Plus, our stock market outlook for the month ahead.
Key takeaways:
01:07 On Radar: Economic Reports & Earnings
06:46 Our Take on NVDA & AI Today
16:59 New Research: March Market Outlook
21:07 Stocks to Sell and Stocks to Buy
What's next is now at the Morningstar Investment Conference. Register now to get to the source for cutting-edge research, expert insights, and thorough analysis.
https://www.morningstar.com/business/events/morningstar-investment-conference?refid=morn_filter
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Follow Morningstar’s coverage of earnings season: https://www.morningstar.com/topics/company-earnings
Learn more about Morningstar’s approach to stock investing: https://www.morningstar.com/stocks/morningstars-guide-investing-stocks
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, before we get started, a reminder that Dave and I are putting together a special viewer and listener mailbag episode of The Morning Filter. Thank you to those of you who’ve sent in your questions. And for those of you who haven’t gotten around to it yet, well there’s no time like the present. Send us your questions at themorningfilter@morningstar.com. And as a reminder, Dave cannot give personalized portfolio advice. All right, good morning, Dave. Any economic reports on your radar this week?
Dave Sekera: Good morning, Susan, and welcome to the month of March already. Can’t believe how fast this year is going by.
As far as economic metrics, not really. I think the only thing I see on the calendar right now is going to be nonfarm payrolls on Friday. And of course that also includes the unemployment rate, average hourly earnings. Looks like the consensus for nonfarm payrolls right now is 153,000. So, a slight increase from 143,000 last month, but not that big of a difference, in my mind.
And of course, you know me, I’ll be watching the average hourly earnings, especially closely as a former consumer analyst. What I’d really like to see here would be those hourly earnings increasing at a faster rate than inflation. That would help repair consumer purchasing power, especially in lower-income and middle-income households. Those households that have been really under the most pressure from the inflation that we’ve had for the past couple of years.
Dziubinski: Let’s talk about a couple of big companies reporting earnings this week that you’re going to be watching. Beginning with market heavyweight Broadcom AVGO. Now Broadcom’s stock jumped after the company reported earnings last quarter on strong results and guidance. So how’s the stock look heading into earnings this time around?
Sekera: And as far as earnings go, I think this is the last of the big AI stocks to report. Now this stock has fallen a little bit over 18% from where it was trading just prior to the DeepSeek scare that sent all the AI stocks plunging, not quite in that official correction territory but getting pretty close. Now, having fallen as much as it has, it’s fallen into 3-star territory. Looks like it closed at $199 a share last Friday, but that still puts it near the top end of the range that we considered to be 3 stars.
We don’t necessarily give quarterly guidance, but we expect that it’ll probably be somewhat similar to what we’ve seen with most of the AI names. I would suspect that they’re going to be consensus, be able to provide some upside guidance, probably in line with the whisper numbers. I think that’s what we’ve seen with the AI names more than not this past quarter. But generally, I think one of the biggest takeaways to think about when you’re looking at the AI names is that going forward, we don’t expect to see anywhere near the same magnitude of upside surprises and increases in guidance that we had in late 2023 and for most of 2024. At this point, we still expect that the sector will continue to keep growing at very fast growth rates. But the days of growing at an accelerated rate, I think that’s behind us.
Dziubinski: And we also have Costco COST, which is the largest retailer by market cap, reporting earnings this week. Stock’s up about 14% this year already. What do you think of the stock heading into earnings?
Sekera: Not only is Costco up 14% year to date already, I was looking at the chart here, it’s almost 60% since the end of 2023. It’s up 130% since the end of 2022.
Personally, I think as an investor, you really need to temper your expectations with as much of a run as this stock has taken. And again, we agree Costco is a great company. We think it’s very strong. We rate the company with a wide economic moat. It has a Medium Uncertainty. But at this point I think the stock has just gotten way ahead of itself.
I did take a quick look at our model over the weekend. From a top-line perspective, over the next five years we’re forecasting a compound annual growth rate for revenue of 7.6%. Look for some fixed-cost leverage there, so we’re looking for margin expansion. We’re looking for earnings growth of over 10% over that time period. Again, pretty attractive growth. But when I look at the valuation of the stock, it’s 56 times this year’s earnings projection. Even if I look at next year’s earnings projection, it’s still 50 times that projection. So, again, at an 87% premium, it trades well into that 1-star territory, according to our valuation.
