Plus, which stocks to invest in after earnings.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski discuss expectations for this week’s CPI report and what it could mean for the Fed rate decision at the end of October. They cover what to listen for in key earnings reports from Tesla TSLA and Netflix NFLX this week, plus a handful of other companies they’ll be watching. They share key takeaways from big bank earnings, whether regional banks could face a bad loan crisis, and if go-to bank pick US Bancorp USB is still a buy after earnings.
They discuss whether Taiwan Semiconductor Manufacturing TSM, ASML ASML, and Salesforce CRM look attractive today after being in the news last week and if insurance stocks are compelling after their post-earnings pullbacks. They wrap up with a handful of stocks to buy before the market rally stalls.
Episode Highlights
Earnings to Watch: TSLA, NFLX, More
Bank News & Top Pick Update
Tech Stocks in the News
Stocks to Buy Before the Market Rotates
Read about topics from this episode.
Q4 2025 Stock Market Outlook: No Margin for Error
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 a 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. Well, good morning, Dave. Let’s start with the read on tariffs with China and last week’s market activity. Now, there’s still a good deal of uncertainty around how tariffs will play out here and whether we’ll have a trade war. But the stock market seems to be shrugging off that uncertainty. What’s your take?
David Sekera: Hey, good morning, Susan. There’s just a lot of posturing going on, a lot of positioning going on. Each side is really trying to be able to put itself in a place where it has some leverage in the ongoing negotiations. Personally, as far as the market goes, my own strategy is really just to be in more of like a wait-and-see attitude. I think until we have a definitive agreement, it’s just too speculative to try and readjust any of your investment thesis, try and change any of the analysis you have on any individual companies or stocks. Of course, President Trump, it seems like he always starts with probably the most extreme stance that you can take, really trying to get that shock value as part of the negotiations. And then he’s willing to walk it back in a little bit afterward.
I think it just appears that he tries to figure out a way to make it such that the ultimate resolution will be more in his favor than the middle ground as they go through these ongoing negotiations, whether or not that’s true at the end of the day, I have no idea. I would just note that as an investor I think that if you were to try and trade the headlines going all the way back to even like March and April what would have happened is that you would have been consistently selling the market after it’s already fallen and then trying to buy back the market after it’s already recovered. So, that’s why I think as a long-term investor to some degree I think you need to look through the noise for now, wait until we get that definitive agreement, and then we can readjust from there if and as needed.
Dziubinski: On radar this week for the economy, we have the September CPI number coming out much later than usual because of the ongoing government shutdown. What’s the market expecting?
Sekera: Taking a quick look here for headline CPI, we’re looking at four-tenths of a percent increase on a month-over-month basis. That would be flat with last month. On a year-over-year basis, looking for that to tick up from last month to 3.1%. And then taking a quick look at core CPI, also on a month-to-month basis, being flat at three-tenths of a percent, but also flat on a year-over-year basis at 3.1% as well. Essentially, not much change whatsoever.
Dziubinski: What about the likelihood of a rate cut at the Fed meeting at the end of this month? Where’s the market pricing at?
Sekera: I took a quick look at the CME FedWatch tool. That gives you the market-implied probability of the Fed rate cuts. Essentially, right now, there’s a 100% chance of a rate cut both this month and in December. So that would take the rate to a 3.75% to 4.00% range next week. And then in December, we’d end up the year at 3.50% to 3.75%.
Dziubinski: Let’s talk about some earnings you’ll be watching for this week. We’ll start with Tesla, ticker TSLA. The stock’s taken some lumps this year, but it’s up about 37% during the past few months. What will you be listening for here? And how does the stock look heading into earnings from a valuation perspective?
Sekera: I think there’s really two big items on the docket. First, it’s going to be the robotaxi timeline. A lot of enthusiasm in the market as far as that being one of the biggest drivers of the firm’s rally over the past couple of months from its April lows. Now, robotaxi is currently in testing. Management’s guided to a full product launch next year. So, we’ll see if that’s still the same timeline. And then also any updates on the lower-price standard versions of its Model Y and Model 3 vehicles. These are sticker prices of sub-$40,000. So just want to get any guidance on how fast they can ramp up that production, any type of long-term production targets that they have. We think generally the market’s overestimating the amount and speed of earnings growth here. We think that to some degree the market is really pricing it more now as an AI stock than more of an operating company. The stock trades over a 70% premium to our fair value. That puts it well into 2-star territory. So, yes, the stock is overvalued. But personally, I would caution. I don’t think that this is a stock to short. Personally, I just wouldn’t bet against Elon [Musk].
