financial crises such as like the beginning of the pandemic or the global financial crisis,
it just feels like news has been moving just especially fast. I mean, faster than what you can actually feel like you can keep up with. So, for example, DeepSeek, if you remember, two Mondays ago, that was all the market could focus on for a day or two. Then almost immediately, it seems like the market forgot about it.
Then the Friday before last, we had the announcement of all the Trump tariffs. That caused a whole bunch of chaos in the markets. And then over the weekend, they were able to negotiate and extend 30 days for Canada’s and Mexico’s tariffs. So again that kind of fell away pretty quickly.
But over it all for the past two weeks we’ve had just a deluge of fourth-quarter earnings updated guidance. I’ve seen a lot of volatility in a lot of different individual stocks. And I don’t have the data to back this up, and I’m probably wrong, but anecdotally just feels like there’s been a lot more volatility this earnings season than usual, especially to the downside on any individual names that seem to fail to meet expectations.
Dziubinski: All right. So before we get back to the week ahead, let’s regroup on the tariff topic since you brought it up. Now we’ve already seen, as you mentioned, tariffs being pushed back a month for Canada and Mexico. So what’s your take on the topic of tariffs as of Monday morning before the market open?
Sekera: Well and even this morning it seems like there’s more tariff noise. coming out today in the steel and aluminum markets. So we’ll take a focus and see exactly what’s going on there. And whether or not we need to, incorporate anything there into our individual, fair values. But, in my opinion, one of the hardest things to do in investing is separate noise from signal.
And at this point, we’re just still remaining very focused on our individual valuations, remaining focused on the fundamentals. Once we get specificity on tariffs or changes to regulatory policy, we will adjust accordingly. But for now, we’re not trying to speculate on what may or may not occur. It’s just too fluid. And I just don’t think we have enough specificity as far as what’s going to actually happen to incorporate that into our valuations.
at this point. It’s just, as we discussed last week, in my opinion, as long as negotiations are making progress, I think you’ll still continue to get these extensions in the tariffs, just like what we saw with Mexico and Canada. But I highly doubt this is all over. At the end of the day, was border control and the drug trafficking really the only concessions that the Trump administration was looking for?
I doubt it. I think this is just the beginning of additional negotiations for other concessions that they’re probably looking for, which that means, to me, I think this is just going to be another issue again, two and a half weeks from now, once we start bumping up against that timeline and then specifically, with China again, I still think we’re in early rounds here.
I think, the Trump tariffs, the Chinese response. This is just the opening salvo. So for example, we saw China announce an antitrust probe into Alphabet. Our analysts took a quick look at it. He didn’t see much substance there. So again this just looks like another negotiation tactic for tariff disrupt discussions. So right now I just really think of this as just like two heavyweight boxers.
They’re circling one another. They’re just making a few initial jabs here and there. But I think they’re really just strategizing, looking for openings in how they’re going to want to conduct the fight going forward. So at this point, until we really know exactly what concessions each side might be looking for and are going to really negotiate for, until that comes into better focus,
I think most of what you’re going to hear out there is really just going to be speculative. And in my mind, I think you’re better off just focusing on individual company valuations and fundamentals.
Dziubinski: So, given the uncertainty around tariffs, still Dave, are there some industries or companies that kind of could be vulnerable in the face of tariffs if they do actually go into place?
Sekera: There are. But I would just say that right now, I’m not changing investment strategy. Our analysts aren’t changing their fair values on this. But we are, as you mentioned, evaluating our sector coverage, how it may impact individual companies. And we will look to identify those companies that could be positively or negatively impacted.
And in fact, I’d say over the next couple of weeks, keep an eye out. I’ll look to publish articles to highlight those individual sectors and stocks as we have more research out on them. But for now, I’d say a couple of things I’m really looking for, those companies that we’re looking to identify, are going to be either those that have a high percentage of cost of goods sold, coming from those tariffs that could be under those countries that we could place tariffs on.
So again, those companies are having a very high inventory coming from those countries, materials, whatever they need to source from those countries under the tariffs, or maybe manufacturing in those countries. But then also looking for companies that have a low percentage as compared to their competitors of materials coming from those countries that actually could benefit from those tariffs being put into place. Those companies that have a high percentage of revenue in those countries, again, those could be at risk of retaliatory tariffs.
