Compass' Shares Rally as Management Guides to Restored Salt Profits; Shares Remain Undervalued
by Seth Goldstein, CFA | Morningstar Research Services LLC | 02-11-20

Wide-moat Compass Minerals reported encouraging fourth-quarter results as operating earnings grew 26% year on year due to higher salt prices and lower salt unit production costs. Management also provided a favorable outlook for 2020, pointing to improved salt profitability as the company continues to make progress on the restoration of its low-cost Goderich mine.

We have long expected improved salt results. With little change to our long-term outlook, we raise our fair value estimate to $81 per share from $80 due to time value of money effects. We maintain our wide-moat rating, which stems primarily from the company's cost-advantaged salt production. Compass shares rallied on the favorable outlook, with the stock up over 12% at the time of writing. However, with shares still trading in 4-star territory, we continue to see upside in the stock.

Dominion Initiates Bullish 2020 Guidance and Reaches Agreement with ACP Customers
by Charles Fishman, CFA | Morningstar Research Services LLC | 02-11-20

We are reaffirming our $86 per share fair value estimate for wide-moat Dominion Energy after the company reported solid 2019 operating earnings, initiated 2020 EPS guidance of $4.25 to $4.60 with a midpoint $0.03 higher than our estimate, and provided an update on development projects. Operating earnings for 2019 were $4.24 per share, $0.02 higher than the average of the consensus estimates and $0.01 above our estimate.

We thought Dominion and Duke Energy would be successful negotiating with customers of the Atlantic Coast Pipeline for higher rates to share the increased cost of the pipeline. After one year of negotiation, it appears the outcome was better than we had assumed. Management expects ACP to contribute $0.20 to $0.25 per share when it is fully in service. Our assumption that the pipeline would initially generate a utilitylike return on invested capital of only 8%, roughly $0.15 per share, now appears too conservative.

Dominion increased the projected cost of the ACP to approximately $8 billion from its previous range of $7.3 billion to $7.8 billion. The new forecast is in line with our estimate. However, Dominion reaffirmed the projected in-service date of early 2022, one year earlier than we assume. We remain confident the pipeline can be expanded, providing additional economic value for the owners over the next 20-plus years.

Duke Energy Increases Capital Expenditure Plan an Impressive 12%, Reports Strong Full-Year Earnings
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 02-13-20

We are reaffirming our $88 fair value estimate and stable, narrow moat ratings after Duke Energy reported $5.06 EPS in 2019 compared with $4.72 in 2018. Management initiated 2020 earnings guidance of $5.05 to $5.45.

After disclosing plans to issue $2.5 billion in equity in 2020 last quarter, management sought to ease investors' concerns about earnings growth by increasing its five-year capital investment plan to $56 billion, up $6 billion from its prior plan. The additional growth is focused on its three high-growth operating areas of Florida, North Carolina, and South Carolina.

Duke plans to invest another $1.5 billion in Florida in additional grid hardening and solar investments. Investment in the Carolinas will focus on transmission and distribution investments at its electric business and integrity management and infrastructure investments at its gas distribution business. We view the capital spending increase positively and think the investments should allow Duke to achieve the midpoint of its 4% to 6% earnings growth guidance in 2020-24.

Enbridge Posts Strong Fourth Quarter and Strong 2019
by Joe Gemino, CPA | Morningstar Research Services LLC | 02-14-20

Wide-moat and Best Idea Enbridge reported another strong quarter. However, it slightly missed our and Cap IQ consensus expectations. The company reported fourth-quarter adjusted EBITDA of CAD 3.19 billion, which was down from CAD 3.32 billion in the year-ago quarter. Consensus expected adjusted EBITDA of CAD 3.26 billion, which was slightly above our expectations. The lower-than-expected performance was driven by the absence of contributions from the company's divested assets as well as a decline in the performance of energy services. Conversely, distributable cash flow of CAD 2.05 was in line with Cap IQ consensus expectations and above our expectations. The increased cash flow resulted from higher distributions from equity earnings and the impact of new assets placed into service, partially offset by the adjusted EBITDA headwinds.

There were no major updates on the company's major growth projects or initiatives. Enbridge expects to complete the Line 3 permitting process but doesn't have a firm timeline on the project. However, we still don't expect the pipeline to be fully operational until the end of 2021. Enbridge continues to advance its mainline priority access contract initiative and is awaiting the outcome of Canada's Energy Regulator review regarding the proposed open season. Enbridge has received support from shippers representing more than 70% of the pipeline's capacity.

We don't see any changes to our long-term thesis and are maintaining our $47 (CAD 62) fair value estimate and wide moat rating. Shares are up over 8% in 2020 and outpacing the market. Despite the higher trading levels, we still see opportunity in the stock. However, we don't expect the market's concerns will be fully addressed for some time, which can lead to volatility. But we advise investors to stay the course while getting paid a handsome 5.8% (and growing) dividend. In the end, we believe Enbridge's long and winding road will lead to over 10% additional upside.