Dziubinski: Netflix, which is ticker NFLX, also reports. This week the stock’s up more than 30% this year and looks highly overvalued, according to Morningstar, so why is this a name you’re watching, Dave?
Sekera: It trades at a 60% premium to our fair value, puts it into 1-star territory based on its Uncertainty Rating. I took a quick look at the charts; I would just note that with Netflix, all of the gains this year really occurred in the first half of the year. Looks like that stock has kind of been in a relatively narrow trading range since then. So, I think that you would need to see some really strong growth dynamics from here for the stock to rally much. The company’s already benefited from the crackdown on password sharing. They’ve already gotten the benefits from growth from their ad supported subscriptions. So, our analyst expects growth here will really start to slow in 2026. Just taking a look at the stock, it trades at like a 29 times our 2025 earnings forecast. At that type of PE ratio, if you get any kind of disappointment whatsoever, I think this is one where you could see that stock price gap down after earnings.
Dziubinski: Now, Intel, ticker INTC, reports this week. The stock’s up pretty significantly since the deal with Nvidia NVDA was announced in September. Is the stock attractive ahead of earnings? And what will you want to hear about from company management?
Sekera: It’s a 2-star-rated stock, trades at a 34% premium. Now, we did raise our fair value to $28 a share following the US government and the Nvidia equity investments. So, really what happened here with Nvidia and Intel, they have announced a collaboration to jointly work on some custom data center and PC products. Our team has noted that really the takeaway here, why they increased their fair value. So they think that integrating the Nvidia RTX GPUs into the PC CPUs could help Intel slow the market-share losses that they’ve had toward AMD. But as far as the market price goes on the stock, we think it’s just gotten ahead of itself. Really, ultimately, when I think about the story here, not that much has really changed here in the short term. Nvidia did not commit to shifting any of its GPU production to the Intel foundry and away from TSM [Taiwan Semiconductor Manufaturing]. That really would be the big catalyst, I think, for the stock if that were to happen. And at the end of the day, Intel still just needs to spend billions of dollars in capex just to be able to catch up to where AMD is technologically today.
Dziubinski: Let’s talk about some defense contractors reporting this week. We have both Lockheed Martin, which is ticker LMT, and Northrop Grumman, which is ticker NOC. What are you going to want to hear about here?
Sekera: I talked to Nic Owens, who’s our analyst that covers these companies, and he said that specifically for Lockheed, he wants to hear any updated commentary on the pace of orders for the F-35. He’d been hearing some rumors that there could be a reduction in the number of F-35 orders. His opinion is that maybe there’s a slowdown in the number of deliveries, but he’s not looking for an overall reduction. Otherwise, I just want to hear if there’s really any reason why these stocks have weakened since the beginning of October. There could be some concern that defense spending, especially coming from Europe, may be less than what’s expected at this point in time. Of course, we now have the truce between Israel and Hamas, less demand if the Ukrainian war gets resolved here in the short term. But I’d note from our perspective, that really would only have marginal impacts on the company’s earnings.
Overall, you would still need to rebuild all the munition inventories that have been used up during these conflicts. That’s probably going to take years for all of that to get rebuilt. But at the end of the day, the big drivers of the defense stocks are the very large multiyear weapons platforms. Those are not influenced by any type of short-term changes among the regional conflicts that are ongoing. And then also, most recently, there was some commentary out there. Nic wrote about this, that the US Treasury Secretary [Scott] Bessent made some negative commentary about the US defense contractors making stock repurchases. Essentially, his opinion is the company shouldn’t be repurchasing the stock with the free cash flow, but spending that money on new research and development. I just note that from a shareholder point of view, the stocks are trading pretty close to fair value. So, whether the companies were to use that for stock buybacks or use that for new R&D, either way, it wouldn’t change our intrinsic valuation all that much on either company.
Dziubinski: Now, both Lockheed Martin and Northrop Grumman were picks of yours earlier this year. Does either stock look attractive as we head into earnings?