So specifically, looking at, like Canada and Mexico, those that we think would be most adversely affected would of course be first, like the Canadian oil producers. But I’m also looking at other companies, specifically industrials that maybe have production close to the border that goes back and forth across the border a couple times, US auto—
Those are going to be the poster child for that, GM and Ford. As far as Chinese tariffs. I’d say really the general takeaway here is that what we’ve seen is a lot of companies over the past eight years had already started to shift some of their supply chains away from just being solely reliant on China.
So we had the tariffs during the first Trump administration and then during the pandemic, a lot of people suffering from the supply chain disruptions and bottlenecks. So a lot of people have already been trying to move away. So that may not necessarily be as much of an immediate impact as some people might think. But of course, think about apparel, apparel retailers, the Chinese tariffs still would adversely impact companies like Macy’s and Kohl’s.
Among the electronic device makers, Apple certainly would be one that would be impaired. The electronic retailers: Best Buy is one that we’ve already written about. And even things like the medical-device industry where they have a lot of the manufacturers and a lot of the suppliers coming from China could be negatively impacted.
Dziubinski: All right. Well enough from tariffs for now. Let’s look ahead to this week. So what economic reports are on your radar?
Sekera: Payrolls last Friday did come out a little weaker than what the market expected. But in my mind I don’t think it’s the jobs market that’s really going to be most heavily influencing the fed right now. And in fact, I think when you look in the market action, last Friday morning, the market really kind of hardly moved after the payrolls print.
So I don’t think the market’s really that much focused on the employment market right now either. I think at this point it’s all going to be about inflation, and that’s this week’s economics. We’ve got CPI on Wednesday, and this looks like a little bit of good news/bad news. So from a headline perspective on a month-over-month basis, consensus right now is looking for 3/10 of a percent increase. That would be down from 4/10 of a percent increase. So year-over-year that would keep inflation at 2.9%, unchanged from last month. But the bad news here is going to be in the consensus core number. So on a month-over-month basis, we’re looking for a slight tick up to 3/10 of a percent from 2/10 of a percent, which would also lead to a slight tick up on a year-over-year basis to 3.2% from 3.1%.
And then that’s going to be followed by PPI on Thursday. Of course, PPI is the cost inflation that producers have. So again that’s expected then to become your future inflation for consumers. So it’s supposed to be a bit of an indicator. So consensus here again, a little bit of bad news. The consensus right now up 3/10 of a percent on a month-over-month basis up from 2/10 of a percent.
And core, same thing, taking up to one tenth of a percent from being flat last month.
Dziubinski: We’re still sort of in the thick of earnings season. We have a lot of companies still reporting this week. So let’s talk about a couple that you’re watching us, starting with Gilead Sciences. Now Gilead was a pick of yours up last May, and it’s done pretty well since then. So what are you listening for here?
Sekera: This pick, as you mentioned, has worked pretty well since we highlighted this one. But I think for the stock to keep moving up from here, we’re going to need some sort of positive news to keep that momentum going, some specific catalyst that’s going to lead in the market to start pricing in some additional earnings growth.
So I think what we’re going to be listening for is any progress on their oncology drugs, specifically several different studies they have on some drugs for myeloma as well as lung cancer. Maybe any updates on growth in their liver disease portfolio. That’s one area that our analyst thinks that company is actually very well positioned to generate earnings growth, or any progress in maybe some new, longer-acting HIV treatments that are in phase 3 trials.
That could be encouraging as well.
Dziubinski: Now, is Gilead stock still attractive from a price perspective as we head into earnings for it?
Sekera: It’s up 44% since our recommendation. So following is as much as it’s increased, at this point, and now looks like it’s trading within that fair value band around our price target, at 3 stars. So again still attractive from the perspective of a company that we would expect to increase over time at similar rates as its cost of equity, but no longer trading at that large discount from its long-term intrinsic value that we’re typically looking for in our picks.
Dziubinski: All right. Well, we also have Kraft Heinz reporting earnings this week. And this is another stock pick of yours. And it’s kind of been one of those stocks that’s gone kind of nowhere for the past few years. So from a valuation perspective, how does it look heading into earnings?
