Plus, our take on Nvidia heading into earnings.
Key takeaways:
02:20 On Radar: GDP and Inflation
06:36 Our Take on NVDA Before Earnings
10:35 New research on WMT, GILD, TDD, Others
25:48 Stocks of the Week
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Susan Dziubinski: Hello. 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 before we get started, I have a programming note. Dave and I are starting to put together a special viewer and listener mailbag episode of The Morning Filter, so send us your questions. You can reach us at themorningfilter@morningstar.com. As a reminder, Dave cannot give personalized portfolio advice. We’ll address some of your questions in an upcoming episode.
Good morning, Dave. Before we get started, I understand congratulations are in order. You just celebrated your 15-year anniversary at Morningstar. Cheers to you with my Morningstar mug!
David Sekera: Good morning, Susan. Yeah, it’s amazing just how fast time can fly. Just thinking about the 15 years I’ve been at Morningstar, I started with the company really just after the global financial crisis. Really, when the recovery was just starting to take hold. We then ran into the sovereign debt and banking crisis in Europe after Greece defaulted. Then in 2014 and 2015, we had the plunge in oil prices that we had to deal with and how that impacted the markets. The US-China trade wars in 2018. Of course, then the pandemic. Seeing some of the things I just never thought I would see over the course of my career. We had oil that was trading at negative prices in 2020. The US 10-year Treasury yield hit a half of a percent. Then of course, we had the meme stocks in 2021, if you remember GameStop and all of those.
Now we’re back to the point where stocks are pretty much trading at their all-time highs. What the future holds for us over the next couple years, who knows? But it certainly feels like we’re living in some of those times where there’s that old adage, “May you live in interesting times,” and I think we are.
Dziubinski: Yes, we indeed are. Nothing is certain but uncertainty. Anyway, all right. Let’s get to the week ahead. You have a couple of economic reports on radar this week, starting with fourth-quarter GDP. What are you going to be looking for here?
Sekera: Well, the advanced estimate was already put out at the end of January and I believe it came in at 2.3%. That of course is a slowdown from third-quarter GDP of 3.1. I think the consensus right now is pretty much most people are expecting those ones to be pretty stable. If it were to come out any different than that same print, it could cause the market maybe to move up slightly or maybe down slightly.
I think more importantly looking forward, just thinking about what we expect for the economy, I know the Morningstar US economics team is looking for the ongoing sequential quarterly slowdowns with the economy slowing every quarter and not bottoming out until the third quarter of 2025. Still holding on to our no recession forecast. When I think about GDP, of course it’s the product of a lot of different areas of spending. How much of GDP in 2024 was bolstered by excess government spending? Spending that I wouldn’t consider to be really economic value-added activity. I think GDP is just becoming increasingly harder to forecast.
I did a little bit of digging over the course of the weekend, and what I found is that, according to the CBO, their estimate for federal net outlays as a percent of GDP in 2024 was 24%. Historically, when I look back over time, prepandemic, that federal outlay as a percent of GDP averaged only 20%. Going back even further, pre-global-financial-crisis, and of course you have a lot of volatility in that number, but excluding recessions, that same percentage of GDP was even below that. If we really are in a period of government belt-tightening, I think that is going to act as a headwind over at least the next several quarters, or maybe even longer. That’s going to be a headwind for the market and for earnings growth.
Dziubinski: All right. We also have the Fed’s favorite inflation measure, the PCE, coming out this week. Given that the CPI numbers that came out earlier this month suggested inflation was being kind of sticky, what are the expectations for PCE?
Sekera: Well, as you mentioned, it was really the headline print that came out for PPI and CPI that were hotter than expected. I know that our economics team, when you really dig into those components that feed into the personal consumption expenditure index, those were actually lower than expected. When I look at consensus numbers out there right now, I believe the annual core PCE inflation rate is actually expected to slow to 2.6% from 2.8%. Again, that’s at least moving in the right direction but still well above the Fed’s target. When I look at what the market’s pricing in right now, the market’s not expecting a cut to the federal-fund’s rate until June at the earliest. Even then, it’s only a 50-50 probability.
I think from an investing point of view, my takeaway here anyway is when I think about the tailwinds that really impacted the market last year, the tailwinds we identified in our 2024 outlook, pretty much all four of those have been really starting to slow over the past quarter or two. They’re really starting to recede. Now, inflation is moderating, but it’s moderating at a much slower rate than our US economics team had originally projected. Between relatively high valuations, these slowing tailwinds, that’s one of the reasons I just really don’t foresee the market making that much more ground over the nearer term, and we’re probably bouncing up against the top of the range at least here for the next quarter or two, until I think we look for earnings acceleration late this year.
