WPP Loses Ford Creativity to Omnicom, but Volkswagen Opportunity Remains; Both Stocks Undervalued
by Ali Mogharabi | Morningstar Research Services LLC | 10-09-18

On Oct. 8, Ford Motor Company finally decided on which ad agencies it will work with going forward and chose Omnicom's BBDO as its creative agency, displacing WPP. However, Ford did retain WPP as its media agency. While Ford's decision will help Omnicom organic revenue growth in 2019, in our view, its negative impact on WPP revenue will not be significant. Plus, we must note that WPP has an opportunity to offset the effect of Ford's decision, as it is one of the final three agencies pursuing the Volkswagen account. We have not adjusted our projections for Omnicom or WPP and are maintaining our per share fair value estimates of $85 and GBX 1,500 for the two firms, respectively. Omnicom and WPP are 4-star stocks, which we continue to recommend for investors.

Small Additional Legal Accrual for Wells, but Expenses Remain on Target for Longer-Term Decrease

by Eric Compton | Morningstar Research Services LLC | 10-12-18

Wide-moat Wells Fargo continues to wade through its legal issues, recording another $241 million in remediation accruals. However, operating losses were at $605 million, down from $619 million last quarter, and far lower than the over $1 billion in losses per quarter for multiple quarters preceding this. This is at least in the right direction, and the bank announced no new legal issues, as the charges were related to already announced items. The return on average tangible common equity improved to 14.3%, and diluted EPS was up over 30% year over year. If Wells can begin to get past its legal and operating woes, maintain expense discipline, and return to anywhere close to its former profitability, the bank is arguably undervalued at today's prices. We are maintaining our fair value estimate of $67 per share.

Primary consumer checking customers were up 1.7% year over year, retention rates for these customers reached a five year high, and debit and credit card purchase volumes were also both up year over year. We view these as positive signs that Wells' underlying consumer business has not been permanently weakened or impaired. Average loan balances were down, which was largely expected, and this was across a broad number of different loan portfolios. However, average credit card balances still managed to grow quarter over quarter for the bank. Credit quality remained pristine, as the net charge-off ratio remained range-bound and provisions picked up only slightly. Management reiterated their expense guidance, and we see the bank being able to consistently decrease the expense base through 2020. This is partially helped by the assumption that legal accruals will not be as sizable and will eventually go away, but it is also based on taking real costs out of the business as well.

Given how Wells is repositioning its balance sheet, it hasn't seen as much of an increase in net interest margins as some peers. However, the bank’s deposit betas remain low, and we still project some expansion in net interest margins helping offset the shrinking balance sheet. Fee income was roughly flat year over year. The bank’s trust and investment fees continued their slow downward trend, but Wells surprisingly saw an uptick in mortgage related fees, despite current headwinds. Expenses remain well in line with our own projections, and we largely view Wells as an expense story over the next several years. Even with little to no revenue growth, if the bank can control expenses and eliminate legal charges, Wells should be well on its way to regaining its past profitability.

Third-Quarter Senior Housing Numbers Lower Our FVE but also Uncertainty for Welltower
by Kevin Brown | Morningstar Research Services LLC | 10-08-18

We are reducing our fair value estimate for no-moat healthcare REIT Welltower to $72 from $74 after reducing near-term senior housing growth estimates, incorporating the HCR ManorCare acquisition into our model and making additional adjustments to our model ahead of the company's third-quarter earnings call. However, we are also reducing our uncertainty rating for Welltower from high to medium as our concerns over senior housing supply have waned over the past few quarters. The National Investment Center for Seniors Housing & Care reported that the national average for seniors housing occupancy was down to 87.9%, the lowest level since the second quarter of 2011. Inventory growth continues to outpace absorption, which suggests that occupancy will continue to decline further into 2019. Additionally, senior housing margins are likely to come under pressure as rent growth has fallen below national labor cost growth. We have reduced our growth assumptions for seniors housing in 2018 and 2019 to reflect the continued slowdown of this sector.

However, we continue to be positive about this sector's long-term outlook. The third-quarter NIC report also showed that construction as a percent of inventory has fallen for the third straight quarter. Companies are reporting that construction starts this year have been less than half of the volume seen in the peak year of 2015. The reduction in starts should lead to lower inventory growth in the next two years, at which point the absorptions should be increasing due to the aging Baby Boomer population. Seeing multiple quarters of declining construction starts and rising construction material prices gives us greater confidence that senior housing will be positioned to potentially produce several years of strong growth. With Welltower's strong position in the senior housing sector, we think that there is less risk for the company today then there was at the peak of senior housing supply a few quarters ago.

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