Dziubinski: Then lastly, we have a couple of cybersecurity names reporting this week, CrowdStrike CRWD and Zscaler ZS. And again, we’ve talked about this theme before. It’s one you like, cybersecurity. How did the stocks look heading into earnings? Any opportunity here?
Sekera: I was actually looking up, it was back in June of 2022, we first started talking about the cybersecurity industry, and why we thought it’s really just such an attractive sector to invest in. And when I look at our notes from back then, our main theme really kind of still holds true today. Heightened geopolitical tensions, ransomware attacks, people working from home, all just require a multifaceted approach for cybersecurity protection.
And again, from a company’s management point of view, getting hacked, it’s just too high of a risk to a company’s operations that if you’re a management team, you’re not going to try doing it on the cheap. Plus, what I also like about this sector is it’s a relatively small percent of overall IT spending. It’s one of those areas that, even in a downturn, I don’t think management is going to try and pull back their spending in that area.
This week, I think we’ve got CrowdStrike and that stock has done particularly well over the past couple of years since we first highlighted it. At this point it’s now trading at a 30% premium. It’s a 2-star-rated stock, so I think you probably wait for a better entry point if that’s one that you’re looking for.
Zscaler has lagged the broader cybersecurity market to the upside, so that stock is still rated 3 stars. But you know what? For a 3-star rating, I actually prefer Palo Alto PANW, which is also rated 3 stars. It’s a little bit more of a discount to fair value, and it has a wide economic moat as opposed to Zscaler with its narrow economic moat.
Dziubinski: Let’s pivot over to some new research from Morningstar. Diving into Morningstar’s take on Nvidia NVDA after earnings. So on the surface it looked like another great quarter and a great forecast for the company, but the market didn’t seem too impressed by it. What are the headlines here, Dave?
Sekera: Well, I think just the quick easy takeaway here is I think the decline in the stock price had to do more with a change in sentiment than it necessarily did with the actual results. The company beat both on the top and the bottom line. They provided guidance that was higher than what the official consensus expectation was, but I think that increase in guidance was less than what the Street was kind of hoping for.
Now, we did maintain $130 per share fair value, but let me put that in context. It looks like the average target price on Wall Street is $175, so we’re well below what the rest of the Street is expecting. So, to some degree, yes, the market is still pricing in very strong growth, but I think that the market was kind of disappointed that growth has been growing and will continue to keep growing, but at a decelerating rate, whereas for much of 2023 and 2024 was increasing at an accelerating rate.
Dziubinski: You pointed out that Morningstar’s fair value estimate for Nvidia is sort of below what the market’s fair value, let’s say, would be on the stock. Walk us through how Morningstar is arriving at that fair value estimate of $130. What are we modeling in?
Sekera: So, a couple of takeaways when I pull up the model. Our fiscal 2026 revenue forecast is a little bit over $200 billion. That’s up 55% year over year. That would put earnings for fiscal ’26 at $4.42 a share. So it’s right now trading at that 27 times forward P/E multiple, which seems pretty reasonable to me.
Just to put this kind of growth in context, that’s over triple the amount of revenue that the company generated just two years ago in fiscal 2024, and 3.5 times the amount of earnings that they generated just two years ago. And we are still looking for a strong growth thereafter. Our fiscal 2027 revenue forecast is for $245 billion, so that would be up an additional 21%. So we’re looking at fiscal ’27 earnings of $5.41 per share, and that would be 22 times 2027 earnings.
Dziubinski: Let’s broaden out beyond just Nvidia for a minute, Dave. What’s your outlook for AI going forward? Where are we in the AI story?
Sekera: I take a look at the chart here in the news that we’ve had over the past month. I’d just note that since that DeepSeek scare a month ago, a lot of these stocks, the ones most correlated to AI, have declined. In fact, a lot of them are down 15% to 20% from those peaks. So, not necessarily quite into that official correction territory but still a good selloff from that peak.
And a lot of these stocks we still think have further to fall. One I would highlight is going to be Arm ARM. That one is down 20%, but it’s still one of the more overvalued stocks as compared to our valuations. So, a 1-star-rated stock at an 80% premium.
Some of these other more like AI-correlated stocks or related stocks like the independent power producers like Vistra VST and Entergy ETR, those are still 1-star-rated stocks trading double our fair value expectations.
