Plus, a huge fair value increase for one Mag 7 stock.
On this week’s episode of The Morning Filter podcast, David Sekera and Susan Dziubinski catch up on which countries have and haven’t inked trade deals with President Trump and speculate whether the Fed will or won’t cut interest rates in September. They also discuss which company earnings to watch this week (Eli Lilly LLY is one) and recap how several former stock picks look after earnings.
They cover new research from Morningstar about four members of the Magnificent Seven that reported earnings last week—including the one that got a 20% fair value upgrade after earnings. And this week’s stock picks include a handful of undervalued stocks with significant upside potential.
Episode highlights:
The Fed: Will They or Won’t They in September?
Company Earnings to Watch This Week
New Research on MSFT, META, AAPL, AMZN & More
Undervalued Stocks to Buy
Read about topics from this episode.
Follow Morningstar’s coverage of earnings season: Company Earnings
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
Read the full earnings reports for Microsoft, Meta, Scotts Miracle-Gro, Kraft Heinz, and Boeing.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Follow us on social media.
Dave Sekera on X: @MstarMarkets
Dave Sekera on LinkedIn: https://www.linkedin.com/in/davesekera
Facebook: https://www.facebook.com/MorningstarInc/
X: https://x.com/MorningstarInc
Instagram: https://www.instagram.com/morningstar...
LinkedIn: https://www.linkedin.com/company/5161/
Viewers who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Read more from Susan Dziubinski and Dave Sekera.
Subscribe to The Morning Filter to get notified when we post. We’ll see you next Monday!
Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now, those in our audience joining us on video are going to see that Dave is in some wonderful, perhaps tropical, if not beachlike, vacation villa. But he’s still with us on The Morning Filter, so we appreciate that, Dave. What kind of mug have you matched with that beautiful background of yours?
David Sekera: Good morning, Susan. No, not exactly tropical. I’m in the Saltaire, which is on Fire Island in New York, so I do have my Fire Island mug going here this morning. But I’m visiting with my brother-in-law and his family, just taking a relatively long weekend, but I’ll be back in the office tomorrow.
Dziubinski: Well, thanks for taking the time for us on your vacation. We appreciate it. Now, we’ve got a full show, so hope viewers and listeners have full cups of coffee because we have a lot to go through. It was a busy week with the economy and the markets last week. Let’s start with President Trump’s Aug. 1 tariff deadline. That’s come and gone. So Dave, where do we stand right now with trade deals and no trade deals, and what’s your best guess at what the implications will be at this point?
Sekera: Yeah, I mean, there’s a ton going on right now. So we’ve already completed the trade agreement with the EU, which is, of course, one of our more important trading partners. As I think we discussed last week, it sounds like talks with Mexico appear to be going pretty well, so we have extended the current tariff rate with Mexico for 90 days. And in the meantime, Mexico has agreed to halt nontariff restrictions.
As we discussed last week with Canada, it didn’t sound like the talks there are going on or at least not progressing very well, so we did increase the tariff there to 35% from 25%, although goods under the USMCA, which is the existing agreement, do still remain exempt for now. Trade agreement with South Korea is done. That’s a 15% tariff with a $350 billion commitment to invest in the US. Now, negotiations with India sound like they’re probably getting difficult, and I think we’re playing hardball with India right now, so we imposed 25% tariffs there.
But really, I think it’s all going to be about China still. I think the market’s going to be very focused on the status of the negotiations there. That tariff pause deadline, of course, is next week on Aug. 12. Now, my understanding is there’s still a lot of negotiation points that are still in the very early stages with China. I think it’s highly unlikely that we would reach a deal by then, but if the talks are constructive, I think that we would continue to keep extending that paused deadline. I think the market would take that in stride if that happens. If the talks break down or are not constructive, then I think that’s really what the big question will be. I don’t think the market would be very happy if we end up trying to go back to putting those really punitive tariffs on China.
Dziubinski: All right. Let’s pivot over to jobs. Friday’s jobs numbers were startling. Not only did the July number come in well below what people were expecting, but the May and June numbers were then sharply revised downward as well. And the market wasn’t happy about any of it. So what’s your take?
Sekera: Well, and again, this is a perfect example of why, whenever we’ve talked about the payrolls numbers in the past, I discussed that, yes, I will watch the payroll numbers, but really, I do that more just because the market is paying attention to it than I think that it’s really necessarily a useful indicator as far as what’s really going on in the real economy. I think it’s better for watching longer-term trends than it is necessarily a point-in-time indicator. So I think the takeaway here from last week is that the labor market has been in a much worse position than what’s been reported. As you mentioned, they missed numbers last week. Nonfarm payrolls came in at 74,000, much worse than expected. Consensus was only looking for about 102,000.