Sekera: Yeah. And we’ve gotten a lot of questions in from our viewers on this one as far as whether this is really a value stock or maybe a value trap. And in this case we still think it’s a value stock. It’s rated 5 stars. Trades at about half of our fair value. It as a company with a narrow economic moat.
So again, maybe we haven’t seen the price appreciation that we would like to see in the stock. But again, with these high-dividend-paying stocks at least you’re getting paid to wait, in this case, 5.5%. Pretty high yield. Not too many stocks out there with that kind of dividend.
Dziubinski: So walk us through Morningstar’s thesis on Kraft Heinz and if there’s anything in particular you’re going to be looking for in this week’s earnings report that maybe could be a catalyst for the stock.
Sekera: Yeah. In my mind, there’s really two parts to the investment thesis here. So really when I think about kind of the long-term trajectory of the company, this is one that was bought out by 3G partners a number of years ago. And when they got involved in the company, they instituted very strict budgeting and cost-cutting measures, really, what they’re looking to do is to bolster their short-term profits as much as possible.
In our view, we think that that short-term focus really eroded the long-term intrinsic value of this company. Now, 3G did start selling their position in 2019. According to some research I was reading over the weekend, it looks like they were no longer involved in the management of the company as of 2022. And since then, in our view, we think the company’s really gotten back to the basics.
They’re really now reinvesting in their brands and their business, rebuilding that long-term intrinsic valuation of the company. In fact, we did award the company a narrow economic moat, upgrading it from no moat last year. That was in response to the management’s renewed focus on the firm. So now we’re in the point where we think that that company will generate returns on invested capital higher than their weighted average cost of capital for at least the next 10 years.
Now, in the shorter term, the second part of the thesis here is that, over the past 18 months the last 24 months, lower-income households, and to some degree we’re seeing also middle-income households, still under a lot of pressure of that combined inflation we’ve had for the past two years now. And that high inflation is taking its toll, not just on this company, but really we see it on all branded food companies.
So from a top line perspective, this is a bit of a normalization play. Over time, as inflation continues to moderate, wages catch up or actually start exceeding that inflation rate. We would expect the top line here to rebound. And then from a margin perspective, over time, as the company is continuing to realize margin expansion from its cost-cutting programs, that should help improve the growth rate over time as well.
Dziubinski: All right. Well, it’s time for us to take a question day from a member of The Morning Filter’s audience. And again, as a reminder, feel free to email us at TheMorningFilter@morningstar.com. Question from Mauro. Mauro would like to know what you think of two stocks in particular: MicroStrategy and Papa John’s Pizza.
Sekera: Well, first of all, I’ll just admit: I got nothing for you on MicroStrategy. We don’t cover it. And my understanding is it’s essentially just a leveraged bet on bitcoin, which, of course, we don’t have an official view on bitcoin either. Now, Papa John’s, however, is another story. And this is actually a good example, I think, of not letting your own personal bias sway your investment decisions.
So here’s my story on this one for you, Susan. So I don’t remember exactly what year it was. It was like in the early 2000s, I was still on the buy side, and I was looking at a deal for Papa John’s. And to be honest, I had never tried it before. So I got home and my wife and I ordered one for dinner.
Now, first of all, let me just predicate this: Granted, living in the Chicago area, we do tend to be a little bit of pizza snobs out here, but this was just awful. I mean, it was just undercooked, doughy crust. Whoever made it just dumped a mound of cheese on top. Didn’t try and spread it out.
The toppings just were not fresh. The sausage was, let’s just say, disappointing. Needless to say, at that point in time, I just passed on that deal. Now, taking a look at this stock today, it’s a 5-star-rated stock. Trades at a 40% discount. Has a 4.7% dividend yield. It looks like it’s a company that our analyst rates with a narrow economic moat.
Took a very quick look at the model here. Its five-year compound annual growth rate is essentially 4%. It’s a combination of expectations of 2.5% compound store growth, 2.5% unit growth. But it looks like the real driver here is going to be expectation of operating margin expanding and expanding quite substantially over the next couple of years.
So this is a pretty long involved story. You can take a look at the long-term chart. You can read our investment thesis here on Morningstar.com But, in the meantime, maybe our viewers here to our show should let me know. Let me know in the comments section below. Should I give Papa John’s another chance?
