Plus, our take on Berkshire Hathaway‘s meeting and Microsoft, Apple, Amazon, and Meta after earnings.
Hello, and welcome to The Morning Filter. Every Monday, Susan Dziubinski sits down with Morningstar Chief U.S. markets strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead. Plus, Morningstar strategist and Berkshire analyst Gregg Warren is joining the show this week to share some highlights from Berkshire Hathaway’s 2025 annual meeting.
Key Takeaways:
On Radar: The Fed, Earnings
Takeaways from Berkshire Hathaway’s Meeting
New Research on MSFT, APPL, AMZN, META, More
Stock Picks of the Week
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead.
All right, well, good morning, Dave. Before we get to what’s on radar this week, let’s quickly talk about some of last week’s economic reports. We had first-quarter GDP, PCE, and April jobs numbers. So what were your takeaways, recession or no recession?
David Sekera: Hey, good morning, Susan. One of my favorite Peter Lynch quotes was, “If you spend 13 minutes a year on economics, you’ve wasted 10 minutes,” and I think in this case that’s especially fitting with what’s going on with the numbers today. So if you remember on our April 14 episode, we talked about why investors should ignore the first-quarter GDP report and where it comes out on a headline basis, and exactly what we discussed back then is what occurred. So reported GDP for the first quarter was heavily distorted by purchasing and imports, all that were made before the tariffs were supposed to go into effect. Essentially, companies were trying to front-run all of their imports before the tariffs, and we noted in that episode this would artificially lower first-quarter GDP.
Now looking forward, I also think investors should heavily discount the reported GDP number for the second quarter. Essentially as inventory is used and sold, it will then artificially bolster second-quarter real GDP. But when I look at our US. economics team’s projections, they’re still expecting that the rate of growth in the real or the fundamental economy away from the headline basis is slowing on a sequential basis and won’t reaccelerate until next year. But having said that, we’re still looking for positive growth in each of the next couple of quarters, so still, no recession is our base case.
Dziubinski: All right, well then let’s move on to this week. We have the May Fed meeting. Now virtually no one is expecting a rate cut, so what will you be listening for in Fed Chair Powell’s commentary?
Sekera: Yeah, I think there’s gonna be a lot of Q&A regarding the GDP growth rate, but I highly doubt we’re going to hear anything new. For the most part, I would expect Chair Powell just really to reiterate those same talking points that he made when he spoke to the Economics Club of Chicago on April 16. Essentially, he indicated that they thought tariffs would lead to higher inflation and slower growth, but he then acknowledged that the size and duration of those effects remain uncertain. Then from there he just kind of went back to the standard boilerplate language that the Fed will react as necessary to support its dual mandate.
Now interestingly when I look at the futures market, the market was pricing in a 60% probability of a cut at the June meeting. That’s now fallen all the way down to only a 30% probability. In my own mind, I think in order for the Fed to cut at the June meeting, we would need to see a lot of very negative economic indicators, negative enough to get the Fed to think that the economy was really getting into trouble here in the short term, which of course, if that’s true I also think that would push down stocks in the short term as well.
Dziubinski: All right, well we’re in the thick of earnings season, so what companies are you most interested to hear from this week and why?
Sekera: I think probably two of the more important ones this week are gonna be Arm ARM and AMD. Arm of course is a 1-star-rated stock, trades about at 70% premium to our fair value. For those of you that don’t know the company, Arm is the developer of the architecture that’s used in smartphone CPU cores, and I’d note here, too, that with the company, Arm China is one of Arm’s largest clients, representing more than 20% of revenue. So I’m sure there’ll be a lot of discussion as far as how tariffs may or may not impact that company. And then AMD is a 4-star-rated stock at 18% discount. I’d note here we did recently lower our fair value to $120 a share from $140. Essentially, we cut our GPU revenue estimate for their AI business to exclude China, and then we also slightly reduced our global personal computer revenue forecasts.
I’m also going to be watching Clorox CLX. That’s a 4-star-rated stock at an 18% discount. I believe they report after market today.