But to me, what was much more shocking was the downward revisions of the past two months. We lowered the May number by 125,000, so this number only came in at 19,000. So a huge decrease from the first report, which was 144,000. And then the June number revised down by 133,000 to 14,000. That came down from 147,000. So essentially, those revisions took away all of the previous reported job growth in May and June.
Now, as we’ve discussed, payroll numbers are subject to revisions over time. Last February, the BLS released their annual benchmark. We talked about how that revision lowered the number of jobs for 2024 by 600,000. That’s an average of about 50,000 per month. Considering the average last year was 186,000 per month, that would have painted a much different picture over the course of last year than what was actually reported at the time. So with these numbers, it’s not necessarily that you take them with a grain of salt. I think you have to take them with a boulder of salt.
Dziubinski: Now, as expected last week, the Federal Reserve held rates steady. And before the meeting, you had said that if Federal Reserve Chair Powell didn’t suggest there’d be a rate cut in September, the market wouldn’t be happy. And the market did pull back a bit after the meeting. So, given all that’s happened since the meeting, what’s the market pricing in today? A cut in September or no cut in September, and why?
Sekera: Yeah, a cut in September, to put it mildly. So the probability of a rate cut did surge in September for, after the payroll numbers came out, it’s now 87%. To put that in context, after the Fed meeting had dropped as low as a little bit under 40%. And similarly, looking at the probability of rate cuts, for two cuts or more, by year-end, that’s now over 90%, and there’s now also a 46% probability of three cuts by year-end, so I believe that would be, like, one cut per meeting through December.
Now, as we talked about last week, I thought the market was expecting Chair Powell to allude that it was his opinion that economic conditions would be appropriate to start cutting rates at the September meeting, and if he didn’t, that the market would be disappointed, which is what happened. Now, considering just how much of a disaster the jobs market has been for the past three months, at this point, I just don’t see how the Fed doesn’t start to ease monetary policy at the September meeting.
Dziubinski: And we also have earnings season in full swing. So, let’s look to the week ahead. Which companies reporting this week are on your radar and why?
Sekera: Yeah, there’s still a lot of earnings coming out this week. So a couple that I’m going to be most focused on where we have differentiated opinions from the market are going to be, number one, Eli Lilly LLY. So we’ve talked about this stock a number of times over the past year. We’ve recommended to sell this stock. It’s been well up into 1-star territory. It’s fallen a bit, but it’s still a 2-star-rated stock at a 17% premium to fair value. Now last week, its major competitor, Novo Nordisk NVO, its stock just got hammered. It was down 33% after they reported revenue growth and earnings were under a lot of pressure from generic GLP-1 weight loss drugs. So we’ll see what happens with Lilly this week.
We have Devon Energy DVN. Now, Devon has kind of been our go-to pick for domestic oil stock exposure. That’s a 4-star-rated stock at a 20% discount. Not really looking for anything in particular out of earnings. I just kind of want to see it perform in line and will be happy enough with that. International Flavors & Fragrances IFF, that has been a stock pick we had talked about a number of times over the past couple years. It has just been relatively disappointing. That stock just hasn’t gotten back on track. And in fact, our analyst team has cut our fair value estimates several times since the beginning of this year. So I think if results could show better stabilization in their fundamentals, the stock could start to see an upswing. Otherwise, I think it’s probably going to languish for a while. It is very undervalued at 27% discount, puts it in 4-star territory.
And then lastly, McDonald’s MCD, and I don’t think there’s really anything to do with the stock here. From my point of view, it’s really just more interesting to listen to their commentary regarding the state of the US consumer. And in this case, I really want to hear about what’s going on with their international business. Just as an aside, it seems to me like the US, while the jobs numbers were really bad, still from an economic point of view is probably holding up better than I think most people had expected. What I’ve been seeing is that international businesses have been a lot weaker than I think what most people had expected. And of course, I also just want to see if they give any commentary as far as, like, where they see consumers today, as far as rebuilding their disposable income as compared to where inflation had been the past few years.
Dziubinski: We have a lot of new research from Morningstar to talk about this week. Let’s start with Microsoft’s MSFT results since Microsoft has been a pick of yours. The stock was up about 4% after earnings, but Morningstar substantially raised its fair value estimate on Microsoft’s stock. So is the stock still a pick of yours after earnings?