Dziubinski: All right. Well, speaking of earnings, let’s talk about the company reporting this week that everyone’s going to be watching. That’s Nvidia. Now Nvidia has done a really great job of reporting results that come in ahead of their guidance. Then they guide for the next quarter ahead of the expectations. Is Morningstar expecting more of the same?
Sekera: Like anything else, and especially for Nvidia, it’s hard to know in any one quarter exactly what the results and guidance are going to be. Especially with a company like this that’s in such a high growth situation for what’s still essentially a relatively new product supporting new technology.
In my mind, I think for investors it’s really much more important to listen to the call or read the transcript and understand what’s going on with the underlying dynamics. I think that’s more important for a long-term investor than whether or not they beat the whisper numbers this quarter or not. Again, whether or not the fundamentals would potentially change our long-term forecasts, or if there’s any change to the story that could make us revise those forecasts.
As you noted, for the past one-and-a-half years, they’ve beat and raised every single quarter. I think the market’s now been conditioned for that and expecting that. Our own view on Nvidia, and just I’d say the AI stocks in general, is thinking about this year, we don’t expect to see them beat anywhere near with the same magnitude of surprises that we saw for the past year-and-a-half. At this point, I think demand is much better understood. It’s at least better measured than it had been in the past.
I think with Nvidia, that’s what we saw last quarter. They beat consensus by a reasonable amount. They were pretty much in line with what the whisper numbers were. They did increase guidance, but I think that had already been baked in. In my own personal opinion, I think that’s probably more than likely what we see again this quarter.
Dziubinski: Then speaking of the fundamentals, what questions would you like to see Nvidia address during their call?
Sekera: Well, in this case, I highly suggest going to morningstar.com and reading the pre-earnings note that was published by Brian Colello. He’s the Morningstar technology strategist that covers the company. I will just highlight in his note a couple things that he detailed.
First of all, one of the things he’s listening for is what percentage of AI workloads are training versus inference. He notes there that Nvidia definitely dominates the training side, but that only 40% of its GPUs are used for inference. He also wants to know exactly how much of the development of large language models is going on in the cloud versus at the edge. Then lastly, he’s also listening for what percentage or what volume is Nvidia seeing from consumers who are using their AI for what he calls moon-shot projects. Things like genetics, drug discovery, robotics, autonomous driving, and so forth.
I think it’s these larger categories and fundamentals really which will inform our estimates going forward, just for how much more growth we expect over the next couple years, or at least over our five-year forecast period, for how much additional data center revenue growth we’re going to see for those AI GPUs.
Dziubinski: Let’s touch briefly on Nvidia’s stock price at this point. From a valuation perspective heading into earnings, how does the stock look?
Sekera: I think it’s actually interesting to note, when I was looking at the stock performance over the past couple quarters, that stock price is actually relatively flat as compared to when it reported last quarter. In the back of my mind, that’s making me wonder whether or not the momentum has run its course in the stock. Now of course, institutional portfolio managers had to have at least a market weight in Nvidia last year just to be able to keep up with the broad market gains. Maybe if it is losing that momentum, maybe it’s not the same case here in 2025.
But looking at the stock price right now, it closed last Friday at 134-per-share. It’s almost right on top of our $130 estimate, so it puts it right on top of that 3-star territory.
Dziubinski: Got it. Well, let’s segue into some new research from Morningstar, specifically about Walmart. Walmart stock felt about 6% last week after the company reported solid results, but offered conservative guidance. Unpack those results for us, Dave.
Sekera: Well, I think it’s just as simple as, and I think we’ve talked about this a couple of times, Walmart and the dollar stores. Walmart has been really a big beneficiary in the change in consumer spending patterns we’ve seen over the past two years in that environment of high inflation and high consumer prices. Walmart has benefited. They’ve seen a very large uptick in the number of shoppers going to their stores. A lot of that I think is just trade-down from the traditional supermarkets. Of course, this has really led to pretty rapid short-term earnings growth for the company.
But longer term, we do expect that once wage income does catch back up to that compounded impact of inflation over the past two years, we would expect spending patterns to normalize and return more toward historical norms. We expect Walmart will continue to get this short-term earnings growth for the next couple quarters, maybe the next year, but that we would not see that same kind of ongoing growth over the long term.
Dziubinski: Then after earnings, were there any changes to Morningstar’s fair value estimate on Walmart? Is there an opportunity here?