Sekera: Taking a look at our recommendations, it looks like we recommended Lockheed on the Feb. 3, 2025, edition of The Morning Filter. At that point in time, it was a 4-star-rated stock, trading at $450 a share. Now, it did peak earlier this month at $515 per share. It sold off a bit since then, but still a 3-star-rated stock. So, nothing necessarily to do in our view today. And then we recommended Northrop on the June 9 episode of The Morning Filter. That was a 4-star-rated stock at that point in time. Similarly, that one rose from about $490 a share up to $638 at the beginning of October. Similarly, it has sold off a bit since, but it’s still a 3-star-rated stock.
Dziubinski: Well, we also have a couple of your recent picks from the healthcare sector reporting this week, and those are Danaher, which is ticker DHR, and Thermo Fisher Scientific, which is ticker TMO. What do you want to hear about from these two companies?
Sekera: Nothing really all that specific. I think in these cases, it’s really just a matter of the companies just being able to execute on their core business and being able to report results in line with their guidance. I’ll listen for any commentary as far as the status to any budget constraints on research-related life science tools as well as consumables. That’s what had hit those stocks in the past. We think that’s behind us at this point. Taking a look at Danaher, early in the year, in April, they provided what we thought was pretty solid outlook for 2025. Then last quarter, the revenue was in line with that guidance, operating margins a little bit better than what expectations were. The company increased its earnings per share guidance by about 10 cents, taking it up to a range of $7.70 to $7.80 a share. If results and guidance are on track, I think that should help bolster market sentiment here. And then for Thermo Scientific, looking at our last note, they delivered what we consider to be decent second-quarter results. They also increased their full-year revenue and profitability guidance. Ideally, I’d just like to see some more of the same for both companies.
Dziubinski: And would you say that the stocks are still buys before they report earnings?
Sekera: So far as I know, there’s really no specific catalyst coming out or expected with the earnings reports. They are both 4-star-rated stocks. Danaher’s at a 22% discount. It is a company we rate with a wide economic moat and a Medium Uncertainty. Thermo’s at a 15% discount, also a wide moat, Medium Uncertainty. So, at this point, unless there is some catalyst that I’m missing, I think you probably just wait for the earnings. Listen to what the numbers are, whether or not there’s anything that could change your long-term assumptions and forecasts. You could get a small pop if earnings are in line, especially if they were to raise any guidance. But with as much of a discount that they’re currently at, even if there was a small couple percent pop in either of the stocks, I think they would still be undervalued at that point in time. I think you can take some risk out by waiting to see what those numbers are.
Dziubinski: Sounds like a plan. Well, viewers, on next week’s episode of The Morning Filter, we’ll be previewing earnings for some of the market’s biggest stocks that report during the last week of October. Some of those stocks include Microsoft MSFT, Alphabet GOOGL, Meta Platforms META, and Apple AAPL. Be sure to join us next Monday. Let’s move on to some new research from Morningstar, starting with our take on bank earnings. What are your takeaways from the big banks, Dave? Any surprises here?
Sekera: No surprises. It’s just that everything that can go right for a bank is going right for a bank right now. You have the Fed easing the federal-funds rate. That’s going to lower their short-term funding costs. We have longer-term interest rates on a downward trend. That’s bolstering the value of any fixed -income securities they have on their books. And we expect short-term rates will fall faster than long-term rates. That will lead to a steeper yield curve. That’s going to lead to wider net interest margins and higher earnings. Yes, the rate of economic growth in the US is slowing, but our US economics team still expects no recession. That’s going to keep a pretty low level of defaults and bankruptcies. That’ll keep loan-loss reserves and charge-offs relatively low.
Looking at some of their other businesses, their trading and underwriting revenue remain pretty high. Their fee income is pretty high. Investment banking revenue looks like it’s picking up. But the problem is all that and more is being priced into the valuations of these stocks. JPMorgan JPM is a 2-star rated stock, trades at a 20% premium. Wells Fargo WFC, 2 stars, 16% premium. Bank America BAC, 2 stars, 11% premium. And even Citibank C is a 2-star-rated stock at 18% premium. And I think that one just really goes to show how much these stocks have run up, in our view. It wasn’t that long ago. I remember you and I talking about Citibank quite often as being a pick. It was one of the ones that was trading at levels that were below its tangible book value. But at this point, it’s now almost as expensive, in our view, as JPMorgan.