Sekera: Yeah, I mean, when I read through our note here, it just seemed to me like the results were just exceptionally strong this past quarter. And I think this just exemplifies why I’ve highlighted Microsoft a number of times as just being a core holding for pretty much anyone’s portfolio. As you mentioned, we did increase our fair value pretty substantially, increased it almost 20% up to $600 per share. Now, considering Microsoft is the second-largest in our US index by market cap, that’s a huge increase for a mega-cap stock. And in fact, that’s enough really to start to skew kind of our overall total market valuation considering Microsoft in and of itself represents 6.6% of the Morningstar US Market Index, leaves the stock in 4-star territory, trading at a 13% discount to fair value. So yes, still looks attractive to us.
Dziubinski: So then, Dave, unpack those results and the guidance and what specifically impressed Morningstar enough to increase that fair value estimate by that much?
Sekera: Yeah, every business segment came in above guidance. Revenue was up 18% year over year, which, I mean, that’s just a huge percent increase for a company this large. And they got some good fixed cost leverage, operating margin expanded 110 basis points to 44.9%. Azure, once again, the star of the show. Revenue there up 39%, and I think it’s still poised to grow even faster. We think Azure has been capacity constrained and that as additional capacity comes online in the second half that that will provide additional growth.
Taking a look at guidance for next quarter, we thought it was robust, the midpoint coming in above consensus estimates. But one thing that kind of really stuck out to me is, and I recommend everyone to go read Dan Romanov’s note, he’s the equity analyst that covers the stock, He actually was particularly excited to hear management mention quantum computing in really the most tangible way that the company has ever talked about it in the past. Now earlier in July, I think the company did announce that they would be able to deliver the world’s first operational deployment of a Level 2 quantum computer. This computer is supposed to be operational by the end of 2026, so not that far away. And he sees quantum computing as a long-term growth driver for the company.
Now from my perspective, I still think we’re in somewhat of the early innings of artificial intelligence. So the question to me is, are we already at the cusp of seeing quantum computing become reality? And if so, that’s just going to be another huge paradigm shift in technology, the implementation of that technology, and, for those companies that are involved in the quantum computing, that’s just going to be like AI all over again.
Dziubinski: Now we saw Meta Platforms’ stock META shoot up 11% after earnings. Morningstar raised its fair value estimate on the stock, too. So what led to the fair value increase on Meta, and is the stock attractive after that boost?
Sekera: Yeah. They also reported very strong results. Revenue up 22%. Also saw their margin expand another 500 basis points to 43%. They did increase their capex but only very slightly, up to 69 billion from 68 billion. So, that’s less of an increase than what we saw from Alphabet, the parent of Google, when they reported their numbers. But to me, it still shows to me that these companies are seeing enough need to spend continually more on building out their AI capabilities. As you mentioned, we increased our fair value up by 10%. Takes the stock fair value estimate to $850 per share. Leaves it at 12% discount to fair value, but that’s in 3-star territory for the stock.
Overall, we just think that the investment thesis we’ve had on this company just is continuing to play out. AI tools are driving better engagement and monetization for their platforms. Meta saw people spent more time on both Insta and Facebook. And advertisers are beginning to use their AI tools in order to improve their advertisements. And we’re seeing ad recommendations using that AI leading to higher conversion rates, which improves the value of those ads. So again, everything kind of just in line with what our long-term investment thesis has been.
Dziubinski: Now, Apple AAPL put up better than expected results. And Morningstar raised its fair value estimate on the stock by $10. So again, Dave, what led to that fair value increase? How’s Apple stock look from a valuation perspective after earnings?
Sekera: Yeah. Revenue was up 10%. iPhone sales were better than expected and that resulted in them being able to beat guidance for the quarter. Taking a look at the guidance for this current quarter, mid- to high-single-digit growth. Also a little bit better than expected. So, we did bump up our fair value by 5% to $210 per share. Not necessarily a huge increase, but certainly, good, positive momentum. But really, it just doesn’t seem like there’s all that much new to talk about regarding the company and the stock.
Taking a read of our note, I still think the biggest concern from our equity analyst team is that the AI software with Apple still needs some major improvements to be much more compelling. But having said that, AI is not necessarily a significant disrupter to their iPhone in the medium term. Taking a look at the stock, it had fallen enough year to date. It is in 3-star territory. It started off the year in 2-star territory. So, with that bump up in our fair value, it looks like it’s trading at just below fair value right now.
Dziubinski: Now, Amazon AMZN posted solid results, but the market seemed disappointed with the company’s guidance. So, what did Morningstar think?