And then lastly, fortunately, believe that’s the first cybersecurity company to report. I think that’ll just provide an early glimpse at how the rest of the cybersecurity industry is faring. Now you know me, fundamentally I really like cybersecurity business and the stocks. At this point, the stocks are either fully valued if not getting to be overvalued. We did note on our April 14 episode that Palo Alto PANW was a 4-star-rated stock at that point in time has moved up enough that it’s now in 3-star territory, but it is still at an 11% discount, so certainly a stock I would put on your watchlist, and if you had an interest, maybe even make a small initial buy here with a little bit of dry powder so if it does trade down that you can dollar-cost-average into a position there.
Dziubinski: All right, well, it’s time to move on to some new research from Morningstar. Berkshire Hathaway BRK.A BRK.B held its annual meeting this weekend, and during it, Warren Buffett announced that he plans to step down as CEO at the end of this year.
Morningstar strategist and Berkshire analyst Gregg Warren is joining us with his take on the news and the meeting, so thanks for being with us early this morning, Greg. Were you surprised by Buffett’s announcement?
Greggory Warren: Yep. Yeah, I think everyone was shocked. He waited till the last very five minutes of the meeting to kind of drop this on everyone. I was kind of wrapping up my own notes and had to rewind a little bit just to sort of figure out exactly what he was laying out. The board actually made it official on Sunday. They voted unanimously to have Greg take CEO role at the end of the year. But I think even Greg was surprised. I think part of this was Warren really only talked about this with Howard and Susan, both of his two children, who are both board members, before the meeting. Didn’t really discuss it with anybody else. I think he was trying to avoid a scenario like what happened in 2021 when Charlie Munger incidentally let slip out that Greg was going to be the new CEO during the meeting. So I think he really wanted to keep this one close to his vest.
Overall, it feels like it’s gone over well. Not a whole lot of negative response. My expectation had always been that Buffett would basically work until he could work no more. But this sort of sets up a retirement phase where he can actually still be around, act as a sounding board for Greg, and be able to sort of continue to contribute without necessarily being CEO.
Dziubinski: Right. So, and he is staying around, too, in the chairman role. So what, what would you expect of Berkshire Hathaway without Buffett in that CEO role to look like?
Warren: Yeah, our expectations are slightly different. Having believed that, again, Buffett was going to work to the very end, we thought his first course of action was going to have to be a little bit more focused on keeping the Class A shareholders invested. And that would have meant buying back a ton of stock, issuing a special one-time dividend, and, potentially, setting up a regular annual or quarterly dividend. All sort of in place to keep the Class A shareholders engaged. For Berkshire, that is sort of the biggest risk, because they’ve got Class A shares with 10,000 voting rights and Class B with one. You don’t really want the Class A shareholders off-loading their shares in any kind of environment, because again, they’re also very thinly traded. So from that perspective, that was sort of our thought, was that was going to be the first thing he’d really have to focus on. Now that said, the balance sheet is still bloated, and they’re going to need to work some of that down, so that’s got to still be on the table. But I think his role is going to be quite different than what we saw from Buffett over the years. Berkshire’s historically been run on a completely decentralized basis, and I think Charlie Munger at one point has said it was decentralization almost to the point of abdication.
Now, there’s benefits from that, letting your line managers run the businesses as they think they should be run. But we’ve noticed over the years that that’s kind of bred some complacency within the businesses. And we’ve also seen potentially some hesitancy on the part of these managers to actually spend capital when it needed to be spent. I think Geico is probably a good example of this. They, for years, were being questioned about why they didn’t have a telematics system, and then two years ago, it came out that, “Well, we’ve got all these systems that don’t talk to each other.” And it’s like, “Well, why haven’t you updated them over the years?” And I think a lot of that was just this willingness on the part of managers to throw all their excess capital up to Berkshire, anything that wasn’t maybe core capex and growth capital spending. And I think it starved some of these businesses. We’ve kind of come around to the notion this past year that maybe that’s what’s going on at BNSF, as well, because they’ve really been hesitant about adopting precision scheduled railroading.