Sekera: All right. Actually, I got a little pop quiz for our audience right now. Without looking, how much do you think Walmart stock was up last year? Before I hit the number, to be honest, I’ll let you know: I was actually even shocked. I knew it was up a lot, but I didn’t realize just how much. I think just like everybody else, I got caught up in the focus on AI stocks and the other thematic stocks, like the weight loss drugs. I think the performance of some of these other stocks kind of got lost in the shuffle.
It looks like Walmart stock was up over 70% last year.
Dziubinski: Wow.
Sekera: I didn’t realize it was up that much. Now, of course, as much as that stock has gone up, it’s just become increasingly overvalued in our mind. We think the market’s overextrapolating this short-term growth too far into the future. The stock trades at a 60% premium at our fair value.
Dziubinski: Wow.
Sekera: It puts it in that 1-star territory. Just for reference here, again we’re not a PE shop, but I would just note the stock currently trades at 38 times 2025 earnings guidance. Our fair value would only be for 23 times earnings. Again, a stock that’s done phenomenal over the past year, but we think the momentum has pushed it up just way too far in our mind.
Dziubinski: All right. Well, we also had one of your former picks, Hasbro. That one was up 14% after reporting earnings. What did the market like in the report? Do you still that Hasbro has more room to run?
Sekera: Yeah, it was nice to see that one take a nice pop like that. It was one of our holiday sales picks from The Morning Filter on Nov. 25. For people to have an interest in the original investment thesis, they can go back and watch that on that show.
Now what happened, and we talked about it back then, is that in the third quarter, sales had fallen by 15% in their consumer products division. But what we noted was a large percentage of that were sales which were in low-margin brands, low-margin products that they decided to exit. Our analyst that covers this one, that’s Jamie Katz. She’s the equity analyst. I’ll also note she’s the equity analyst that also covers the cruise lines, which also have been very good calls of hers over the past two years as well.
Her investment thesis here was that after exiting these underperforming brands, she was forecasting a pretty steady state for their branded portfolio in 2025. Relatively stable demand. That’s all it really took in order for the market to rebound on this one. We are looking for a return to top-line growth this year. Not a huge amount, but at least a return to growth. The operating margin of 20% in 2024, we expect that to start expanding up to 20.8% this year, with further expansion thereafter. A lot of that due to the mix shift. Again, as they become a higher percentage of sales in digital games, which has a higher operating margin, that will lift the margin for the overall company.
Right now, on average, we’re projecting 12.6% earnings growth through 2028. It’s a stock that trades at only 15 times our 2025 earnings estimate, 4-star rated stock, 19% discount, nice dividend yield at 4.1%. It is a company we rate with a narrow economic moat.
Dziubinski: All right. Well, we also had several companies that we’ve talked about before on The Morning Filter from the healthcare sector report during the past couple of weeks. Let’s start with Gilead Sciences. The stock was up more than 7% after earnings, and Morningstar raised its fair value estimate. Why the positive response to results? Is the stock attractive?
Sekera: For the quarter, the results both top and bottom-line were better than expected. The guidance for the year was better than expected as well, even though that guidance was only flat to maybe a 1% drop in sales this year. But looking for operating margins to improve to about 45% from 43%.
Now looking forward, as far as potential catalysts, our equity analyst noted a potential launch of their six-month injectable drug for HIV prevention later this year. That could be a catalyst for the stock. As you noted, this was a stock pick on the May 20 show. At this point, I think the stock is up over 60% since then, so that this point it’s moved up enough it puts it in the fair value range at 3 stars. It still pays a 2.9% dividend. It is a company we rate with a wide economic moat.
Dziubinski: Now we also had Medtronic reporting results. The stock pulled back a bit after earnings on slower than expected top-line growth. What did Morningstar think? Is the stock still undervalued today?
Sekera: Well, actually, let me note here first. Yes, the stock did pull back immediately after earnings. But looking at the charts, I actually like how it rebounded thereafter and recaptured a good amount of that pullback. Again, maybe this is at least a short-term bottoming here at this point.
Now, this is a stock we’ve recommended several times on The Morning Filter. I think the first time we recommended it was on a June 26, 2023 show. Since then, this stock has slipped, rebounded, slipped again, rebounded again. I think this is just a good example of how we’ve talked about maybe building positions in a stock over time. Now personally, I always like to start with maybe a half-sized position as far as how much a stock I’m going to want to own in my portfolio. Then that way, if a stock does slip after your original purchase, you’ve got the bandwidth to be able to buy more, to either get to a full position. Or when you buy more, then that does give you the ability to sell some and take some profit when that stock rebounds and then leave you that room to rebuy that stock again if it does slip. I think we’ve seen that in a number of different instances over the past almost two years on this stock.