Sekera: So, the results did come in pretty good. I mean, they beat the high end of guidance on both the top and bottom line. Revenue up 12%. Again, another story where that operating margin is expanding. Went up to 11.4% from a 9.9%. But I think what the market was disappointed in was AWS, Amazon Web Services. That’s its cloud hosting platform. So there, we thought results were solid, but they weren’t necessarily as strong as what they saw from a number of their competitors. Plus, their margins in AWS were lower than last quarter, so I think that’s also a concern from the market’s perspective.
Taking a look at our fair value, it’s not a concern for our point of view. In fact, we bumped up our fair value to $245 per share from $240 per share. Our analyst team expects AWS revenue and margins to both expand and grow over the future. We think AWS capacity has been constrained. So, another similar story where, as that continues to get expanded over the second half of the year, we should see additional growth. And capex we expect to decline overall, but that’s not because they’re pulling back on their AI spending. They’ve had elevated spending on their satellite launch program. So, as that winds down, that actually should end up helping their margins and their ability to generate free cash flow.
Dziubinski: Now, Amazon’s stock has been a pick of yours in the past. So, how does it look after earnings? Is the stock a buy, or is it more of a “keep on your radar” type situation right now?
Sekera: Yeah, I think it’s more of a “keep on radar” type of stock at this point. It’s a 3-star-rated stock, 12% discount. We rate the company with a medium uncertainty and a wide economic moat. And I would note here, it is a very wide economic moat. One of the few that uses four of the five moat sources to dig that moat. But for now, probably nothing to do in that stock.
Dziubinski: All right. Let’s talk a little bit about some new research around some of the chemicals companies that have been picks in the past. We saw both Scotts Miracle-Gro SMG and FMC FMC fall about 8% after reporting earnings. So, what’s Morningstar’s take on the results for both of these companies, and is either stock attractive today?
Sekera: Yeah, and some of my commentary here is idiosyncratic to these individual companies. But overall, I’d say the takeaway is all of the chemical companies in the basic materials sector seem to do pretty poorly after earnings this quarter. To some degree, while each company had its own reasons for why it sold off, taking a look at the jobs numbers, taking a look at the economy, I’m starting to wonder if, maybe, the market is starting to pick up on the economy maybe slowing more or going into more of a deeper slowdown than what was expected. If so, kind of this area of these chemical commodity companies is where I’d expect to see that start to take a hit first.
Now, going into the individual companies here, first we have Scotts Miracle-Gro. Now, our analyst noted this was kind of an odd trading session. So we thought the earnings report was just fine, revenue was up year over year, operating margins were expanding. So in after-hours trading when those numbers first came out, the stock actually rose 4%. But then during the conference call, it turned the opposite direction. Ended up falling down 10%, so you had a 14-point swing. Now when that happens, typically that tells me that management maybe came out with weaker-than-expected guidance or there was some other negative catalyst. In this case, it seems like it was a bit of a self-inflicted error on the company’s part.
Now management on the conference call had highlighted a sell-side analyst report. They opined that they thought Scotts Miracle-Gro was going to start losing market share to private-label penetration. That’s not new news. I mean, they’ve been competing with private label for decades. Yet management never really gave a reason to the market as far as why they didn’t think that they would start losing market share. So in this case, it seems like, while they talked about it, they didn’t necessarily address it. And by doing that, that started the worry amongst investors, and the stock sank thereafter. So again, we held our fair value steady. There was nothing new to change our long-term assumptions. Stock trades at a 31% discount to fair value. It’s a 4-star-rated stock.
However, at this point, until the company really is able to address the issue of that private-label competition and whether or not we’ll see any additional private-label penetration, I think the stock is going to languish. So I think the company’s got some education that they need to do.
Dziubinski: And what about FMC?
Sekera: Unfortunately, this is kind of another unforced error by the company. We think the company did a poor job of communicating guidance. So, Seth, who’s the analyst that was on this company, was listening to the conference call, and when the company was asked about why they were lowering guidance on their earnings call, our analyst didn’t think that they did a great job of explaining it. So FMC is in the process of making a divestment of its India commercial business. So to us, it appears that the guidance that they gave was flat to prior guidance, but you have to adjust for that divestiture, and it doesn’t seem like the market is interpreting it the same way.
So this is a stock that’s significantly undervalued compared to our fair value estimate. I think it trades at over a 50% discount to fair value. It’s a 5-star-rated stock. However, I would note, we do rate the company with a high uncertainty, and that high uncertainty was certainly justified this quarter. But overall, we do think the company does have a narrow economic moat.