I think that that’s something that Abel has been focused on the past, what, seven years? He was announced to be vice-chair of the noninsurance businesses in early 2018. But I never felt like he had the full force of the top to start pushing some changes through. So I think that’s what we’re going to start seeing now, too, is he’s going to start acting both as an operator, making some changes within the businesses that I think have needed to be made for quite some time that Buffett was never going to do. Buffett’s never been one to sort of come down on his managers and say, “You need to do this, you need to do that.” So, I think from that perspective, it’ll be a change there. And then the investment side, it’s kind of on autopilot right now. I mean, he’s got Ted Weschler and Todd Combs around, even though Todd’s running Geico right now. But he’s got a decent sounding board there. And again, like I said, Warren’s still going to be around, so they’ll be having some big discussions about what the investment portfolio should look like as time goes on.
Dziubinski: Now interestingly, before Buffett made the announcement during the meeting, a shareholder asked Greg Abel to talk about how he’d allocate cash assets once he’s in charge. And, lo and behold, by the end of the meeting, he was going to be in charge. So what’s your take on how Greg replied to that question?
Warren: I felt like, this meeting, Greg was a little bit more himself than I’ve seen the past few meetings. I, having covered Berkshire for 15 years and having talked with him in the past, I always felt like, that first few meetings, he was a lot more deferential to Warren. Really not willing to step out as much. And that was, that was always a little bit strange to me. But I felt like he was a little bit more upfront this time.
I think he’s learned well at Buffett’s knee as far as what they should be focused on and what they should be looking at. But, I think the thing is, I really feel like the big challenge for him is he’s got a book overall that is just well overcapitalized. I mean, you know Berkshire historically has been, they’ve had 2.5 times their loss reserves in any given quarter. And I’d say the last few quarters, it’s been closer to 3 times. That’s way, way more capital than they need. And that’s kind of a huge drag on returns over time. And if Abel’s going to be judged more like a normal CEO over time, he’s going to have to do something there to figure that out.
It was interesting, because Buffett didn’t really dismiss the idea that the $330 billion, or whatever it is now in cash, was a slush fund for Greg and the board to use to buy back stock or do a lot of things that they might need to do after his departure. But I don’t feel like he really totally dismissed it. He did talk about the idea of, it’s great to have all this capital, it allows us to take advantage of opportunities when they do arise. He’s always liked to move slowly, but you know, when he needs to, he’ll move fast.
And so, I think from that perspective, I think Abel’s learned well, but I think he’s going to be held to a different standard.
Dziubinski: So-
Warren: Oh, sorry.
Dziubinski: No, go ahead.
Warren: And I think that that’s, I think that’s going be sort of the issue for him as he figures out how he needs to address the investment part of the business.
Dziubinski: As you said, there is all this cash and Berkshire hasn’t been buying back stock, it didn’t during the first quarter and of course, as you said, doesn’t pay a dividend. So, you don’t think short term that they are going to start paying a dividend. Do you think that would be something that really, Buffett’s gonna be completely out of the picture before they would do that?
Warren: I don’t know. I mean, he still has 30% voting rights. And, if he’s still on the board, he can still influence that. And I know he’s always been hell-bent against a dividend, so that’s going to be a little bit harder, unless he sees the value of it for Greg and for Berkshire and for shareholders longer term.
It’s going to be interesting to see how this kind of pans out. I mean, I’ve always been of the belief that companies should just buy back shares on a regular basis, dollar-cost average. Blackstone or BlackRock has been doing that for decades. But Buffett has always been focused on trying to get the best value when he’s buying back the stock. Ironically, they’ve not bought anything back at all since May of last year. And then when you look at the first quarter of- of 2024 repurchases, m- most of that was the billion dollars that they- they bought from [Ruth] Gottesman who was looking to fund a trust for the medical school in New York.