Dziubinski: Let’s talk a little bit about the regional banks. We did see some selling in last Thursday in the market among the regional banks on concerns about some bad loans and we talked a little bit about this on last week’s show. So, what were what was sort of the new developments here and what should investors make of them
Sekera: Still just a lot more smoke in the lending markets on these riskier credits that are out there. As we talked about before, first, we talked about how DBRS Morningstar, which is Morningstar’s credit rating subsidiary, had been reporting that they were seeing more downgrades and upgrades and especially the need for capital infusions in the private debt markets. Then we had the defaults and bankruptcies for Tricolor and First Brands. Both of these appear that they’re going to result in some pretty significant losses for the lenders that are involved in both of those companies. There’s some reports that the collateral has been used more than once or used as collateral for more than one lender. Also looks like investment bank Jefferies JEF is getting caught up in that first brand story. Now, that stock was a 2-star-rated stock as recently as September. It’s now down 28% from those September highs. I also took a look at where the bonds are trading. I just note that the credit spreads on the five-years there have traded out or widened out 30 basis points. So, the credit markets again, where they’re trading doesn’t necessarily concern me from a credit risk perspective just yet, still an investment-grade-rated company, but the market is taking a certainly much more cautious view on Jefferies at this point.
More recently, we did have Zions ZION and Western Alliance Bank WAL both sell off. Zions announced they’re taking a $50 million charge off that they’re also blaming on fraud. And then Western Alliance filed a lawsuit against one of their borrowers for fraud for a $100 million exposure. So, it’s one of those things when you think about the banking business overall, it’s a business that is just based on confidence. And if that confidence is broken, then you start seeing funding and liquidity start to dry up. And things can go the wrong way for a bank very quickly if that confidence is broken. So, I’d say all three of these are stocks to keep an eye on. There’s still a lot of us around here who lived through the global financial crisis. Now the stocks did bounce on Friday. I think that is showing that the market still has some confidence in these names for now. But if these three names were to resume a slide, I think that would be a red flag overall for the more regional banks here that people could be getting more cautious about some of their credit risk exposures.
Dziubinski: Morningstar’s favorite name in the bank industry has been U.S. Bank USB, which is the largest regional bank. How did earnings look from U.S. Bank? And is the stock still undervalued?
Sekera: We thought it was a pretty strong third quarter. They gave solid revenue growth and expense control that all helped grow net income by 17%. Their net interest margin expanded by 9 basis points. That should expand more as the Fed cuts the federal-funds rate. Overall, we think the company remains on track toward its medium-term targets on return on tangible common equity and its efficiency ratios. Our analysts noted they expect to increase our fair value somewhere in that low-single-digit percentage area. But overall, with this company, with this bank, it still seems like the market just doesn’t care. And I think to some degree, it’s a little bit of an orphan stock.
You mentioned it is a regional bank. It is the largest of the regional banks. So, I think it’s overlooked because it’s on the big side for being a regional, but it’s not big enough to be a mega-cap bank, which is getting all the attention these days. That’s probably the reason that it’s still trading at a 15% discount puts it in 4-star territory does have a pretty nice healthy dividend yield at 4.4%. So, I expect that at some point I would look to see institutional players maybe swap out of some of those overvalued mega banks into U.S. Bank maybe some of the more the The players that are in the smaller regional banks might look for something like U.S. Bank, which isn’t going to have the same kind of concerns about their credit risk exposure. But again, at the end of the day, I just don’t know what the catalyst is going to be really to get this one to accelerate up to our fair values.
Dziubinski: All right, let’s pivot over to tech, specifically talking about some tech stocks that were in the news last week, starting with Taiwan Semiconductor, ticker TSM, stock pulled back after earnings. What did Morningstar think of the report? And is there a buying opportunity here, Dave?