Dziubinski: All right. Let’s stay with the chemicals industry theme. We had LyondellBasell’s stock LYB also pulled back quite a bit after earnings. Results looked pretty weak on this one, right?
Sekera: No, I mean, the results were just awful, to put it bluntly. Adjusted EBITDA was down almost 50% versus the prior-year quarter. So I did have a quick call with Seth, who’s the equity analyst that covers this one, at the end of last week. Now, overall, he thinks that we are near the cyclical trough in the commodity chemicals area. The company is taking the right actions in his view to help be able to improve the business for the long term. But we did cut our fair value 10% down to $90 a share.
Now, the other concerning aspect that I heard when I was talking to Seth is that, heading into earnings, Seth had thought Lyondell’s dividend was going to be intact. And unfortunately, at this point, this is no longer the case. When he updated the financial model, it now shows that free cash flow is no longer going to be able to cover the dividend in 2025 and 2026. So in our view, if global macroeconomic conditions don’t improve next year, you may see Lyondell cut that dividend in order to be able to preserve its cash.
Now taking a look at the stock here, at least it fell less than Dow had after Dow had reported earnings. To some degree, I think that’s because Lyondell has a greater amount of its revenue in the US as compared to Dow. We see the US doing much better than a lot of the international, the global developed markets as far as the economy and their use of chemicals. Lyondell also does have a stronger balance sheet, so they can use that to support their dividend whereas Dow doesn’t. But again, this is one where we thought that dividend was going to be OK. And at this point, it’s a much higher probability that you could see a cut maybe in the next couple of quarters or next year.
Dziubinski: Now you did mention Dow Chemical DOW, and we received quite a few questions about it after last week’s episode. And we just ran out of time last week to talk about it, so let’s cover it now. Dow stock cratered after reducing its forecast and cutting its dividend in half. So viewers want to know, Dave, what’s Morningstar think of Dow stock today?
Sekera: Yeah. And I had a pretty lengthy call with Seth because we covered this one as well. So I did want to talk to the analyst before we talked about this one on The Morning Filter. And so first of all, I mean, just taking a look at the market action and taking a look at the stock chart based just on how far the stock fell and considering the stock is now, I think, lower than even in early 2020 at the beginning of the pandemic, I think it’s just indicative just how much the poor results and the dividend cut really surprised the market. Now from an operating perspective, sales fell across all of its different business lines. They noted that pricing was weak, that there is excess capacity globally within the industry. And of course, the operating margins fell. It suffered negative fixed cost leverage from the lower revenue.
Now looking at the revenue by geographic region, it’s about a third, a third, a third. So a third in the US, a third in Europe, third of rest of world. So compared to Lyondell, they have more international exposure, and I think that’s part of the reason that the Dow numbers were better. When you look at the different geographic regions, US results were OK, except for autos. That was weak. But really, it was management calling out the slowdowns in international construction and manufacturing being the worst areas. Specifically, China I think is one of the weakest. And of course, the Chinese economy and their construction market is really hard to get a read on exactly what’s going on there.
So what’s our outlook now? We do think the company are taking some of the right steps to help improve margins for the long term. They are closing some facilities in Europe. They’re going to onshore back to the US in some of these products where we think that they have an advantage in their feedstocks, so that should help margins over time. And unfortunately, we did push back when we expect kind of the cyclical recovery in commodity chemicals to take hold.
Originally, we had thought it was going to be here in 2025. It’s now probably 2026 at the earliest and, in fact, may not even be until 2027 at this point. Seth noted that he was pretty disappointed that the company had cut the dividend. He had thought that they were going to be able to maintain it here in 2025. And so kind of reading between the lines here, when I was talking to Seth, he mentioned that after last quarter, after the first-quarter earnings release, he spoke directly to the company. They told him at that point in time specifically that they did not have any plans to cut the dividend.
So with that dividend cut now, the question to me is: Does this indicate that the company is really battening down the hatches because they just don’t see that cyclical recovery coming for a while, and they’re doing that in order to protect their balance sheet? I don’t know. Sure seems that way to me. So the stock today, again, very undervalued, trades at about half of our fair value estimates, a 5-star-rated stock, very healthy dividend even after that dividend cut. But I think you’re going to need to start seeing improvement in a lot of these other global and developed-market economies before this stock starts to work.
So having said all that, I know it’s a very long answer with both Lyondell and Dow, so if you’re involved in either of these stocks or because they are so undervalued you’re taking an interest in it, I would just highly encourage you to read through Seth’s analysis on both companies before you get involved in these stocks or take additional positions on.
