At-Home Eating Drives Strong Quarter for Narrow-Moat General Mills, but Shares Fully Valued
by Rebecca Scheuneman, CFA | Morningstar Research Services LLC | 07-01-20

The pandemic-related shift to at-home eating (a channel that accounts for 85% of its sales) boosted General Mills' fourth-quarter organic sales by 12% and adjusted operating margin by 40 basis points to 17.7%. For fiscal 2020, organic sales grew 3% and operating margins improved 40 basis points to 17.3%, compared with our estimates of 2% and 17.5%, respectively. We plan to maintain our long-term expectations for 2% annual organic sales growth and 18% operating margins and do not expect a material change to our $54 fair value estimate. With the shares trading modestly above this level, they appear fully valued.

While the pandemic doesn't alter our views on the long-term potential size of the packaged food market, increased trial could lead to enduring share gains for brands that generate high repeat purchase rates. During the quarter, General Mills increased household penetration by 2 points in each of its major markets (U.S., Canada, Europe, China, Brazil), realized share gains in nine of its 10 largest U.S. categories, and reported repeat purchase rates that broadly outpaced category averages, citing the highest rates for Cheerios, Pillsbury, Betty Crocker, Annie's, and Old El Paso. We were pleased that the firm increased media investments by 39% in the quarter, which should further support strong brand equities that underpin our narrow moat rating. General Mills solidified its lead in U.S. cereal with 70 basis points of share gains in fiscal 2020. The firm also reported another strong year for pet, with double-digit all-channel retail sales growth. However, snack bars lost share in fiscal 2020, although innovation and improved merchandising led to share gains in the fourth quarter. And U.S. yogurt is taking a bit longer than we expected to stabilize, as Greek and light varieties continue to decline, but the core business (original style, Go-Gurt) and new innovations (Starburst, dairy-free Oui) are strong and should help to improve the business in fiscal 2021.

General Mills' free cash flow grew 42% in fiscal 2020 to $3.2 billion, allowing the firm to reduce net debt to adjusted EBITDA to 3.2 times, besting the firm's 3.5 goal and our 3.4 estimate. We expect the firm to approach its long-term goal of 3.0 times by fiscal 2021, which should position it to resume dividend increases or pursue acquisitions.

Duke Energy Receives Constructive Indiana Rate-Case Decision
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 07-01-20

We are reaffirming our $95 fair value estimate and stable, narrow moat ratings after Duke Energy received a constructive order from the Indiana Utility Regulatory Commission for its subsidiary Duke Energy Indiana.

Regulators approved a $146 million rate increase and a 9.70% allowed return on equity with a 53% equity component in the unit's capital structure. Duke initially requested a $396 million rate increase and 10.4% allowed return on equity.

We expected regulators would approve a slightly higher allowed return on equity, but the higher-than-expected equity component offset the impact, resulting in no fair value estimate change. Rates will go into effect in two steps, with 75% of rates effective late July 2020 and the remaining effective in the first quarter next year. Overall, the rate-case decision supports our view that Indiana remains a constructive, albeit average, regulatory jurisdiction for Duke.

On average, we think Duke operates in supportive regulatory jurisdictions. Florida remains one of the most constructive regulatory jurisdictions in the U.S., with industry-leading allowed returns on equity, automatic base-rate adjustments, and strong growth opportunities.

North Carolina remains supportive of Duke Energy's capital investment plan focused on transmission and distribution investments and gas infrastructure development. South Carolina's regulatory environment has declined recently, but the jurisdiction represents just 12% of the company's rate base. We think Duke has enough growth opportunities across its service territories to adjust capital allocation if necessary.

Duke Energy remains one of the cheapest regulated utilities we cover, and we think its steep discount to its peers is unjustified. The company's 4.7% dividend yield is a 110-basis-point premium to its peer group as of early July.

Good News from BioNTech and Pfizer's Phase 1/2 COVID-19 Vaccine Trial, but Long Road Ahead
by Anna Baran | Morningstar Research Services LLC | 07-01-20

On July 1, partners BioNTech and Pfizer reported positive early data for one of four vaccine candidates against SARS-CoV-2. The data from an ongoing U.S. trial demonstrated promising antibody responses with good safety data for the two lower doses of the vaccine candidate, BNT162b1. We are maintaining our fair values for no-moat BioNTech and wide-moat Pfizer at $40 per ADR and $42.50 per share, respectively.

In the phase 1/2 trial, all 24 patients that received the two lower doses (10 micrograms and 30 micrograms) showed elevated antibody levels, and those responses, on average, were above the levels observed in the comparison panel of 38 patients that had naturally contracted SARS-CoV-2. We don't yet know what level of immunity is needed for protection against the virus, but to see an immune response above what is observed in patients that naturally contracted the virus is a promising start. Further, side effects in patients that received the two lower doses were mild to moderate and quickly resolved. These included local pain at the injection site, fever, headaches, and fatigue. The highest dose, 100 micrograms, was dropped following heightened side effects after the initial dose. We're encouraged by the results from the two lower doses--both the efficacy observed and the absence of serious side effects.

We expect data for the remaining three candidates over the coming weeks, which will allow the partners to select a lead candidate to move forward into a large phase 2b/3 trial, which may start as early as July 2020. BioNTech and Pfizer continue to ramp up manufacturing capacity, with plans to produce up to 100 million doses by the end of 2020 and over 1.2 billion by the end of 2021.

Several open questions remain, including the duration of the response, as the trial only tested the immune response for two weeks after the second dose. Further, it's worth noting that the trial was conducted in healthy adults under 55 years of age, so the response may differ for other patient populations. Additionally, we'll continue to watch results from the comparison panel, which in this case included serum from a broad set of patients, aged 18 to 83, with varying severity of infection.

BNT162b1, one of four candidates tested by BioNTech and Pfizer, is a nucleoside-modified mRNA (modRNA) candidate that expresses the SAR-CoV-2 receptor binding domain (RBD). The companies are also testing a modRNA candidate targeting the full spike protein, a self-amplifying mRNA (saRNA) candidate targeting the full spike protein, and a uridine mRNA (uRNA) candidate targeting the RBD. The uRNA and modRNA candidates will require both an initial immunization and a booster dose, but the saRNA only requires one injection at a low dose, as saRNA requires a dose about 60 times lower than uRNA to induce immunity. While any progress with vaccine development will have substantial implications for the world, the saRNA candidate could be a strong differentiator relative to other vaccines against SARS-CoV-2 in development and have a meaningful impact on manufacturing capacity, ease of distribution, and medication adherence.

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