Sekera: Overall, from our analytical team, there’s just really no surprises that occurred here. Overall, the company reported pretty strong results. They raised their revenue guidance to mid-30% from low 30%. Now, the stock did slip a little bit. I’m just assuming that just means the market wanted more of a beat and a raise than what they got here. But I also just want to put that in context. When you look at this stock, it’s up 30% just since the beginning of September. It’s up over 50% year to date. This is a stock that we have recommended in the past. It was a 5-star-rated stock in October 2022. It was a $60 stock back then. It’s, I think, about $300 right now. At this point, it is a 3-star-rated stock, trades pretty much right at fair value. So, probably nothing to do as far as this being an undervalued stock trading at any kind of margin of safety.
Dziubinski: Now, ASML has been a pick of yours in the past, and the stock was up a bit after earnings last week, and Morningstar raised its fair value estimate. Unpack the results for us.
Sekera: Looking at the stock over the past couple of years, it’s been pretty volatile. But I think it’s also one of these cases where investors could have used that volatility to be able to manage their position, to be able to take profits off the table once it’s run up too high, and then be able to reload once it’s sold off. Looking at our recommendations, this was a pick on the Oct. 23, 2023, episode of The Morning Filter. It was a 4-star-rated stock went on a really strong run thereafter. It rose up into 2-star territory in March 2024. When it hits 2 stars, that’s usually a pretty good time to at least harvest some of the profits that were out there. Then the stock fell into 4-star territory in October 2024. Now, it’s run back up. It’s back now in that 3-star territory, so overall results were fine. Really not all that much to talk about. I read through our note here. Our analyst did note still some ongoing weakness in China that’s expected to hit the company even further in 2026, but we think there’s enough strength elsewhere to more than offset the weakness in China. So, overall, no real change in our long-term forecasts.
Dziubinski: Now, you mentioned the volatility with the stock, and we have ASML stock up about 50% this year. So, then from a valuation perspective today, Dave, is ASML still a buy?
Sekera: Probably not. I mean, it really looks to us like it’s pretty fully valued here. I think this is one where with as volatile as it’s been, it’s probably one you keep on a watchlist, wait for those pullbacks. When you look at the valuation, it trades at 34 times our 2026 earnings, 29 times our 2027 earnings. So, pretty fully valued. I think this is one that you would need some sort of catalyst or some sort of change for our long-term assumptions for this one to trade up much higher from where it is today.
Dziubinski: All right. Salesforce, ticker CRM, was a pick of year on last week’s episode of The Morning Filter. And the stock was up last week after management issued new guidance for the next few years. Walk us through what management had to say, and tell us whether you think Salesforce is still attractive.
Sekera: The stock took a really nice pop from their investor day. But when I look at the intraday trading, it looks to me like someone else is still scaling out of this position. They must have some institutional investor that, for whatever reason, they want to get out of the stock. I think they use that pop as an opportunity to be able to sell into it. The stock did give back about half of that gain. Salesforce during the investor day really focused on artificial intelligence, specifically Agentforce 360. That’s their AI platform. The company now has increased the target for revenue for 2030 to $60 billion.
Our model forecast is for $56.5 billion. Just running the numbers, to get to their number, that would be a 10% compound annual growth rate. Our CAGR right now is 8.2%. And I do think that, based on their forecast, there could be some upside to our earnings growth, which is currently an 11% compound annual growth rate. And our analysts did note that if we were to use their expectations for revenue and for earnings in our model, there would actually be 15% upside from our current fair value. But at this point in time, we’re holding steady with our long-term assumptions. Even then, 25% discount, 4-star-rated stock, one of the few undervalued tech stocks. Thanks. And I think it’s just a matter of there is just so much focus on AI hardware today, I think a lot of these software stocks are just under followed and unloved right now.
Dziubinski: Let’s talk about an industry we don’t talk about very often on The Morning Filter and that’s insurance. The stocks of insurers Progressive, which is ticker PGR, Travelers TRV, and Marsh & McLennan MMC fell last week after earnings. What happened here?
Sekera: It’s been a while. I know we have talked about the insurance companies on past shows, but generally we’ve called them out as really being overvalued. So, there’s really nothing to do from a buying perspective. Now, at this point, it looks like Progressive is down 22% from its June high. Travelers is down 9% from its recent high. Both of those stocks are currently rated 2 stars, trading at 19% and 12% premiums, respectively. Marsh is down 22% from its April high. That one’s actually fallen enough now to get into that 3-star range. I think to some degree, what we’ve seen over the past couple of years, similar to what banks are expecting now, for insurance companies, everything that could go right had been going right for them. Our investment thesis was essentially that insurance for the past couple of years had been able to push through some extremely high price increases that bolstered their results. But It’s a competitive business. We expect the pricing would normalize over time. And I think we’re starting to see indications of that pricing normalization now, which is what I think has put those stocks under pressure in the near term.