Dziubinski: All right. And a reminder to our audience, if you have a question for Dave, be sure to send it to us at themorningfilter@morningstar.com.
All right, Dave, well, a couple of your recent consumer defensive picks reported earnings last week. Kraft Heinz KHC and Hershey HSY. Looks like Morningstar held its fair value estimates on both stocks after earnings. So what’d you think of the results, and is either stock attractive after earnings?
Sekera: Yeah, Kraft Heinz still looks like it’s really attractive to us. It’s a 44% discount, puts it well into 5-star territory, 5.6% dividend yield. Now, taking a look at the results, Erin noted that, yeah, they were a bit softer than expected. Organic sales were down 2%. The operating margin contracted a little bit. However, the company did maintain their guidance for adjusted earnings for the year, so we’re looking at $2.51 to $2.67. So when you use that midpoint of that range, the stock’s still only trading at 10.6 times earnings.
However, even at that valuation, it’s just not getting the market’s attention, for whatever reason, and I think that’s probably a big reason why the company is currently rumored to be evaluating strategic alternatives. That could include a breakup or a spinoff to try and unlock shareholder value. I think overall, Kraft is probably considered by the market to be too big to buy in and of itself, but if we do see different areas spun off, those parts could garner a buyout bid and help unlock shareholder value that way.
Dziubinski: And, what about Hershey?
Sekera: Yeah, so Hershey, it looks like the stock traded up a little bit after earnings, but then it ended up just giving that right back, with the softer overall market. The stock is a 4-star rated stock, but just barely. It trades at a 10% discount, so it’s kind of right in that range between 4 and 3 stars. Dividend yield attractive, 2.9%, not necessarily all that high. This is a stock we recommended several times earlier this year, but now that it’s traded up, it’s only at that 10% discount. Yeah, I see just better areas where you can get a greater margin of safety elsewhere. So on this one, maybe wait until you see an improvement in cocoa growing seasons and for cocoa prices to start coming back down.
The other thing I just really want to mention for investors on this stock, this is one where I do think you need to ignore kind of that price/earnings ratio for right now. So the PE this year is over 30 times, based on the company guidance of $5.80 to $6.00 a share. But over time, as cocoa prices come down and you’ll start seeing more normalized operating margins, more normalized earnings, that would end up taking that PE back down on a normalized basis below 20 times, taking a look at our model. So again, this is one where, yeah, I don’t think you really want to look at the PE as far as trying to gauge the long-term valuation of the company.
Dziubinski: Now, Boeing BA was a pick of yours in spring, and the stock pulled back a little bit after reporting, but Morningstar raised its fair value estimate by a few dollars. So what do you think of Boeing stock after earnings?
Sekera: Specifically, that was one of our picks on the May 19 episode of The Morning Filter. In that one, we did identify five different Trump trade picks. He was doing some international trips, number of different announcements of governments agreeing to buy more planes from Boeing. It was also, Boeing’s just a beneficiary of a lot of these other countries increasing their spending on defense as well.
Taking a look at the quarterly results, I think they just showed the company’s on track with expectations. No real new news to report. Our fair value increase was only 3%, not necessarily a big increase, but again, I like to see it moving in the right direction. Now, since that recommendation, the stock has moved up. It’s currently a 3-star rated stock at an 11% discount, so no longer at that margin of safety that we’d be looking for.
Dziubinski: And UPS UPS has also been a pick of yours in the past, and that stock fell about 10% after weaker than expected report, and the company also withheld its guidance. So what do you think of those results and of the stock today?
Sekera: Yeah, I mean, it’s just like UPS just can’t catch a break. I mean, they had the driver contract renegotiations I think in mid-2023. That increased their costs. Throughout 2024, they worked to try and improve their cost structure to accommodate those higher costs. And now here in 2025, Amazon announced it’s reducing the amount of volume that it’s putting through the UPS network. And then the company’s had to deal with the huge impact of the pull forward as people were buying before the tariffs, and then of course now the subsequent pullback in those business-to-business deliveries. So again, it’s been very difficult to really understand kind of the true long-term earnings power of this company as it’s gone through all of that.
Now in the short term, definitely some disappointing margin performance, specifically in their international profitability. But they also have not been able to reduce their costs fast enough to account for the lower domestic delivery volumes as well.
Looking forward, very cloudy here in the near term. Similar to FedEx FDX, management did not provide guidance for the full year, citing kind of that heightened uncertainty surrounding the impact of the tariff changes on consumer demand. So in this case, we did lower our fair value by 5%. Again, not that big of a decrease but going the wrong way in this case. So overall, there is enough margin of safety that it is a 4-star-rated stock, trades at a 28% discount, pays a pretty healthy dividend yield of over 7%.