So from that perspective, they’ve not been out there being market buyers for a while, and that sort of lines up with our valuation. We’ve had Berkshire either fairly valued or overvalued for much of the past year or so. So I think that that’s been the focus, and it sounds like Greg’s in that mold as well. I think he’s going to kind of continue to follow that, unless huge opportunities come along. I feel like he might be a little bit more aggressive if, say, the stock sells off a lot in the near term, than Buffett might have been. I think one of the things that some shareholders got annoyed with was during the covid pandemic, during the early days, Berkshire did not buy back any stock at all. And there was a huge opportunity for them to go in there and buy back shares.
Dziubinski: Now, Berkshire also reported earnings this weekend, which wasn’t in the limelight given the news. So, talk a little bit about earnings and what your takeaways were from that.
Warren: I think my headline on the earnings was solid quarter but tariff concerns loom. We’ll have to see what the impact’s going to be on the railroad business because we’re already starting to see a huge drop-off in shipments into the California ports from the Asia-Pacific region. Overall, it’s going to be interesting to see how some of this pans out, but I think the big story was insurance had been a huge ballast for the business for the last two, three years. We had price hardening across most lines of business, you had on the insurance reinsurance side, not a whole lot of catastrophes overall. And then Geico was starting to get back on its feet, you know, overall. So we’ve seen great results from the insurance business for two-plus years overall. Now that came back down to earth a bit this past quarter. It looks like price increases within PNC and insurance and reinsurance have come down to low single digits. They had been double digits for a while there. And then that means Berkshire’s just not going to underwrite.
And then we had the Southern California wildfires. It was about $1 billion, $1.1 billion in losses that they booked during the quarter. So we started to see that business come down to earth a bit more and that means that diversification within the portfolio, you kind of want to have one part of the business, doing well while others might be suffering. And I think we’re going to go through a period where everybody’s facing some headwinds. Which makes us wonder where the stock is trading right now, I mean on a valuation perspective. It’s not really trading on fundamentals.
Dziubinski: That’s a good segue into my final question, Greg. So what would you say to someone who owns Berkshire stock today, given that current valuation, given what we heard in the earnings report, and given Buffett’s announcement?
Warren: I think it’s still somewhat of a hold. I mean, it’s at about a 10% premium to our fair value estimate. For a low uncertainty stock, that’s in the “start thinking about trimming positions” kind of mode.
But overall, I think there’s probably more headwinds than not going forward, and even though this announcement’s out there now and we know that Abel’s going to be CEO at the end of the year, I think there’s still some uncertainty. I think there’s going to be—what does this mean? What is the company going to look like? We’re probably at a point where you’ve probably got a fair amount of Class A shareholders who’ve been with the stock for probably five, four or five to six decades. And the original holders, they may just decide to, to move away now that Buffett’s gone. You know, and I think from that perspective, that’s going to be one issue. And I think the other thing is that the kids and the grandkids who may have inherited some of those stakes, they may not have the same sort of vested interest with the business, with the shares, and everything else. So we’ll have to see.
But on a valuation perspective, it’s modestly overvalued at this point. We would look for prices anywhere between 5% and 20% below our fair value estimate to start looking at it and building up stakes. But right now, it’s definitely more in the premium category than not.
Dziubinski: Got it. Well, thank you again for your time today this morning, Greg. We really appreciate it.
Warren: Thanks for having me.
Dizubinski: So in addition to Berkshire, several other big companies reported earnings last week, and we’re going to run through them starting with Apple AAPL. Apple stock slipped after reporting good earnings, but warning about tariff costs in the next quarter. So what’s Morningstar’s take, Dave?
Sekera: The margin guidance came in a little bit weaker than what we expected. As you mentioned, that really came from higher costs from tariffs, although they did point out those higher tariffs are really more in the accessories business as the cellphones are still exempt from tariffs.
Overall, I’d say the quick takeaway is really no change to our outlook or forecast, so at the end of the day, we maintained our fair value estimate.
Dziubinski: There’s been some talk about whether Apple will be given an exemption overall on tariffs. Does Morningstar have a take on that?