Dziubinski: Well, this week, we’re going to combine our question of the week and Dave’s picks. As a reminder to viewers, be sure to send us your investment questions to our inbox at themorningfilter@morningstar.com.
I’m doing some paraphrasing here, but Ovidiu asks, “In recent weeks, I’ve been hearing more terms like bubble, crash, and bear market. Classic defensive stocks such as Coke and Procter & Gamble haven’t performed particularly well during the bull market. So, Dave, which companies strike a good balance resilient during downturns, capable of capturing upside in bull markets, and are also trading at a margin of safety right now. Go, Dave
Sekera: A great question, but essentially asking me to go unicorn hunting. So looking for an undervalued stock, with limited downside risk, and still has upside potential. I mean, to be honest, that’s the stock that everyone in the world is really looking for those types of characteristics. So, of course, I just have to caution you. First of all, no matter what, no matter how high of a quality of a company, whether or not it has an economic mode or not, no matter how defensive a sector that company might be in, or how much of a margin of safety we think that stock is trading at. Of course, all stocks have downside risk, whether that’s idiosyncratic, whether it’s a potential paradigm shift within the industry, or if it’s just a broader market and economic downturn. All stocks do have principal risk. So, I’m trying to, yes, identify some that fall with those characteristics.
Again, as an investor, you should only really be investing in the amount of equity that you can within your own risk tolerance, within your own investment goals, your investment horizon, that you can really leave through any kind of downturns, to be able to ride out when we do have those market selloffs. So, in order to try and find some stocks that kind of have these type of characteristics, I did a couple of different stock screens. I looked for those stocks that were rated 4 and 5 stars, so those that do trade at a margin of safety from our long-term intrinsic valuation. I only looked at those companies with wide or narrow economic moats. And then I also only looked for those companies that had a Low or Medium Uncertainty Rating. Now, I did prefer looking for companies with larger capitalizations. But if it was a mid-cap or small-cap stock in a more defensive sector or industry, I took a look at those as well to come up with today’s list.
Dziubinski: All right. And actually, viewers can head over to Morningstar.com to build the screen using those exact same criteria that Dave just outlined. All right. So then, let’s get straight to the picks, Dave. Your first pick this week is Microsoft. Hit the highlights.
Sekera: All right. Well, first of all, who here is tired of me talking about Microsoft? Please raise your hand. I promise after this week, I’m going to take a break about talking about Microsoft. It’s just that when I’m looking at what we still think is undervalued out there, Microsoft is just the last of the wide-moat mega-cap stocks that’s undervalued. One of the few tech stocks that is leveraged to the growth in artificial intelligence. That’s why you’ve heard me talk about it so much for so long at this point. It’s a 14% discount to fair value, puts it in 4-star territory. We do rate the company with a Medium Uncertainty.
So, in my mind, I think it should perform well to the upside as artificial intelligence continues to keep growing. In my mind, I think that, yes, it would trade down in a downside market scenario. But it only has a beta of 0.9, so that means that it’s been less volatile than the overall market. In a risk-off environment, I suspect that it would probably trade off slower than what you’d see across the broad market, and then I think over time in any kind of risk-off scenario you probably get that rotation out of the companies or the stocks that are rated High and Very High into that Medium Uncertainty Rating. I think there’s a couple of different ways of this one. It does help you, to the downside, but I think it still offers that upside with the rest of the market.
Dziubinski: Now, a company having an economic moat is one of your criteria in your screen this week. Talk a little bit about Microsoft’s moat and its moat sources and then, of course, why you like it.