Dziubinski: And Mauro, thank you for the stock tip because this one was not flying on the radar, so we appreciate it. All right. So we’re moving on to some new research from Morningstar about companies that reported earnings last week. Let’s start with Alphabet, which has been a pick of yours, Dave. The stock slipped a bit after earnings, but Morningstar raised its fair value estimate after.
So why did the market in Morningstar has such different takes on those results?
Sekera: Yeah, the stock fell over 7%. I think the market was just disappointed by a combination of a little bit of deceleration in the growth for the cloud. But, at the same point in time, some acceleration in capex. So I think the market is maybe pricing in some short-term operating margin contraction.
But in our view, 4-star-rated stock, now trading at a 19% discount to fair value. As you mentioned, we actually raised our fair value by 8% to $237 a share. Taking a look at our note, fourth-quarter results were ahead of our forecast. We expect reacceleration in the Google Cloud as more capacity comes online over the course of the remainder of this year. It had been capacity constrained because it was growing just so fast. But just taking a look at our investment thesis, it’s just one of the few companies that we think really will be able to generate additional revenue growth as it has what we consider to be a full stack approach to artificial intelligence: provides the infrastructure, has the software, has the applications, can leverage off of all of that with its ad environment.
So we expect operating margins will remain steady over the longer term just as they’re able to capitalize on that capex and monetize that over the time. Taking a look at the individual businesses, search and ad monetization, the AI overview that they provide now, it looks like the monetization trends there are still on track, it’s still is being able to help them generate even more monetization despite kind of the recent launch.
So I think that’s at least performing in line with their traditional search monetization. Take a look at Google, the AI cloud demand here. Yes, it was capacity constrained, kind of a similar story to what we’ve talked about with Microsoft. But we think that the capex that they’ve spent over the past couple of quarters will lead to reacceleration of that growth in the second half of the year.
And then, just taking a look at this Chinese antitrust probe, we just don’t see much substance in it. So that’s nothing that’s really a concern to us. We think it’s really more a larger negotiation tactic in the tariff discussions with China. And in fact, if anything else—just kind of reading between the lines with Trump’s personality—I think if anything else, that might actually make him more likely to defend the US companies against the Chinese.
Dziubinski: All right. Now let’s pivot over to Amazon. Amazon reported solid earnings but sort of disappointing guidance, and the stock pulled back. But here’s another case where Morningstar raised its fair value estimate on the stock by about 20% after earnings. So again, why the difference in response? What drove that fair value increase?
Sekera: Yeah, this is one I’m not going to try and get any market takeaways in the short term based on how that stock performed after earnings. Stocks were down in general a lot on Friday afternoon. So how much of this was specific to Amazon versus how much of this is just selling because the overall market was falling at the same point in time. To some degree, I think that maybe, in the short term, this could be pretty similar to Alphabet. I think the market was concerned about the capex spending potentially limiting the operating margin growth over the next couple of quarters. From our perspective, guidance, I think the market may not necessarily have liked it. We didn’t think it was all that bad.
In fact, the guidance was actually slightly better than expectations from our analytical team. And I think our fair value increase was just really a combination of slightly better profitability, maybe some reduced working cap assumptions. And considering just how low the margin is for this company right now and how much we think that that can grow over the long term. Any increase in the margins here does have a very levered effect on our valuation in our DCF model.
Dziubinski: All right. So after that pullback in Amazon stock plus that fair value increase, how do shares look today? Are they attractive?
Sekera: Yeah I mean, it’s a 3-star-rated stock. It does trade at a 5% discount to fair value. So again a little bit of a discount. But I wouldn’t say necessarily particularly attractive at this point in time. But with the rest of the market trading at a premium, just the strength and the quality of this company overall, if an investor wanted to start building a position here, I certainly wouldn’t argue with that today.
Dziubinski: Got it. Now, the stock of Advanced Micro Devices, which has been a pick of yours, fell after the company reported disappointing data center revenue. So unpack these results, Dave.
Sekera: Yeah. In this case, I think it’s all about growth, or in this case specifically, about the lack of growth in its AI accelerators. Our note here from our analysts, really talked about how the traditional CPU business actually did pretty well, still growing market share, taking some of the share away from Samsung and Intel.