I think, overall, what we’re seeing with AI is a lot of these stocks are going or undergoing a recalibration of expectations. Personally, I wouldn’t be surprised to see many of those hardware providers continue to keep selling off here in the near term.
In my view, and I think about the AI story more broadly, I think 2025 is going to be the year that we really see the next step in the evolution of investing in AI. I think investor focus is going to start shifting away from the hardware providers that we’ve seen, toward trying to identify those companies that can actually utilize AI in order to drive revenue growth and/or expand margins. Two companies we’ve highlighted in the past that we think are early indications of that are going to be Microsoft MSFT and Alphabet GOOGL.
Dziubinski: As you pointed out, market enthusiasm has cooled for AI stocks. Give us a little bit of a recap of how they’ve done recently, and are there any attractive opportunities out there right now?
Sekera: There’s still a couple of attractive opportunities, especially with how much some of these have sold off from their peak. I break it into two categories.
So from the perspective of what I consider to be kind of that direct, highly correlated AI stock place, I’ve got three here. The first one is Taiwan Semi TSM. It’s a 5-star stock at a 34% discount. A company we rate with a wide economic moat. And then ASML ASML and AMAT [Applied Materials]. Both 4-star-rated stocks, trading at a little bit under a 20% discount. And again, two companies that we both rate with a wide economic moat.
Now, from the perspective of companies that we think will benefit from AI over time, we already talked about Microsoft and Alphabet, both rated 4 stars, Microsoft at a little bit under a 20% discount. However, Alphabet is trading at a much greater discount of almost 30%. And again, a lot of that is also because of the regulatory risk overhang there.
And then last thing I’m going to highlight Amazon AMZN. That’s a stock we really haven’t talked about much as far as really being a buy for quite a while. But at this point, it looks like the stock has sold off enough that it’s retreated and is now in 4-star territory, trading at a 12% discount.
Dziubinski: Let’s get back to some company-specific research. Salesforce CRM reported earnings last week, and the stock was down about 3% afterward. What did Morningstar think of the results and were there any changes to our fair value estimate of the stock?
Sekera: I mean, taking a look at the chart, this stock has been on quite a ride over the past year. In fact, on our June 2, 2024, show, we highlighted that we thought that Salesforce was actually one of the best long-term stories in the software sector. When I talked to Dan Romanoff, the equity analyst that covers the stock, he just thought the company had the best combination of revenue growth, operating margin expansion potential, a strong balance sheet. Back then it was a 4-star-rated stock at a 20% discount. But since then that stock has run up pretty substantially. It’s now at the point where it’s in that overvalued territory.
I think it peaked right before the DeepSeek news came out. It’s now fallen about 11%. So it’s back in kind of this 3-star range. As far as results go for its fiscal fourth quarter 2025, we thought that they were solid but not necessarily hitting the cover off the ball. The company did have a newly initiated outlook that they gave guidance for fiscal ’26 that was slightly below our expectations on both at a top and bottom line basis, but overall it wasn’t enough to change our longer term projections. So, we did maintain our $315 per share fair value.
Dziubinski: We did have a viewer question come in about a company that reported last week, Caesars Entertainment. Bryce, and Bryce asked us more than once, Dave, he wants to know what Morningstar’s take is on Caesars CZR and what’s the market missing?
Sekera: Well, first of all, with Caesars stock, this is probably a stock that’s not going to be for everybody, especially for those people that don’t want to invest in a gaming company or a company that would support gambling. Having said that, it is a 5-star-rated stock, trading at a 50% discount. It is a company we rate though with no economic moat and a very, I’m sorry, just a High Uncertainty Rating, not a Very High Uncertainty Rating.
So I quickly spoke with Dan Wasiolek, he’s the equity analyst that covers Caesars, and there’s a number of different reasons that he thinks the market is really just kind of uncomfortable with the stock right now. First of all, its balance sheet is highly levered, the debt leverage is well over 6 times EBITDA. That’s a pretty high debt leverage. Just a general negative sentiment, just across the gaming sector in general, just with the expectation of an economic slowdown pressuring the gaming names.
And then lastly, concerns about potential increases in gaming tax rates in several different regional gaming jurisdictions that it has a couple of different locations.