Sekera: We do. So our base case in our financial model is still that Apple will maintain those exemptions on its cellphone business. However, our analyst did point out there is a significant downside risk if they don’t. I think about half of Apple’s revenue does come from the iPhone, and he estimated approximately a 25% downside if they were to lose their current exemption and face the full brunt of the tariffs.
Of course, offsetting that risk, it appears that they are moving production of the iPhone, and taking it to India away from China, so that would help offset some of that downside risk as they make that move.
Dziubinski: So, then as of right now, have we made any changes to the fair value estimate on the stock? And then, you know, is Apple stock attractive today?
Sekera: I don’t see it really being particularly attractive at this point. We didn’t change our fair value estimate. I’d note the stock is down about 18% year-to-date, so down a lot more than the broad market. It’s fallen enough that it’s now moved into 3-star territory from 2-star territory, but it’s still a few dollars above our fair value. So the answer to me is, no, not especially attractive at this point.
Dziubinski: All right. And then let’s talk about Microsoft MSFT. Now, Microsoft stock was up quite a bit after the company reported better-than-expected results, and Morningstar raised its fair value estimate a bit on the stock by $15 to $505. So unpack the results for us.
Sekera: You know, from a quarterly results and guidance point of view, I think it’s just everything that you want to see when a company comes out with their numbers. Their quarterly results are just still hitting on all cylinders across all of their business lines. Guidance came in exceeding expectations. The star of the company still remains Azure. That’s its AI hosting platform. And even though that is capacity constrained, it still grew 35%.
Looking forward, we think that, as even more capacity comes online, that growth can accelerate into the second half of the year. And I think one interesting takeaway that the management noted was that they reported no change in their own customer behavior based on tariffs at this point.
Dziubinski: All right, so now given that we saw a little bit of a rally in the stock, is Microsoft attractive today from a valuation perspective?
Sekera: We think so. In fact, our analyst noted that it’s one of our top picks, coming from our equity analyst team and from the tech team in particular. In my opinion, I still think this stock is a core holding for more portfolios. So the stock is up, I don’t know, I think about 12% just over the past week or so, and that’s up from when we recommended it on the April 14 episode. So maybe not as undervalued as it has been, but it’s a 4-star-rated stock, still at a 14% discount to our fair value.
Dziubinski: All right. Now, Meta Platforms META was also up after beating on earnings. The ad business showed resilience, and margins expanded, too. So what did Morningstar think of those results?
Sekera: We thought the financial results for the quarter were pretty strong. We also saw and noted very good operating margin expansion. Again, another better-than-expected outlook for the second quarter. Ad spending still coming in very solid. And we suspect the advertisers probably have been reallocating ad dollars away from some of their competitors, some of those other platforms where the return on ad spending is lower than what we see at Meta. But overall, nothing really changed our long-term assumptions and our forecast, so our fair value was unchanged. And I still look at the stock as being a play on our theme for 2025, just expecting the market to rotate out of a lot of the AI hardware stocks and into those companies that are able to utilize AI in order to be able to bolster their own revenue and drive more margin.
Dziubinski: Now, despite that rise in the stock after earnings, Meta still looks really undervalued. So how does Morningstar’s thesis on Meta differ it from the market’s view?
Sekera: We still think the stock’s attractive, trades at about a 22% discount to our fair value, puts it well into that 4-star territory. To some degree, I think the market is still just very leery about the amount of money that they’re spending on capex, and whether or not Meta will be able to get that long-term return on invested capital here.
So if you think about Meta, they definitely have a pretty checkered history as far as their major capex spending programs in the past not necessarily working out. The perfect example there is all this spending that they did on the Metaverse, which really haven’t gotten much returns on.
However, in this case, our analyst team does think that Meta will be successful in continuing to monetize the money that they’re spending on capex for AI, and it is definitely, in this short term anyway, driving higher ad engagement and revenue.
Dziubinski: All right. Well, now Amazon AMZN beat on both the top and bottom lines, but guidance was mixed. So walk us through the results.