FirstEnergy Accelerates Transmission Investment; Increasing Fair Value Estimate
by Charles Fishman, CFA | Morningstar Research Services LLC | 02-13-20

We are increasing our fair value estimate to $45 per share from $43 after FirstEnergy reported strong 2019 operating EPS, reaffirmed its 6%-8% annual EPS growth target through 2021, and initiated a 5%-7% growth target through 2023. The utility increased its planned transmission capital investment in 2021 to a range of $1.2 billion to $1.45 billion from the previous point estimate of $1.2 billion and initiated the same range for 2022 and 2023.

The increase in our fair value estimate was due in part to increasing our earnings estimates for FirstEnergy's Regulated Transmission segment following the acceleration of planned capital expenditures. We estimate transmission investment totaling $6.5 billion will represent 42% of total capital expenditures over the next five years. We expect this level of transmission investment to last for over 20 years. We raised our five-year average annual operating earnings growth for transmission by 60 basis points, to 8.9%.

Our fair value estimate also benefited from increasing the assumed return on new invested capital in the second stage of our valuation model (years 6-15) to 8% from 7%. Roughly 90% of the transmission investment is covered by forward-looking Federal Energy Regulatory Commission rate frameworks that provide returns on equity ranging from 10.3% to 11.7%. This is well above our estimate of FirstEnergy's cost of equity for these businesses and our consolidated cost of equity of 7.5%.

Hanesbrands Closes 2019 on a High Note While 2020 Looks Like a Transition Year
by David Swartz | Morningstar Research Services LLC | 02-07-20

Narrow-moat Hanesbrands met our sales and earnings figures for the fourth quarter of 2019, capping off a year in which we believe it made progress in improving its balance sheet and transforming its business. The firm paid down over $600 million in debt in 2019 (reducing total debt by about 15%) and its year-end inventory was 7% lower. Meanwhile, its most strategic businesses showed growth. Hanes' international segment grew to 36% of total sales in 2019 (up from just 13% in 2013) and its Champion sales (excluding C9) grew 40% in constant-currency. While Hanes faces some near-term challenges, such as weakness in basics and the end of the C9 deal at no-moat Target that will likely weigh on 2020 results, we also think the cash-generating potential of the business will become more apparent. We do not expect any change to our Hanes $28 per share fair value estimate and view shares as undervalued.

Omnicom Outperformed Expectations in the Fourth Quarter and Provided Strong 2020 Organic Guidance
by Ali Mogharabi | Morningstar Research Services LLC | 02-11-20

Omnicom ended 2019 on another strong note with both the top and bottom lines coming in above our expectations and the FactSet consensus. Narrow-moat Omnicom's strong organic growth, especially in developed regions such as the U.S. and Europe, demonstrates how well its reputable agencies continue to execute. We remain impressed with Omnicom's further strategic investments in and development of data analytics capabilities without big acquisitions, unlike its peers IPG and Publicis. Management guided for 2%-3% organic growth and no change in margins in 2020 (both in line with our projections). We did not make any significant adjustments to our model and do not plan to materially change our $85 fair value estimate.

Omnicom reported fourth-quarter total revenue of $4.1 billion, up 1.3% from last year as the negative impact from agency divestitures and foreign exchange rates was more than offset by impressive 3.5% organic growth. The firm posted year-over-year organic growth of 2.8% in the U.S. driven by continuing demand for services in advertising and media, CRM consumer experiences, and healthcare. Similar services also performed well in the U.K. and Europe and pushed 3.3% and 4.7% organic growth in those regions, respectively, although continuing weakness in France as demand for traditional marketing services, mainly print, continued to decline faster. While revenue from the Asia-Pacific region grew 4.5% organically from last year, it did include weakness in China, which we think may worsen given the ongoing impact and possibly further spread of the coronavirus. Weakness in Brazil pushed organic revenue down 1.3% in Latin America. And revenue in the Middle East and Africa, which represents less than 3% of total revenue, grew 19.5% organically year over year.

Underlying Trends Intact in PMI's 4Q
by Philip Gorham, CFA, FRM | Morningstar Research Services LLC | 02-11-20

Philip Morris International reported fourth-quarter and full-year 2019 results that modestly missed our estimates due to marginally weaker volumes. Guidance for next year is also a touch below our expectation, but that is more a result of the few pennies in earnings per share the company missed by in 2019 than any deterioration in trends. We are reiterating our $102 fair value estimate and wide moat rating. There is still considerable upside in our tobacco coverage and PMI is the quality pick of the group. The industry is not without catalysts, but these results confirm our thesis that a material improvement in adoption of new generation products will require a strong pipeline of new technologies.

Solid Portfolio Growth but Disappointing Bottom Line for Welltower in Fourth Quarter
by Kevin Brown | Morningstar Research Services LLC | 02-13-20

We see positives and negatives in Welltower's fourth-quarter results and 2020 guidance, though nothing that would materially change our $79 fair value estimate for the no-moat company. Welltower's total same-store net operating income growth of 2.2% did exceed our 1.8% estimate. Senior housing results continue to be positive in a difficult period, with the operating portfolio up 1.3% and the triple-net portfolio up 2.9%. The company's other segments also saw positive same-store NOI growth, with medical office up 2.3%, health systems up 1.4%, and skilled nursing up 4.3%. However, operating expenses for the non-same-store portfolio were much higher than we had anticipated, which led to Welltower reporting normalized funds from operations of $1.05, which missed our estimate by $0.03.

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