Now, I’m also going to caution in the short term, Dan noted the results may look somewhat pressured here. The company is up against pretty tough year-over-year comps. We had the Super Bowl in Las Vegas in February 2024, and that was on top of already pretty tough comps for the two years back before that, back in 2022 and 2023. Las Vegas did rebound very quickly after the pandemic. Longer term, which is of course how we think about long-term intrinsic value for companies, kind of ran through the model here, and I think our forecasts look relatively conservative. From a top line perspective, only modeling in GDP-type growth in Las Vegas and the regional markets, looking for a little bit faster growth in its digital game business.
Overall, we think the company should benefit from some mix shift going forward. We do look for that operating margin to expand as digital gaming becomes a larger percentage of its overall business. We’re looking for an out margin of 22.4% here in 2025, growing to 24.9% in 2028.
I think this is just going to be one of those stocks that it just may take a while for it to really be able to perform to get up toward our intrinsic valuation. I think the company needs to be able to dedicate free cash flow to deleveraging that balance sheet. I think that would help provide some comfort for investors. We need to see those margins expand as we have projected, and I think this company would also benefit if interest rates come down, long-term interest rates come down, as we currently forecast as well.
And then lastly, just to kind of wrap things up, Dan also mentioned that the market typically values gaming companies using an EV/EBITDA basis or multiple as opposed to more traditional P/E multiples. So on that EV/EBITDA, you know, he said the company looks like it’s trading at about 8 times his projection, whereas historically it’s traded closer to 11 times. So, another area that we think there is some upside potential.
Dziubinski: March is upon us, as you pointed out at the top of the show, so it’s time to dig into your market outlook for the month ahead. So, we’ve had a busy start to the year: We’ve had tariff talk, we’ve had sticky inflation, we’ve had policies shifting around. And although we have seen the market hit new highs this year, it really feels like the market is in a holding pattern. Dave, recap what’s been going on?
Sekera: I think that’s kind of the understatement of the day as far as everything we’ve had to contend with thus far this year. But as you noted right now, as of last Friday, the Morningstar US Market Index, that’s our broadest measure of the stock market, is up 1.3% year to date. But as you noted, we have had some volatility this year, so that’s really kind of close to the middle of the range the market has traded at year to date.
From a valuation point of view, the market right now is just a hair above a composite of our fair values. It had started to get into that maybe overextended area, back at the highs in mid-February before that pullback. So at this point, I remain a market-weight recommendation at your targeted allocations overall. But as far as if you’re going to be thinking about putting out new money into the market today, personally I’d kind of like to see a 5% pullback before we put new money in.
Dziubinski: You suggested at the start of the year that investors emphasize value stocks over growth stocks due to valuations. How has that value growth story played out so far this year?
Sekera: Coming into the year, when I looked at the growth category, it was very high premiums over our fair values. In fact, the premium was as high as the last time we’ve seen since early 2021, which is about the peak of that disruptive tech bubble we had at that point in time. So, year-to-date growth has retreated a little bit, it’s down 1%. When I look at the core category, that’s a flat year to date, and it’s really been all about value stocks. That was up about 6.4% through last Friday.
Now having said that, even with value stocks up 6.4% and growth being down 1.0%, when I look at the spread between those two, we still see much better value for investors in the value category looking forward.
Dziubinski: Dave, what about market cap? Are we still seeing large caps outperforming smaller companies, or have we seen some rotation there, too?
Sekera: The large-cap index is up 1.25%, so still doing just fine. The mid-cap index is actually up 2.10%, so outperforming. And small caps at this point are essentially flat year to date. What it looks like to me is I think investors are willing to start moving down in capitalization as those mid-cap stocks have performed best but not necessarily yet willing to dive into that small-cap space just yet.
I think it might just be a little bit of overhang still from the potential tariffs, which will be coming to fruition this week, next week—I don’t know, we’ll find out. But again, I think that most people expect small-cap firms who might have a harder time finding ways around the tariffs or being able to put through those cost increases. So, I think a lot of people are concerned about the small-cap space overall, but from a valuation point of view, they still offer the best valuations. Core stocks at this point are pretty near our fair value estimates, and large-cap stocks still trading a little bit above fair value.
Dziubinski: Dave, how should investors be thinking about their portfolios two months into 2025 in terms of investment style and market cap?
Sekera: For now, I’d say pretty similar as to our 2025 outlook. So again, market-weight stocks in general, but again, I think you need to temper your expectations for just how much price appreciation you should expect at that broad index level for the next couple of quarters and even maybe for the full year.