Sekera: Well, it’s just one of these ones. I mean, when I think about the economic moat, it has almost all of the five moat sources that we’re looking for. And so it’s just one of these companies that it’s going to have so much a better ability to generate those long-term returns on invested capital than what we’re going to see in a lot of other areas. What I also like about this one, too, is I do think there is a good catalyst going into earnings as well. Our team has noted that they have been spending more money on capital expenditures in the first half of this year, specifically building out their cloud business, the hyperscaler business for AI. We are looking for an acceleration in growth in that part of their business here in the second half of the year. I’m hoping that comes through in the third-quarter earnings as well as maybe an increase to guidance into the fourth quarter.
Dziubinski: All right, well, your next pick is Deere DE. Run through the key metrics on this one.
Sekera: So Deere, of course, you know, one of the world’s leading manufacturers for ag equipment and also a major producer of construction machinery. What happened with this one is this one is still being impacted from the pandemic. We had a huge pull forward in demand in 2021 and 2023. Corn prices, wheat prices, soybean prices all were accelerating higher at that point in time. And then we had all of the government spending on infrastructure from the different government stimulus programs. What we’ve seen over the past year or so is we’re actually just going through kind of this natural down cycle. Demand has dissipated. We’ve got that natural give-back from all that pull forward that we had those prior couple of years. Plus, at the same point in time, we’re seeing some softness among all of those different commodities as well. And lastly you know the government stimulus measures on all the infrastructure spending really has you know run its course.
So, we’ve seen pretty weak performance in 2024 and expected here in 2025. Revenue dropped 19% last year in 2024. We’re projecting it to drop 13% this year as well so this is really more a forward-expectations story. We’re looking for more normalized sales generation beginning next year in 2026. The stock looks a little pricey, trading at 26 times this year’s earnings but with a more normalized revenue on the top line being able to generate better fixed leverage as you get that top-line growth. Your earnings come up such that the valuation drops to only 16 times our 2026 earnings expectations.
Dziubinski: Now again, as you suggested you know the company’s been having some struggles the past couple of years. So the stock It’s having an OK year, actually, but it is kind of trailing the market. So talk about, again, specifically why it’s a pick. It’s more about forward expectations, right? That it’s cyclical.
Sekera: Exactly. It’s just really going through that natural business cycle. Now, that natural business cycle here had been thrown off because of the pandemic, because of all of that pull forward you saw in 2021 and 2023. So you’ve just got that natural give back the past couple of years. But our analyst team is looking for that normalization to begin next year. And I think we’re looking for maybe an 8% compound annual growth rate on the top line thereafter.
Dziubinski: All right. Well, we talked about a couple of large cap companies. Now your next pick, we’re going to go down the market-cap ladder. And the pick is Huntington Ingalls Industries HII. Tell us about it.
Sekera: Huntington is rated 4 stars, trades at a 14% discount, has a 1.9% dividend yield. We rate the company with a Medium Uncertainty and a wide economic moat.
Dziubinski: Now, Huntington’s stock is really having a terrific year. It’s up more than 50%. Why do you think this one still has more gas left in the tank?
Sekera: A lot of people may not necessarily know this one, but they are the largest independent military shipbuilder in the US, sole provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and is also only one of two producers of the nuclear submarines for the US Navy’s fleet. Now, last fall and early this year, the stock got hit pretty hard a couple of times. Really, what was happening here is the company was taking charges against its nuclear sub building business. The contracts that they had entered into a number of years ago didn’t have really the appropriate mechanisms to be able to pass through the high inflation that we had in 2021 through 2023. We also had a lot of different types of bottlenecks and supply issues. So, they were taking a lot of hits on those contracts. In fact, I think they’re losing money on a number of those contracts.
When we first recommended this one, the investment thesis was essentially that as those contracts rolled off and as they negotiated new contracts for the next batch of submarines, not only would they be able to get back to profitability on those. But we also thought that the US government would acknowledge some of the losses that they had taken on those prior contracts and probably give them a little bit of extra margin really to kind of make up for the losses that they had. We’re now in the stage that those shipbuilding margins are expanding. The margins had dropped as low as 5.2% in 2024. We’re expecting to come up to 6.3% here in 2025 and gradually expand up to 8.6% by 2029. So, while the stock is trading at 19 times this year’s earnings it does drop to 16 times next year’s earnings
Dziubinski: Your next pick this week is from the healthcare sector. It’s Medtronic MDT.