Sekera: Yeah, and actually looking at the price action on the stock after earnings, to me it looks like the market still thinks the jury is out on Amazon and its stock price. Now they beat first-quarter guidance on both the top and the bottom line, but I think the big concern in the market here was that the AWS growth rate for the quarter was slower than what Microsoft posted for its competitor, Azure. So we’re not necessarily as worried. We do think growth capacity here has been constrained, but as the company has been spending more capex in that part of their business, it should accelerate in the second half of the year.
Now guidance for the operating margin was below expectations. However, some of that is one-time costs with the satellite launch costs, as well as some additional spending on AWS. But I think that as the satellites start coming online, as the AWS spending, starts helping build out that part of the business, we should see that, over time, adding to the company’s revenue and to their earnings.
Now for this year, we already incorporated flat margins into our model, so with all of that, there was just no change to our longer-term assumptions and forecasts.
Dziubinski: All right, so no change to the fair value on it then. So then is Amazon stock attractive today?
Sekera: Yeah, still looks attractive to us. Four-star-rated stock at a 21% discount.
Dziubinski: All right, and then lastly, we had Eli Lilly LLY report last week, too. The stock fell, I think it was about 10% after reporting what seemed like pretty solid results. Morningstar held its fair value estimate of $650 on the stock. So, what happened here?
Sekera: Well, again, you’re still seeing exceptional growth for its weight loss drugs, but in this case, I think the market was expecting even more. Plus, we are seeing competition ramping up even more than what the market expected. For example, competitor Novo Nordisk with its Wegovy product, they announced that they’re now preferred status with CVS, so we are seeing more price competition, which of course will limit the margin growth that the market was expecting. Now, we’ve already expected that, over time, so more price competition would come in. That’s already baked into our estimates here. And I’d also note, too, there are several other of those GLP-1 drugs that are in different stages of testing. A lot of those could be approved over the next couple of years, so net-net, no change to our long-term assumptions.
Dziubinski: Now, Lilly stock was trading 38% above Morningstar’s fair value estimate heading into earnings, so basic math tells me that it’s still overvalued today even after pulling back, right?
Sekera: Exactly. We did get a good bounce on Friday with the rest of the market when it moved up, but, at this point, it’s still a 27% premium, puts it well into 2-star territory.
Dziubinski: All right. Well, moving on to our audience question of the week, one of our YouTube viewers asked a follow-up question during last week’s show about the discounted cash flow model that Morningstar’s analysts use to estimate fair values. The question was, “Dave, does the model factor in higher interest rates for the next five or 10 years?”
Sekera: So shorter answer is no, we don’t factor in higher interest rates. The risk-free rate in our model is 4.5%, which is where it’s been for quite a while. And when I look at where the 10-year Treasury is today, it’s actually really close to that.
So overall, when I think about trying to calculate the long-term value of a stock and how you incorporate that risk-free rate into a model, you want to keep it pretty stable, and the only time we’ll actually revise that risk-free rate is when we think that there’s a structural change in long-term interest rates. We’re not going to move it up and down just based on wherever the market happens to be going in the short term.
So for example, we didn’t lower the risk-free rate when interest rates were artificially suppressed during the pandemic, and conversely, we also didn’t raise it when the 10-year was starting to get up toward 5% in 2023.
So lastly, I would just note in the model when we are calculating our weighted average cost of capital, our cost of equity is tied to our Uncertainty Rating and the cost of debt is going to be tied toward how risky the credit quality of the company is.
Dziubinski: All right. Well, audience members, we ask you to please keep sending Dave and I your questions. You can reach us at themorningfilter@morningstar.com. And as a reminder, Dave and I will be taping a special episode of The Morning Filter at the Morningstar Investment Conference in Chicago on June 24 and 25. We hope to see some of you there, and you can learn more about the conference in the show notes.
All right, so it’s time for the picks portion of The Morning Filter. So this week, Dave, you brought us five stocks to buy in May and hold for the long term. What qualities do these stock picks share?