Within your portfolio, I would look to overweight value, especially high-dividend-paying stocks, which I think are both undervalued, as well as you’re going to get paid to wait for the next couple of quarters. I would look to underweight growth, overweight small caps, although again with small caps, you might have to temper your expectations a little bit before we really see that rotation moving into that space. But I think that once it starts moving into small caps, it could move pretty quickly. And, of course, to be able to pay for that overweight in the small-cap space, you’d need to have at least a slight underweight in the large-cap space.
Dziubinski: We’ve made it to the picks portion of our program. This week, you’ve brought us three stocks to sell and three stocks to buy in March. Let’s start with your sells, the first of which is Vistra. Walk us through the numbers.
Sekera: Vistra is a 1-star-rated stock, and I would say it’s actually one of the most overvalued stocks that we have under our coverage as compared to our fair value. Looks like that stock closed at about $113 per share last Friday. Our fair value estimate is only $53 per share. It’s a company we rate with no economic moat and a High Uncertainty Rating.
Dziubinski: It’s not often that we see a stock trading at such an enormous premium to Morningstar’s fair value estimate. What’s the story here, Dave? How does Morningstar’s opinion on Vistra differ so dramatically from the markets?
Sekera: First of all, I think you have to look at what the company does. Vistra is what we consider an independent power producer. So, it’s not going to be constrained by the regulatory regime, as the way you see most regulated utilities. And so in this case, we think the market is just pricing in just too much volume, too much pricing growth for electricity over the next couple of years.
In general, our investment thesis for utilities overall and for independent power producers in particular is that AI computing requires multiple times more electricity to run as compared to traditional computing. And of course, as AI usage grows, the demand for electricity is going to surge over the next couple of years. And we agree with the market investment thesis. That’s one of the big reasons why we thought utilities stocks were so undervalued in October 2023.
But again, the market has caught onto that story since then. We’ve seen the utilities sector overall do very well, these IPPs really skyrocketed since then. I think this is a story of just watching how the market can sometimes act like a pendulum. You can get market momentum pushing a stock just too far above its long-term intrinsic value. Just taking a look at this chart, this stock had run up from $30 to $200 at its peak. Looking at the charts, it looks like it has rolled over. It has begun to start selling off. It’s down to $133 per share, but we still think it has much further to fall.
Dziubinski: All right, well your second stock to sell is a name you’ve suggested selling before. It’s Eli Lilly LLY. Hit some of the key metrics with Lilly.
Sekera: It’s still a 2-star-rated stock, trading at a 48% premium to fair value. With the stock price as high as it is, the dividend yield is only six tenths of a percent. Now again, it is a company we rate with a wide economic moat. We do think there are long-term durable competitive advantages here. But I would also note too, that we do rate the company with a High Uncertainty Rating because of its concentration in the GLP-1 drugs.
Dziubinski: Eli Lilly’s stock was a market darling for quite a while and then it pulled back a bit in 2024, and now it looks like it’s resuming its climb. Why is it one of your sells?
Sekera: Well, I think with Eli Lilly, too, it’s very difficult to forecast really how much long-term growth we see in that GLP-1 market. So, we are forecasting what I think is very strong growth over the next five years. But when you get past that longer portion of our explicit forecast period, I think the market is still over extrapolating that growth too far into the future.
Taking a look at our note here, we do note that we think new competition will come online over time. So in our model, our top-line growth is an 18% compound annual growth rate over the next five years. So, essentially, that takes revenue from $45 billion in 2024 all the way up to just over a $100 billion in 2029. We’re looking for very strong earnings growth of over 28% over that same time period. But right now the company trades at 39 times our 2025 earnings estimate of $23.72 per share. We do think that it’s possible that there’s up to 16 new obesity drugs that could launch by 2029, which, of course, if they get that regulatory approval by the FDA and they come out, that would certainly pressure both volume and pricing when that happens.
Dziubinski: Your third stock to sell in March is Wingstop WING. Run through the numbers.
Sekera: Two-star-rated stock, trading at almost a 50% premium to fair value, only half a percent dividend yield. Company we rate with a narrow economic moat, but a High Uncertainty Rating.
Dziubinski: I’ve looked through the Analyst Report on Wingstop before, and Morningstar thinks this is a great company with a long runway for growth. Is Wingstop one of your sells based strictly on valuation?