Really, just getting to the investment thesis here. Really, no change. I’d just say the quick synopsis on this one is, to some degree, I think this might just be a situation where you have to wait for this one to work itself out over time. It does pay a 3.1% dividend, so at least you’re getting paid a reasonable rate while you wait. Stocks at a 20% discount, it’s enough to put it in that 4-star range. It is a company we rate with a narrow economic moat. I’d also note here, too, the company is buying back stock. I think that does help add to economic value over time, as the company buys back stock at below what we think its intrinsic valuation is.
Dziubinski: All right. We also had Baxter International report. Its stock was up about 8% after the company posted solid results and issued a pretty good forecast, despite tariff talks. And also, there’s an impending CEO departure at the company. What did Morningstar make of the results?
Sekera: Yeah, there’s a lot going on with this one. It just might have been a bit of relief rally here in the short term. I’d just say, overall, as painful as this story has been over the past three years, I think investors at this point, they were just relieved that both the top-line and bottom-line guidance for 2025 were pretty solid.
Now, I also have to point out on this one, and you don’t see this very often in our ratings, but we do have a Poor Capital Allocation Rating on this stock. For this stock, if this is one you’re interested in, I’d highly recommend going and reading the write-up online. But I’ll just note a couple things here that were outlined in the capital allocation section, as far as why we rate this one with that poor rating.
First of all, just highlighting relatively weak execution that the company had during that 2023 and 2022 inflationary period. Some bad pricing decisions on its Hillrom acquisition and the Kidney Care divestiture. Yet we think the balance sheet is still relatively weak, and its distributions to shareholders over time has been pretty mixed in our mind. To some degree, all of that may be what explains that sudden departure of the CEO. I believe it was announced at the beginning of February that it would be effective immediately.
I know we had Warren Buffett release his note, so it’s a good time maybe for a Warren Buffett quote. Overall, for this company, when we think about the fundamentals of the company, about what’s happened over the past couple of years. Yeah, his quote in this case is, “I try to invest in businesses that are so wonderful that an idiot can run them because sooner or later one will.”
Dziubinski: Well, thank you, Warren. All right. With Baxter, any changes to Morningstar’s fair value estimate after earnings? Does the stock still look attractive?
Sekera: Yeah. Again, this is a stock that we first recommended a while ago and we’ve reiterated that buy several times since. Looking at the chart, maybe this is now finally in the process of bottoming out. Maybe the transition to some new management might be enough in order to get some investor confidence back here. Top-line, we’re looking for mid-single-digit revenue growth. Bottom-line, I think the company guidance was looking for 245 to 255 in adjusted earnings per share. That would put the stock at only 13-and-a-half-times where it’s trading today.
Looking at our model, we’re projecting average growth of 13.7% in 2026 through 2028. Again, I think this is just a good solid value buy at this point. It trades at a 39% discount to fair value. It puts that well into the 5-star category. It has a nice 2% dividend yield. It is fundamentally a company that we think does have long-term durable competitive advantages, as we rate it with a narrow economic moat.
Dziubinski: Now, you mentioned Warren Buffett. One of the companies that Berkshire Hathaway has a pretty sizable stake in is Kraft Heinz. Kraft Heinz has also been a pick of yours, so you’re in pretty good company there, Dave. But Kraft Heinz fell after reporting a slump in sales last quarter. Unpack the results for us.
Sekera: Well, this one actually, I kind of like the performance of the stock. As you noted, it did fall after earnings on Feb. 12. Since then, it’s rebounded, and not only rebounded but it’s actually up 5% since we’re at close before earnings. I think initially the market sold off, it was overly focused on organic sales, which slide by 3%. That was a combination of a 4% decrease in volume, which was partially offset by pricing. But I think they overlooked the good news, and I think maybe that’s why we’re seeing the stock really starting to rebound at this point—was that the operating margins, adjusted operating margin, did increase by 90 basis points to 21.1%. Overall, we think the company remains focused on doing the right things to create long-term economic value here. We are expecting the operating margin to continue expanding over the next five years.
Dziubinski: Is Kraft Heinz attractive? Would it still be a pick of yours today, Dave?