Dziubinski: Now we saw some significant upward price movement in a couple of your picks, your prior picks last week. And those were in Chart Industries GTLS and Marvell Technology MRVL. So review what happened with each of these, and tell us whether either stock is still attractive after the price movement.
Sekera: So Chart Industries as a small-cap stock pick is going all the way back to early 2024. The stock is up about 40% since then. They announced that they’re being bought out for $210 a share. So I think there’s still a few percent upside here to that buyout price, and I think we expect that that buyout will end up closing.
Marvell shares, they traded up about 8% last week after a competitor research firm put out some estimates that they think that the company’s business with Microsoft’s next gen AI chips are going very well. So it traded up enough that that stock did move into 3-star territory. This is a stock we had highlighted back on the March 17 and May 12 episodes of The Morning Filter. We’d also reiterated our call in mid-June on that one as well.
And then another stock that we’ve recommended in the past is Huntington Ingalls HII. That was first recommended about a year ago. And this is also a good example why I think, when you first start a position in an individual stock, maybe only start off at a half-size or maybe third-size position so that way if the stock does go down, you can dollar-cost average into it. When you look at the chart over the past year on this one, the stock got hit several times pretty hard as the company’s margin was under pressure just due to their inability to pass through inflationary increases.
We generally kept our long-term view of the company the same over time. Now that they’re negotiating new contracts with the government on the next batch of nuclear submarines, we expect that’s going to generate higher margins. Looks like that’s starting to come to fruition. That stock moved up 8% after earnings. Still undervalued at a 17% discount, so trading in that 4-star range.
Dziubinski: All right. Well, it’s time for everyone’s favorite part of the podcast, and it’s your picks of the week. And this week, Dave’s kept things pretty simple. It’s five cheap stocks that look attractive at the start of August. Now Dave’s first pick this week is Alphabet GOOGL. Dave, run through the numbers on it.
Sekera: Yeah. A stock we’ve talked a lot about over the past year, a 4-star-rated stock, still at a 20% discount, company we rate with a medium uncertainty and a wide economic moat. In fact, that wide economic moat is bolstered by four of the five different moat sources. And I think it’s still probably the most undervalued of the Mag Seven stocks.
Dziubinski: Now Alphabet did put up some good second-quarter numbers, but the stock really hasn’t moved that much. Is it really those Department of Justice lawsuits overhanging on the stock, or is there something else going on, do you think?
Sekera: Yeah, I think it’s a confluence of a lot of different things that’s going on with Alphabet. But yes, I do think the market is probably overly pessimistic regarding the impact of the DOJ lawsuits. Ultimately, our analytical team doesn’t think that Alphabet will end up getting broken up. However, even if it does, they did a sum of the parts analysis, and based on that analysis, they think the stock is still worth at least what it’s trading at today.
I think the market’s also still very concerned about how artificial intelligence could end up disrupting Google’s search business over time. For now, we’re not seeing that. In fact, the integration of AI features such as AI overviews and the AI mode have not only maintained their dominance in Search, but Search actually grew 12% year over year this last quarter as compared to a 10% growth rate the prior quarter.
Also, a lot of concerns about the potential monetization of all of the money they’re spending on AI. Last quarter’s earnings, they talked about increasing their capex spending to 85 billion from 75 billion. So I think investors still want to get that clarity that they will be able to generate excess returns on all of that spending over time. Our opinion is that it will end up generating excess returns, and that when we incorporate that into our model, we think the stock is very undervalued here.
Dziubinski: And your second pick this week is Adobe ADBE. So what do Adobe’s key metrics look like today?
Sekera: A 4-star-rated stock, 38% discount. Again, a stock that in the technology sector, like a lot of stocks, we do rate with a high uncertainty. But it does have a wide economic moat based on switching costs.
Dziubinski: Now it seems like here’s a stock that just can’t seem to find its footing this year. How does Morningstar’s take on Adobe differ from that of the market’s?
Sekera: Yeah, so I think the market right now is very focused on the potential bear case here, which is that artificial intelligence could reduce or even eliminate the need for Adobe’s Creative Cloud product. We don’t think that’s true. We think that Adobe’s new products utilizing AI, such as AI Assistant, Firefly, GenStudio, are all helping be able to offset any potential pressures you could see in some of their other product lines. Firefly specifically leaves Adobe well-positioned with artificial intelligence. We think that product’s still at the very early stages of monetization.