In fact, AMD’s revenue in the December quarter was almost 7.7 billion, up 12% sequentially, up 24% year over year. But the real concern here is that that data center revenue from AI and those accelerators only rose 9% sequentially. And so when we take a look at the guidance, the AI GPU revenue, which, in the first half of 2025, we expect that to be similar with what they earned in the second half of 2024, as opposed to the market really wanting to see that acceleration in that specific business, we were looking for an increase in that growth rate. So I think that was really what ended up cutting our fair value here, was that lack of growth in the short term in that part of the business, whereas we were looking for a continued increase in that growth rate.
Dziubinski: So then what does Morningstar think of AMD after earnings? Were there any changes to our fair value estimate on the stock?
Sekera: Yeah. So we did cut our fair value by 12%. Cutting it to $140 a share from 160. And it’s really all about the reduced projections for AMD’s GPU growth. So for example, when I opened up our model and went through the different segments here, I noted that we reduced our revenue forecast for AI GPUs down to 7.7 billion for the full year.
That’s down from 9 billion before. And then also forecasting AMD overall generating 16 billion of AI GPU revenue in 2028. That’s down from our prior forecast at 24 billion.
Dziubinski: So then is AMD stock a buy after earnings?
Sekera: Well, yes, but I think investors might need to be pretty patient with this one. I think we’re going to need to see that growth rate in the AI accelerators really start to move back up again in order for the stock to be able to start moving up meaningfully. So even after our fair value reduction, it is a 4-star-rated stock, trades at a 23% discount to fair value.
It is a company with a narrow economic moat. Of course, it’s a tech company so it does have that High Uncertainty Rating.
Dziubinski: All right, well Palantir stock was up 34% last week after reporting blowout fourth-quarter results. So what did Morningstar think, and how does the stock look from a valuation perspective today?
Sekera: Yeah, I mean, Palantir really has just been the poster child for growth in AI utilization. Of course, this goes back to our theme and our 2025 outlook, talking about how we think this is the year the AI really evolves away from being focused on the hardware manufacturers and moving into those companies that are able to really utilize AI in order to generate revenue growth and/or operating efficiency.
Palantir specifically on a year-over-year basis, they increased the number of US customers by 73%. Their commercial revenue grew by 63%. Revenue from the US government, of course, being their longtime biggest client, that was up 45%. Dissecting our financial model here a little bit, and this growth rate, we don’t expect really to slow down, so our five-year compound annual growth rate for revenue is up 34% over that five-year period. So essentially that means revenue goes from 4.1 billion, in our view, for 2025, up to 12.5 billion in 2029. And of course, looking at fixed-income leverage or fixed-cost leverage, our five-year compound annual growth rate for net income is to grow 55%.
So we incorporated this into our model, led to us bumping up our fair value by 14% to $90 a share. However, based on where the stock is right now, it’s at that top end of our 3-star range.
Dziubinski: All right. Well, we also had two big names in the weight loss drug market. Eli Lilly and Novo Nordisk both report earnings last week. Any surprises from either company, and does either stock look attractive?
Sekera: At this point, I would say it didn’t seem like there were any real surprises to our analyst team. Really nothing at all that different from, I think, what we were expecting. The GLP-1 drugs, of course, still growing especially rapidly. I think our analysts made a few adjustments, but pretty minor adjustments, to our models here and there. So it looks like we bumped up our fair value on Novo by 3%, increased our valuation on Lilly by 7%.
But at the end of the day, Lilly is still a 2-star-rated stock, trading at a 42% premium over our fair value. Whereas Novo is a 3-star-rated stock and it looks like that stock price is trading pretty much right at our fair value.
Dziubinski: All right. Well, we’ve talked a couple of times in the past on The Morning Filter about Estée Lauder. And that stock was down about 20% last week after the company posted weak quarterly results and announced plans to cut about 7,000 jobs as part of its restructuring plan. So what’s Morningstar’s take on Estée Lauder today?
Sekera: I was just reading and trying to catch up with this one over the weekend. So our analyst here, Dan Su, she’s the analyst that covers the stock, did update her fair value over the weekend. She dropped it by 26% to $120 a share. And I think really what’s going on here is that, from what we originally projected, we were looking for a much faster rebound in the Chinese economy than what’s occurred.