Sekera: It is just a matter of valuation. As you noted, it does have a lot of very good growth characteristics. And I don’t know why this happens, but I’ve seen this multiple times over the course of my career. It always seems like the markets seem to just way overpay for growth, specifically for new restaurant concepts while those new restaurant concepts are in their expansion phase. So when I take a look at our model, our five-year compound annual growth rate for the top line is 18%. Essentially that takes revenue from $626 million in 2024 all the way up to $1.4 billion in 2029. And that’s based on the combination of same store-sales growth, as well as just continuing to open new franchises every single year.
So in our model we’re looking for same-store sales growth to average kind of that 4%5% range over our forecast period. And we’re looking for the average percentage of franchised growth to increase 13% each year over the next five years as well. It looks like the company had 2,500 and some total units in 2024. We’re modeling that to grow to about 4,600 by 2029. Looking for earnings growth of 20% on average as well. So, yes, very, very strong growth dynamics, but the stock is trading at 59 times our 2025 earnings estimate of $4.00 per share. And even when we look out past that for our 2026 earnings, it’s trading at 45 times our $5.22 share estimate.
Dziubinski: Let’s move on to your three stocks to buy. First up is WK Kellogg KLG. Hit the highlights on this one.
Sekera: Four-star-rated stock, trading at a 27% discount to fair value. Pretty respectable dividend yield at 3.3%. Now I will highlight we don’t provide or we don’t rate the company with an economic moat, but it is only a Medium Uncertainty Rating.
Dziubinski: WK Kellogg has been a pretty strong performer. It’s about 40% over the past 12 months, yet the stock still looks really significantly undervalued. What do you like about it?
Sekera: This is a stock going all the way back to January 2024, when we first recommended it then, and there was actually pretty good timing at that point on our part. Sometimes you’re better lucky than smart, but the stock doubled through April 2024. Looking at the chart, it’s really been in what I consider kind of a wide trading range ever since. Again, this is a company where in October 2023, Kellogg split up into two businesses. So, you have Kellanova, whose ticker is K, that’s the higher-growth, higher-margin snacks business, and WK Kellogg, which is the slower-growth, lower-margin traditional cereal business.
Taking a quick look through our model here, we’re only looking for flat revenue over the next five years. So, again, I would say that’s probably a combination of lower volumes over time, offset by inflationary price increases. But, overall, we think this is a business that management and the company had underinvested in prior to its spinoff.
The company had been using it as a cash cow to support the other higher-growth businesses here. So, as a stand-alone business, we think it’s going to be able to use its free cash flow now to be able to reinvest in its own business. Our investment thesis here is, as they invest or reinvest in their own supply chain, drive enhancements there, they’ll be able to get some additional operating efficiencies. So, this is a margin expansion story, in our view. So we’re looking for the operating margin of 4.5% in 2024 to expand toward more normalized levels that we see in the food business. In this case, getting to 11.6% by 2028, yet the stock is only trading at 10 times P/E ratio right now.
Dziubinski: Now your second stock to buy this week is Sealed Air SEE. Walk through the deck on this one.
Sekera: Four-star-rated stock trading at a nice healthy discount of 37%, 2.3% dividend yield. A company we rate with a narrow economic moat based on switching costs. Again, Sealed Air’s equipment is usually embedded within its customer’s production process. Once you’re in someone’s process, very difficult to get out. But a stock we do rate with a High Uncertainty Rating.
Dziubinski: Sealed Air’s stock is well off its 2022 highs, and it seems to be in a bit of a holding pattern. What’s the story here?
Sekera: This is another one we recommended in January of 2024, but since then it looks like the stock has had several pretty sharp moves both up and down. This would be one that, if you did buy an initial position back then, as it sold off, you added to that position and then when it moved back up on some of these spikes, took some profit off the table, you probably would’ve done OK over that time period. So it hasn’t necessarily been just like a buy-and-hold and put away stock, but one that you probably wanted to manage your overall position. But like I said, essentially the stock has kind of gone nowhere over that time period.
The story here is, this is just a good example of how the pandemic led to very large shifts in the business cycle, and in some ways, specifically with this company, that’s still kind of working itself out.