Sekera: It is a 5-star rated stock, 42% discount to fair value. Nice hefty dividend yield at 5.1%. Again, the company we think has a long-term durable competitive advantages rated with a narrow economic moat. It just looks like a good, solid value play. It trades at only 11-and-a-half-times adjusted earnings guidance of 263 to 274.
Now this is a story that probably takes some time to play out. Short term, I know there’s a lot of concerns in the market that weight loss drugs are going to reduce food consumption, specifically on snacks and other things like that. We think that concern is probably overblown from an overall category level. Looking for this company to continue improving itself over time.
Dziubinski: All right. Well, it’s time for a question from a member of The Morning Filter’s audience. Dee wants to know what you mean when you say that a stock is trading at an X-percent discount? How is that discount calculated?
Sekera: Sure. When I refer to a discount or a premium, that’s really compared to the fair value for the stock. The fair value of the stock is just that stock price, that’s really just what we think the intrinsic value of what that company is worth divided by the number of shares outstanding. Of course, when we think about what is the long-term intrinsic value of a company, that’s essentially the present value of all the future free cash flow that we model that a company will be able to generate over the course of its entire lifetime.
Just as a quick example here, let’s just say our fair value for a stock comes out at $100-per-share. If that stock is currently trading at $80, that means it’s trading at a 20% discount. Conversely, if that stock is trading at $120-per-share, that would be a 20% premium.
Then the other thing I think you need to realize, too, as an investor, what that means for returns is if that stock’s trading at a 20% discount, it’s trading at 80 bucks, we think it’s worth 100. If it does move up toward our $100 fair value, that’s actually a 25% increase because you’re coming off of that lower denominator. Whereas if a stock’s at 120 and it does fall to $100-per-share, that’s going to be a 16.7% decline.
Dziubinski: All right. We’ve come to the picks portion of today’s episode. Now with the stock market hitting new highs last week even as uncertainty around the economy and tariffs persist, you’ve brought us three undervalued defensive stocks with economic moats. Your first pick this week is PepsiCo PEP. Run through the numbers for us.
Sekera: Sure. Pepsi, rated 4 stars, 10% discount, 3.5% dividend yield. A company we rate with a wide economic moat based on its intangible assets and its cost advantage, and a company we rate with a low uncertainty.
Dziubinski: Now, Pepsi’s recent results were pretty solid, but the company issued a disappointing outlook for 2025. Why do you like Pepsi anyway?
Sekera: I think it’s probably maybe a bit of an overreaction to that weak guidance. Of course, that weak guidance being driven by relatively sluggish demand in snacks and beverages in the US divisions. In my mind, I think it’s probably a symptom of that ongoing consumer shift in spending as wages have failed to keep up with inflation over the past two years. To some degree, the thesis here will be that as wages catch up to inflation over time, we’ll expect consumer patterns and consumption patterns to normalize.
Just taking a look at what’s going on fundamentally, the guidance was for only low-single-digit increase over 2024 earnings. That puts the stock at about 18 times our 2025 earnings. Over time, the stock is average probably a PE of the low 20s, maybe 22, 23 over the past decade. We did end up lowering our 2025 estimates slightly, but we did maintain our long-term forecast for 4% annual sales growth. It doesn’t seem like a huge lift to me. And looking for a 16% average operating margin. Again, not necessarily really trying to knock the lights out with a huge increase in operating margins. Good, solid value stock in today’s market.
Dziubinski: All right. Well, your second pick this week is Hershey HSY. Walk through the data on this one.
Sekera: Yeah. I think this is a pretty rare opportunity as Hershey has hardly ever traded in 5-star territory over the past decade or so. It’s currently rated 5 stars. It trades at an 18% discount and provides a 3.2% dividend yield. Now, we rate the company with a low uncertainty and a wide economic moat. That wide moat being based on its intangible assets and its cost advantage.
I’d just note, when you look at market share for chocolate in the US, the company has a 36% market share. That compares to its closest competitor, Mars, which only has 29%. Then after that, you have relatively low market shares by all the remaining branded and private-label competitors out there. I like the setup, as far as being the market leader in that category.
Dziubinski: Now, high cocoa prices are expected to eat into Hershey’s margins in 2025. Given that, why is Hershey a pick now?
Sekera: Yeah. That’s exactly why it is a pick now. Again, this is one where I think you really need to understand the background and the story as far as why Hershey’s stock price in our view is so low at this point.
Looking at the numbers here, global cocoa production is estimated to have declined by 14% in the 2023-24 growing season. Cocoa prices, if you look at the charts, have just exploded higher. They’ve pretty much tripled over the past one-and-a-half to two years. When you look at cocoa production, 60% of global production comes from West Africa. They suffered droughts and some other issues in 2023.