Looked for a faster rebound in consumer demand in China than what’s actually occurred. And at this point, it really seems like the economic recovery in China is going to be more prolonged than I think what we originally had expected. And, of course, with China being about 25% of the company’s revenue and really pushing out the recovery that we expected there, that was a very large reason for our fair value reduction on this individual stock. Now, at that same point in time, we also cut our operating margin assumptions here. And we also revised our Uncertainty Rating up to High from Medium. Now, I’ll admit, the news and our valuation here did come out over the weekend. I haven’t had a chance to really do a deep dive into our financial model yet.
But we will try and do a much deeper dive on the stock. The big reason is it’s still rated 5 stars, trades at a 46% discount to our fair value. So I think we really need to dive into this one and really do a much deeper dive in order to really understand what’s going on, to figure out exactly what’s driving our fair value estimate.
Dziubinski: All right. I’ll hold you to that, Dave. And now FMC, which is another pick on the show before, it had a kind of tough week. It was down about 33% after guidance came in well below consensus on revenue, earnings, and cash flow. So what happened with FMC?
Sekera: Well, before we get into what happened here, just this past week, let’s just go a little bit back into the backstory here, because that provides a very large portion of what our investment thesis is on the sector and on the individual stocks. So, back in 2021 and 2022, we had all the covid supply chain disruptions that led customers to buy and hold a lot of excess inventory those years, and that pulled forward a lot of the future sales. And so in 2023 and 2024, once things started to normalize, the industry underwent industrywide destocking. So again, all of those sales that were pulled forward because people wanted to make sure that they had that inventory because of those bottlenecks, they were able to use up once things started to normalize.
Now, in this case, we thought that that destocking had come to an end, whereas management came out and said that they still think inventory out there in the industry is still too high. And so they ended up reducing their guidance. They brought it well below what consensus expectations were. So it seems like here in the short term we’re going to have another year of inventory destocking, as you mentioned, that’s going to lower sales, that’s going to lower profit growth and reduced free cash flow generation here in the short term. I also have to caution that management’s guidance for free cash flow generation in our model anyway is less than its dividend payment. That could put that dividend at risk if it were to cut, if sales or free cash flow were to come in below what the current management guidance is.
So need to highlight here that if you’re relying on that dividend, while management probably has that baked into their expectations, if we have any additional weaknesses, that there’s something certainly that we think could get cut in the near term.
Dziubinski: Oh, I’m sorry, Dave. Go ahead.
Sekera: Yeah. No, I was just kind of getting a little long in the tooth, I know. But the revenue for our five-year compound annual growth rate in our model. So we reduced that to under 4%. That was over 6% prior to our reduction. And this is a pretty high fixed-cost business.
So that reduction cuts our operating margin here pretty substantially. It was 28.1%. We’ve cut that down to 17.4%. So our earnings compound annual growth rate, we essentially cut that in half to 6.7% from 14.5%. So those were really the biggest changes in our model from what it was prior to management coming out and really cutting that guidance.
Dziubinski: And that those changes sort of led to this fair value estimate cut, which was about 13% to 14% from Morningstar’s perspective. So, what’s our outlook on the company then?
Sekera: The stock is a 5-star-rated stock, trades at a 60% discount to fair value. Here in the short term, I’ll just note that Seth Goldstein in his note, he’s the analyst that covers the stock, expects that the company will see probably low-single-digit revenue and profit growth here in 2025.
And as the company is pursuing kind of this value over volume strategy and is working to resize its inventory out there, a lot of pressure here in the short term. Now moving into kind of the medium term, he thinks that there’s going to be a couple of things happening.
The company does have three new active ingredients and a biologicals portfolio ramping up in 2025 and beyond. So he thinks that part of their business should start to generate double-digit growth later this year and into 2026. I think that’s going to help as well. And when we think about really the long-term assumptions for this company, we still forecast that they’re what he considers to be a strong pipeline of new products coming out over time, will generate about 3 billion of sales by 2030.
So I think that’s really going to help the company’s growth and profits over time. We’re looking for adjusted EBITDA margins to recover back to the mid-20% over the course of the decade. But again, there is a lot going on here. I think this is one where you really need to read through Seth’s analysis before you make a decision as far as what to do with the stock here.