Sekera: Well, I’m thinking about May. There’s the old adage in the market, sell in May and go away. And in this case, I don’t necessarily think that you want to be out of stocks altogether, but I think you need to make sure that you’re positioned in case we do hit some turbulence here in the markets just with all the volatility that we’ve seen year to date, everything that’s still going on with the tariff situations.
So in this case, I’m looking for stocks that already reported earnings, so taking that risk out of the equation, looking for a stock where our fair value was at least unchanged or maybe even moving slightly higher and also looking for a stock where the trading pattern was unchanged or even higher after earnings. Of course, looking for a company that has a narrow or a wide economic moat, a low or medium uncertainty. For this environment, I do prefer stocks that pay a relatively attractive dividend and are in the value category. And with our expectation that the economy will be slowing on a sequential basis over the course of the year, certainly looking for those stocks in the defensive sectors.
Dziubinski: All right. So your first pick this week is actually a big holding of Berkshire Hathaway’s, and it’s Kraft Heinz KHC. So give us the highlights.
Sekera: Well, in fact, Kraft Heinz was one of our picks as recently as Jan. 6 earlier this year. Now year to date is it is down about the same amount of the market. It’s a 5-star rated stock at a 46% discount to fair value, 5.6% dividend yield, company we rate with a narrow economic moat, and the stock is assigned a medium uncertainty.
Dziubinski: Now Kraft Heinz reported earnings last week. What did Morningstar think of those results? And why is the stock a pick of yours this week?
Sekera: Yeah. As you mentioned, the top line was a little disappointing, but earnings it did come in line. The company was able to generate a small amount of positive operating margin, which otherwise with the top line down, I would have expected to see margin contraction as opposed to expansion. So I like seeing that they’re able to still be able to get those additional margins here.
But overall, no change to our forecast. We are reaffirmed our fair value. In this case, we still think the market is just being overly pessimistic regarding the long-term outlook. When I look at our model, we’re only modeling in kind of that low-single-digit top-line growth, so not necessarily expecting the company to have to drive that much more revenue to be able to achieve our fair value.
So overall, a stock that we think is significantly undervalued, has a narrow economic moat, high dividend yield, should benefit from the rotation into value and away from growth over the course of the year. And in a slowing economy, of course, it’s hard to get much more defensive than a food stock.
Dziubinski: All right. Well, your next pick this week is a wide-moat name in healthcare. It’s Bristol-Myers Squibb BMY. Hit the highlights for us.
Sekera: Yeah. This was a pick as recently as December of 2024. And I’ll acknowledge, this is down a little bit more than the market, but that should be offset by the relatively high dividend payment here. It is a 4-star rated stock, trades at a 23% discount, has a 4.9% dividend yield, a company that we assign a wide economic moat. The stock rating is a medium uncertainty. And after earnings, we did reaffirm our fair value.
Dziubinski: Now, many of the drugmakers are undervalued today. So why do you like Bristol specifically?
Sekera: Generally, we think the market’s just underestimating the strength of Bristol-Myers’ next generation drugs that are currently in testing and in their pipeline. Plus, I also think the market might be a little bit too focused on last year’s earnings report. They did have some accounting adjustments for acquisitions that lowered their earnings temporarily. But when I look at their normalized earnings power for 2025, we’re seeing the stock only trading at about 8 times our 2025 projected earnings estimates. Of course, pharmaceuticals, a very defensive sector in a slowing economy. And again, I think the stock will probably benefit from the rotation into value and away from growth that we expect over the course of this year.
Dziubinski: Now your third pick this week is U.S. Bancorp USB. Share the key metrics.
Sekera: So this is another stock that we recently recommended back on March 10. It is a 4-star rated stock at a 22% discount, 4.8% dividend yield, company that we rate with a wide economic moat, and the stock is assigned a medium uncertainty.
Dziubinski: Now, solid expense control has become a theme at U.S. Bank during the past several quarters. So why else do you like it?