Sekera: Medtronic is a 4-star-rated stock at a 14% discount, 3% dividend yield, rated with a Medium Uncertainty Rating and has a narrow economic moat based on its switching costs and its intangible assets.
Dziubinski: Medtronic has looked undervalued for a while, but the stock is up 22% this year. What’s Morningstar’s thesis here?
Sekera: We first recommended this one all the way back in June 26 of 2023. And we’ve reiterated that several times ever since. I think this is just a good example how sometimes it just takes a while for a stock to start trading toward our long-term intrinsic valuation, really to strip out the noise, and focus much more on the signal. Medtronic, of course, one of the largest medical device companies out there. Their portfolio includes pacemakers, defibrillators, transcatheter heart valves, stents, insulin pumps, and so on.
Overall, we think the company is very well positioned to be able to benefit from the aging of the baby boomer generation. I think the stock probably benefits as we start seeing some rotation back into the healthcare sector, which we think is generally undervalued. Should benefit as we would look for more investors to rotate into the value category as a growth category is overvalued. I think our assumptions and our valuations here are pretty modest at this point. We’re looking for top-line growth of about 5% for the next five years on a compound annual growth rate. A little bit of operating expansion at the same point in time. That gets our earnings-growth rate to a little over 7% on a compound annual growth rate over the next five years. So, trading at 17 times this year’s earnings, 16 times next year’s earnings, so valuation that looks relatively attractive not necessarily hugely cheap. As you said it has moved up thus far this year but still might have some further room to run
Dziubinski: Your last pick this week is Hershey HSY. I would have thought this would be a pick next week for Halloween, but OK, give us the headlines on Hershey.
Sekera: It’s a trading at only an 11 % discount, but with a Low Uncertainty Rating, that is enough to put it in 4-star territory. A 2.9% dividend yield, a company we rate with a wide economic moat based on its cost advantages and its intangible assets.
Dziubinski: Now, of course, high cocoa prices have taken a bit of a toll on Hershey. So, why do you like the stock?
Sekera: We first recommended Hershey at the beginning of the year. We’ve reiterated that buy a couple of times since. Taking a look at our price/fair value going all the way back over the past decade, this is a stock that pretty rarely trades below fair value. And I believe the reason for that is because cocoa prices really had skyrocketed in 2023 and 2024. Now, about 60% of global cocoa production comes from West Africa. They had suffered some droughts. They also had some problems with the cacao swollen shoot virus. Either way, the amount of supply really fell, and that’s ended up shooting prices much higher. I think they doubled, tripled, maybe even quadrupled, and depending on what type of chocolate you’re making, cocoa is a huge percentage of your cost of goods sold. It’s anywhere from 20% to 50%, so, of course, this resulted in industrywide price increases, but they weren’t able to push through as much price increase as their own costs were going up. That did result in a margin squeeze in the short term.
Looking forward in the commodity markets, the old adage is high prices are the cure for high prices. You’ll get demand destruction over time as the high prices reduce demand, but you’ll also get new supply emerging. I think it takes anywhere from like three to four years for new cocoa plants to grow from seed to the point that they’re producing, so we expect that probably to start coming online in the next year or two as well. So we have seen cocoa prices start to subside. They do look like they’re moving down and to the right at this point. Now, as far as valuation, the company’s adjusted earnings per share guidance for 2025 is only $5.81 to $6 a share. That puts you at the midpoint at about 31 times earnings, which seems pretty high.
I just note that in 2024, their earnings were $9.37 a share, much higher than what they’re going to earn this year. We’re currently forecasting about 8.50 in 2026. That will bring your ratio down to 22 times, and then we’re looking for the company get back to $9.57 in 2027. That puts the valuation at about a little under 19 times our earnings. Now over the past 10 years when you look at the average PE multiple that this company trades in, it’s somewhere in like the mid-20s. So if you think about by 2027, if we’re looking at $9.57 a share at a 25 times multiple, that puts the stock at $240. So, I think there’s plenty of room for this one to rebound over the next couple of years as cocoa prices roll over and continue to keep coming down. And in the meantime, you’re clipping it pretty much a 3.0% dividend yield, so not necessarily one trading at a huge discount to long-term intrinsic valuation, but one I’d still like nonetheless.
Dziubinski: All right. Well, thank you 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 Monday morning for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.