So, overall that stock had ramped much higher in 2021 and into 2022, as you noted. But, of course, at that point in time there’s a big increase in demand for their food-packaging products. We had a big shift to goods away from services, and then we also had their customers overordering products just due to shipping bottlenecks. Then in 2022 and 2023, the results were pressured because consumers were unwinding those excess inventories that they purchased. Consumer spending of course then shifted back toward services and away from goods.
So, in 2024, we did see some further top-line erosion, but encouragingly we did see margins start to turn around after bottoming out in 2023. For this year, 2025, we’re still forecasting just flat top-line growth, which of course is better than the declines that we’ve seen for the past couple of years. But then looking for growth to kind of normalize back toward a 3% rate thereafter. We’re also looking for a rebound in operating margins to get back toward more normalized levels. That should drive kind of that average earnings growth to about 8% over time. Taking a look at the stock specifically, it only trades at about 10.5 times our 2025 estimate of $3.22 per share.
Dziubinski: Sealed Air’s CEO is leaving after less than a year in the role. Does that concern you?
Sekera: It does, but I think that’s also why you need to buy a stock like this at kind of that big discount from that long-term intrinsic valuation. I don’t know exactly what’s going on with that, but obviously he was certainly not the right fit for the company for some reason. But then again, it doesn’t appear that he really made that large of an impact one way or the other. So, I guess hopefully this time around the board will be able to find someone or find the right person to take over who can actually help improve this business over time.
Dziubinski: Your last pick this week is Dow DOW and, wow, look at that yield.
Sekera: Four-star-rated stock, I’m sorry, it’s a 5-star-rated stock, trading at a 40% discount. As you mentioned, that’s a 7.4% dividend yield. Taking a look here, it’s a narrow economic moot based on cost advantages and a Medium Uncertainty. As you noted, it does have a very high dividend yield. At the end of last week, I did reach out to Seth Goldstein, he’s the Morningstar equity analyst who covers the company, and in his opinion, he thinks the company should be able to continue to maintain that dividend going forward.
Dziubinski: Well, that’s amazing. So, Dow stock is down about 26% over the past 12 months. So what’s going on?
Sekera: So again, this is just another one where we see how the pandemic and the supply chain bottlenecks and just the shift in consumer patterns have kind of worked its way out over time. So originally we thought much of the inventory destocking that led to the 2023 and the early 2024 declines in the revenue was kind of behind them, and that 2025 would see kind of that return closer to normalized demand levels. However, demand in Europe and China both remain below normal. So again, we now think that this is probably going to be another down year for the company in 2025. Specifically, the company did issue first-quarter guidance below consensus estimates. Just again that lower demand, lower volume growth, and higher input costs are also going to weigh on profits in the short term.
Dziubinski: Dave, why do you like the stock today then? Is there a catalyst in sight that could boost the stock near term, or is this more of an idea for patient longer-term investors?
Sekera: I think it’s more of an idea for patient longer-term investors. Again, you get a very nice high dividend yield, so you’re getting paid to wait on this one. But in my mind, I think this is really that true value situation that I think investors are going to have to wait to see that upturn in the global economy, specifically in Europe and China, for the stock really to start performing. Taking a look specifically at our model, we’re looking for revenue to be up less than 1.0% in 2025. But then the average 4.4% top-line growth thereafter, is essentially just a combination of inflation and a very slight increase or rebound in volumes, but it is a very high-cost or high fixed-cost business. So, we’d be looking for a slight increase in adjusting operating margins to 5.6% this year from 4.4% last year. Then looking for further increases in that operating margin going forward.
We’re modeling a 7.3% in 2026 and 9.4% in 2027. Just to put that in context, the average operating margin over the prior five years was 8.8%. So again, not getting to that kind of historical average until well into 2026 or early 2027. And I think this is also a good example of why you can’t always necessarily rely on like P/E multiples to try to find intrinsic value.
When I look at the P/E multiple here, it trades at 17.8 times our 2025 earnings forecast. That sounds pretty high here in the short term, but when I look at our 2026 earnings forecast, it trades under 14 times there. So again, I think there is a lot of upside leverage here as this is a high fixed-cost business. Between just a little bit of top-line growth and a little bit of margin expansion, you can really see this one or the earnings start to expand pretty quickly thereafter. The current multiple would actually be at less than nine times our 2027 earnings estimate. And, like I said, in the meantime, you’re collecting over a 7% dividend yield.
Dziubinski: 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 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.