Sekera: Well, first of all, just thinking about the US regional banks, they’re not directly subject to any of the Trump tariffs. Listening to the conference call here, management maintained their guidance and their medium-term targets. And opposed to most other US regional banks, we think U.S. Bank has some pretty strong revenue coming from their corporate trust fees, a pretty strong deposit franchise. As you mentioned, it’s one of the best as far as their operating efficiency, and they have very good returns on tangible equity over the past decade. We maintained our fair value after earnings. And lastly, still another stock that I think will be a beneficiary from that rotation into value.
Dziubinski: All right. Well, your next stock to buy this week is Pepsi PEP. Run through the numbers.
Sekera: Four-star rated stock, 21% discount, 4% yield, company with a wide economic moat and a low uncertainty. Now there seems to be a little bit of a cloud around Pepsi’s stock with management reducing its earnings outlook for 2025 due to tariffs.
Dziubinski: They’re experiencing soft demand in their US snacks business. And then there’s the news of the FDA’s plans to phase out certain artificial food coloring by 2026. So given all that, why do you like the stock today?
Sekera: Well, to some degree, that’s exactly I think why we like the stock today. I mean, with all that bad news, all the negative market sentiment, we think the market is just currently pricing in too much pessimism here. Now taking a look at the stock, it’s down 24% over the past 52 weeks. In fact, it’s down even more if you look at a longer-term time frame and over the past recent trading. We’ve seen the stock, take a hit based on some of the tariff costs that they might end up having to take, depending on how the tariffs work out.
When I take a look at our financial model, we’re only modeling in 4% top line growth over the next five years on average, so that’s really just a combination of mostly pricing with only an expectation of some minimal volume growth. So, I don’t think it really takes all that much to be able to meet our top line expectations. We are modeling in some positive operating leverage over time, but when I look at that same model over that five-year forecast period, we’re only averaging about 6.7% net income growth.
So, really, you don’t have to hit any real heroic numbers to be able to get to where our fair value is, so I don’t think it’ll be all that difficult for the company to be able to at least meet those expectations. And when I think about heading into this economic slowdown, certainly looking for a stock like this with that wide economic moat and that low uncertainty, again, in a defensive sector, value category with a 4% dividend yield, which I think looks quite attractive.
Dziubinski: All right. Well, your final stock pick this week is Constellation Brands STZ. Hit the highlights.
Sekera: Constellation Brands is a 5-star rated stock, trades at a 32% discount, only has a 2.2% dividend yield. I’d actually prefer a dividend yield that is higher than that, but they do buy back their stock in the market, which, of course, as long as you’re buying it back at a discount to your intrinsic value, that does accrete over time to increase shareholder value. We rate the company with a wide economic moat and assign the stock a medium uncertainty.
Dziubinski: Now, Constellation Brands stock isn’t having too good of a year. Last I checked, it was down about 15%, and that’s after being down last year, too. So, what’s the long-term story here, Dave?
Sekera: Yeah, and I mean, I’ll have to admit, based on our recommendations, we’ve been long and wrong on this one for a while. Taking a look at the chart, I’m no technical analyst, but it does look like the stock is at least in the process of bottoming out. The company does have some wine and spirits business, but the bulk of their earnings really comes from importing Corona and Modelo from Mexico into the US. A lot of concern being baked into the company as far as how tariffs on the beer business may impact the company over time. We think that concern is probably overstated. Their beer business is compliant with the USMCA agreement, so they should not be subject to any additional tariffs from here.
The company did provide updated guidance, including how tariffs is impacting their business. So while they may not be impacted directly on the beer, but there will be potential impacts on some of the other costs of goods sold, like the aluminum for aluminum cans, but we think that’s already incorporated into the stock price. Trades at under 14 times our adjusted earnings estimate. It’s a value stock in a defensive sector, and best of all, this is one where you can support your investment in the stock by enjoying a couple of Coronas on the beach or by the pool this summer.
Dziubinski: I will be having one tonight to celebrate Cinco de Mayo. So, 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 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.