Dziubinski: All right. Well we’ve made it to the stock picks portion of this week’s episode. Now, last week Dave, we talked about three stocks to buy that it pulled back after earnings but that you liked. And this week you brought us three more. So your first pick this week is a company that reported last week and that we talked about earlier in the show.
It’s Alphabet. So run through the numbers.
Sekera: Yeah it’s actually interesting. I was taking the look at Alphabet. And this is one of the stocks that almost goes back to the beginning of when we started the show over two years ago, Susan, that we’ve consistently thought has been undervalued, have consistently seen a lot of value for long-term investors here. It is still a 4-star-rated stock.
After that pullback, it now trades at a 22% discount. Maybe not necessarily the best stock for dividend investors—less than a half a percent dividend yield. But again a company we rate with a Medium Uncertainty. Very high-quality company in our view. We rate it with a wide economic moat. In fact, when we look at the economic moat sources, we do have those five sources that can build that economic moat.
it’s one of the few stocks that has four out of those five sources that helps them dig that moat.
Dziubinski: So then how does Morningstar’s thesis for Alphabet differ from the market’s?
Sekera: Yeah, I mean, the stock fell 7% year after earnings, and I think it was just because the market was disappointed by a combination of a slight deceleration in the growth in the cloud environment. Yet at the same point in time, they are accelerating their capex spending. So market probably looking for some operating margin contraction here in the short term.
Yet we raised our fair value by 8% to $237 a share. And our view, results in the fourth quarter were ahead of our expectations. So we bumped that up in our model. We expect that, Google Cloud sales there will reaccelerate in the second half of the year. They’ll benefit from that CapEx that they’ve been spending in order to generate, additional capacity, whereas it’s been capacity constrained for the past couple of quarters.
And longer term, our investment thesis here: Alphabet, one of the few companies out there that has that full stack approach to AI. It has the infrastructure, it has the software, it has the applications. It’s going to be able to leverage its advertising business based on all of that. So we’re looking for operating margins, even in the short term, to remain relatively steady, relatively steady over the long term as they monetize that capex.
Looking at the three different businesses here, search and ad monetization, their AI overview. I think they only launched that a couple of months ago, but when you look at the monetization of that, it’s already as good as the traditional search monetization. Cloud and AI was capacity constrained for the past couple quarters.
We think that capex expansion is going to lead to reacceleration in the second half of this year. If we see that, I think that’s going to be a pretty good catalyst for the stock.
Dziubinski: Now your second pick this week is Schlumberger. So here’s some of the highlights on this one, Dave.
Sekera: Yeah. And this might be a new one I’m not sure if we’ve actually talked about this one before. It’s a 4-star-rated stock. Trades at a 26% discount to fair value, 2.8% dividend yield. A company that we rate the stock with a Medium Uncertainty and rate it with a narrow economic moat.
Dziubinski: Now, Schlumberger stock is down about 6% since reporting and was down 24% last year. So, why do you like it?
Sekera: Well, exactly that. I mean, when I just look at it from a valuation basis, we think the market is overly penalizing the stock to the downside too much here in the short term. So overall when I think about valuation, I would just note the energy sector itself we think is one of the most undervalued sectors in the marketplace today.
And one of the reasons I wanted to highlight this one is I think this is also just a good play on energy other than just the individual oil producers. So we’ve highlighted some of the EMP stocks as buys on prior shows. But in this case, the company is a services provider.
Now the other thing that I like about this one is, I was talking to Josh, who’s our analyst that covers it—This might also be a good play on the evolution of artificial intelligence to those companies that can really utilize AI to enhance their own products and services. So Josh thinks that Schlumberger has an industry-leading position in their digital services.
This is one where AI, he thinks, will help them be able to maximize producing assets for their clients. Now I will note that Schlumberger does have more of an international presence. One of the reasons I kind of like the services companies here is, under the Trump administration, we could see a lot more exploration and drilling here in North America.
So Schlumberger may not necessarily be the best pick as far as if you want to try and play that theme. I’d recommend taking a Halliburton if you want to play that theme specifically. But as far as trying to play more the longer-term theme of companies that could be that utilization play on AI, I would recommend taking a look at Schlumberger.