Now with Hershey, of course some of this will have been hedged out over the next year or so, that they’ll be able to use the futures market for that. But some of it will have to flow through, it will squeeze their margins here in the short term. But again, this is something that’s going to impact all the chocolate manufacturers, not just Hershey. It will result in industrywide price increases, so it won’t just be Hershey that’s having to bring prices up. Of course, cocoa is only just one part of the cost inputs. Depending on the type of chocolate, it may be anywhere from 20% to 50% of the cost.
Now, thinking about what’s going to happen in cocoa, I have no idea what’s going to happen with cocoa prices here in the short term. I remember a number of years ago, I was looking at buying some farmland when corn prices were high. I remember talking to a farmer then. He made the old adage that, “The cure for high prices in the commodity markets is high prices.” That does end up leading to demand destruction as high prices reduce demand. But over time, you’ll always have new supply emerge to take advantage.
Now in this case, it takes three to five years to grow new cocoa trees from when you plant them to when they start producing. I think when I look at what’s going on and what’s priced in the market, I think for the most part, this is all already incorporated into the stock price. In fact, the stock is down 37% from its May 2023 peak. But it’s also pretty much about the exact same time that cocoa prices really began to run higher.
Now, the company put out adjusted EPS guidance for 2025. That’s $6 to 6.18-per-share, which would end up being 28 times earnings. A pretty high PE multiple. But I’d also note that, in the past like last year, their earnings was $9.37-per-share, that’s only 18 times. The normalized PE over the past 20 years looks to be about 20. In this case, over time as cocoa prices normalize, you get back toward a much more normalized environment, I think there’s plenty of room for this stock to rebound once we have that normalization of cocoa prices, once they roll over and you start seeing more normalized type earnings guidance.
Dziubinski: Now, we also have Hershey’s current CEO stepping down later this year. Any concerns about that?
Sekera: Nope. In this case, I think her planned retirement date isn’t until June 2026. I think that gives the company more than enough time to identify the right candidate to take over for her. Even then, it gives that new CEO plenty of time to get in the saddle really as the leadership is transferred over to whoever that new CEO is going to be.
Dziubinski: All right. Your last pick this week is somewhat of a rarity these days.
Sekera: Yeah.
Dziubinski: It’s an undervalued utility stock. It’s FirstEnergy FE. Tell us about it.
Sekera: Yeah. No, unfortunately, I got to admit, it’s really hard to call this one cheap at this point. It’s only trading at a 4% discount at this point.
Overall, as you mentioned, utilities overall still pretty overvalued. This stock actually just ran up 4% just in the past two trading days. Yeah, it was looking a little cheaper than where it was than where it’s opening up this morning. I think at this point, that stock probably starts to move into that 3-star territory from 4-star, unless it sells off. It is a narrow economic moat, provides a 4% dividend yield. Just on a relative value basis compared to the rest of the utilities sector, still looks pretty good to us.
Dziubinski: Then talk a little bit about the thesis and why you like this one specifically, besides the price.
Sekera: Yeah. I think investors really need to be focused on what’s going on with their investments over the next, call it, four or five years. Now, we think we’re going to see accelerating investments that will result in relatively solid earnings growth. We expect the company to invest $26 billion of new capital through 2028. That’s a 40% increase from their previous five-year capital investment plan. We think that’s going to be enough to support our expectation that the management can achieve their guidance for their annual earnings growth targets over the next couple years.
For investors that don’t know this company, they serve Ohio, Pennsylvania, and New Jersey. When we look at their service area, we think Ohio and Pennsylvania probably have higher probabilities than average as far as seeing new data center buildouts that will provide that growth that we’re looking for here. Those states have what’s considered to be relatively strategic locations. They have economic incentives. They have the right infrastructure. To some degree, they’re a little bit like Wisconsin where we’re seeing a lot of new data center growth go on up there. It is much easier to keep data centers cool in the northern states than in the southern states.
Then lastly, I have to report it looks like they have earnings coming out this week. Of course, there’s always the risk that something unexpected comes up. But in this case, after talking to our analytical team, we probably think it’s actually more likely that we’d see a higher probability of an upside surprise than negative news in this case.
Dziubinski: All right. Well, thanks for your time this morning, Dave. Those who’d 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 next week for a new episode of The Morning Filter, on Monday at 9 a.m. Eastern, 8:00 AM Central. In the meantime, please like this episode and subscribe. Have a great week.