Took a quick look at our financial model over the weekend. We’re looking for a 9% compound annual growth rate for revenue over the next five years, looking for a 14% increase on a compound annual growth rate for the operating margin over the next five years, but yet the stock still only trades at 17 times earnings.
Dziubinski: Your third pick this week is Salesforce CRM. Run through the numbers.
Sekera: Salesforce trades at a 23% discount to fair value. It’s in 4-star territory. Again, another stock with a high uncertainty rating, but does have a wide economic moat based on two moat sources of the network effect and switching costs.
Dziubinski: Now, Salesforce is one of those companies that you think is really smartly using AI in its products and services, right?
Sekera: Yeah, so again, it’s just this play on the theme that we’ve talked about a couple of times, that we think the market right now is at the point where investing in AI is going to start shifting away from the focus on hardware. We think hardware stocks generally are pretty fairly valued if not getting to be overvalued again, and the market really is looking for those companies that will be able to use AI to drive their top line growth and/or improve efficiency and generate higher operating margins over time. When we take a look at this company’s sales of Agentforce, which is its AI-powered platform, is showing strength, seeing very strong growth there.
Took a quick look at the company’s financial model. We’re looking for compound annual growth rate on the top line of 8% or better over the next five years, leading to earnings-growth rate of over 13% over the next five years, and it’s just another company that’s just not especially expensive from a PE point of view. Trades at 23 times this year’s earnings, comes down to 21 times next year’s earnings. So, this is just a stock that, especially when it gets to be in this undervalued area, we think is a buying opportunity. One of these stocks that doesn’t trade in 4-star range very often within the technology sector. Our team has just highlighted this as still having one of the best combinations of top line growth potential, margin expansion, and a strong balance sheet, and I think the market’s giving you that opportunity to get involved in this one today.
Dziubinski: Now, your next pick is a stock that I don’t think we’ve talked about before, or if we have, perhaps it’s been a while. It’s Workday WDAY. Give us the highlights on this one.
Sekera: Workday trades at a 26% discount to our fair value. Puts it in 4-star territory. Another one with a high uncertainty rating because of the sector it operates in, but based on its switching cost, we do rate the company with a wide economic moat.
Dziubinski: So then is Workday another one of those sort of AI plays, Dave?
Sekera: I think so, and I think AI provides Workday with an extended growth runway. Workday Illuminate is their latest product offering utilizing artificial intelligence, helps human resources and financial professionals with recruiting, payroll, financial auditing. So again, we think this is a good long-term play on the utilization of AI.
Taking a look at our model here, five-year compound annual growth rate for revenue of over 12% over the next five years, leading to an earnings-growth rate of 15%. Trades at 27 times 2025 earnings, but that drops down to 24 times next year. So again, another stock that we think looks attractive today.
Dziubinski: And then your final pick this week is Biogen BIIB. So go through the key takeaways on this one.
Sekera: So this one trades at a 40% discount to our fair value, enough to put it in 5-star range. Now, based on the company’s products and the research and development that you need to see in order to be able to bring out new drugs, we do rate this one with a high uncertainty, but we do think it has a narrow economic moat based on its intangible assets of its drug portfolio and its research and development pipeline.
Dziubinski: And here’s another stock that just can’t seem to dig out of its hole. Why are investors so down on Biogen’s stock? And what does Morningstar see that the market doesn’t?
Sekera: Yeah, I mean, they reported earnings that beat both consensus on the top line and the bottom line. Management increased earnings guidance by 5%. Now, the stock did initially trade up after earnings, but it gave up those gains, but it really, I think, it gave up those gains, so it just dropped alongside the rest of the market as the market was coming down.
Ultimately, the key here is going to be the launch and the success of Leqembi. That’s its Alzheimer’s drug. We think that drug will help offset some of the declines it might see in its multiple sclerosis franchise. Now there’s just a lot of uncertainty on the launch trajectory for this new drug. Right now it’s doing well. Looks like it’s on its way to exceeding our full-year forecast of 450 million in global sales. Overall we forecast this drug will be 3 billion in peak sales, globally. At this point, I think we’re just waiting on decisions for two different key catalysts that could accelerate growth here.
Now, we maintained our fair value, but again, it is a high uncertainty rating because of the wide range of potential outcomes based on what the peak sales potential really will end up being for this Leqembi, but, based on our numbers now, we think this one is quite attractive.
Dziubinski: All right. Well, thank you for your time this morning, Dave, and safe travels back home. Those who’d like more information about any of the stocks that Dave talked about today can visit morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central, and in the meantime, please like this episode and subscribe. Have a great week.