But Halliburton, also a 4-star-rated stock at a 26% discount.
Dziubinski: Now, Schlumberger’s management announced that a sizable share buyback program for 2025. So what theoretically could that mean for shareholders?
Sekera: Well, from a trading point of view, it provides a bit of technical support to the stock. Just knowing that you’re going to have them out there buying back more and more stock if that stock continues to keep trading down from here. So may not necessarily provide an ultimate floor, but certainly from the technicals will help the downside perspective here.
But from a fundamental point of view and this is for any company, if a company is buying back stock, especially if it’s a pretty large number like that and if they’re buying it back below what we think is the long-term intrinsic valuation of the company, that discount will actually accrete to the remaining shareholders over time.
Dziubinski: Now your last pick this week is UPS. The stock’s down about 15% since reporting earnings. So, run through the key metrics on this one.
Sekera: Unfortunately this has been a little bit of a disappointing situation, but we still look at it as a 4-star-rated stock, pays a very high dividend yield 5.8%. It’s trading at an 18% discount. But it’s a company with a wide economic moat, with that wide economic moat being based on cost advantage and efficient scale.
So high-quality company that we think is trading at a pretty significant discount from its long-term intrinsic valuation.
Dziubinski: Now, UPS announced that Amazon will be reducing the number of packages it sends through UPS by about 50%. So Morningstar reduced its fair value estimate on the stock as a result. So, what’s Morningstar’s take?
Sekera: Well, we had already forecasted that Amazon volume would decline by 10% to 15%. So this is a larger or greater decrease in that volume from Amazon than what we had originally modeled in. So once we took that into account, we did lower our fair value, but we only lowered it to $138 from $145. So I think this is probably less of a cut in fair value than a lot of people might expect based on that reduction in volume from Amazon.
And I think there’s a couple of reasons for that. And it’s not as much of a hit as people might necessarily think. So one: Of course, that Amazon business is only one portion of the UPS business. But when we looked at that individual part of their business, it was actually margin dilutive to UPS. So our forecast is that the impact will only be an 8.8% decline in domestic package volumes overall.
But UPS expects that the yield on the remaining business will actually increase by 6%, resulting in a favorable mix. So when I look at the domestic margin here, it’s actually increasing to 9% in 2025. And we’re expecting that that will continue to increase over time, reaching a 12% margin by the fourth quarter of 2026.
Dziubinski: All right. So then outside of that Amazon story, sum up why you like UPS today.
Sekera: Then again, this is a longer-term story that we think here is still continuing to play out. So in the short term, I think it actually helps the stock here that there’s already a lot of negative sentiment surrounding this stock. So a lot of people have already been puking out their positions here. And so I think probably from a technical point of view, a lot of that selling pressure is probably behind us.
at this point. But when I think about the stock longer term, it ran up in 2020 and 2021. Of course, if you remember it back then during the pandemic, everyone was buying things online and having it shipped at home. And that stock had run up way too far in our view. Put it well into 1-star territory.
The market at that point was overestimating just how long that kind of growth was going to last. And the stock’s been, if you look at that kind of long-term chart, really on a long-term downward trend ever since. Now recently the stock had come under pressure, renegotiated its contracts. It had to make some pretty significant wage increases last year.
Company’s still working through ways to be able to mitigate those wage hikes under that new union contract. But again, I think all the negative sentiment, this long-term downward trend, I think a lot of people have already priced in the worst of what we hope is now behind us. When I look at this stock valuation, again, we’re not a PE shop, but the stock currently trades at just under 14 times our 2025 earnings. It’s only trading at 12.5 times our 2026 earnings, which I think is going to look pretty undervalued over time. So I think in this case we just need the company to post a couple of no-surprise quarters, and I think once the market gets some confidence in management back again and that things are really bottoming out here, I think this is one that for long-term investors is one that’s going to look pretty good for the next couple of years.
Dziubinski: Well, thanks for your time this morning, Dave. Those who would like more information about any of the stocks Dave talked about today can visit morningstar.com for more details. We hope you’ll join us for the next episode of The Morning Filter in two weeks on Monday, Feb. 24 at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe!
Have a super week!