Morningstar Advisor - August/September 2012 - (Page 71)

petitive advantage for a longer period of time than a narrow-moat company. By restricting our search to wide-moat companies, we are reducing our list of investments down to businesses that can generate long-term excess returns regardless of market volatility. active research and development efforts are creating the next potential blockbusters with several hepatitis C drugs and kidney disease drug bardoxolone showing particularly strong clinical data. Exxon Mobil XOM And Morningstar Rating  QQQQ Finally, we look for stocks that earned a 4- or 5-star rating from Morningstar’s analysts. Analysts discount projected future cash flows to arrive at an intrinsic price or fair value estimate for a company. Firms with 4- or 5-star ratings trade at market prices significantly discounted from the fair value estimate; therefore, we can double-check that we are looking at companies trading at significant discounts to their intrinsic value. We ran this screen in June. Here are some of the results. Abbott Labs ABT Exxon Mobil sets itself apart among the other supermajors as a superior capital allocator and operator. Through a relentless pursuit of efficiency, technology, development, and operational improvement, it consistently delivers higher returns on capital relative to peers. With a majority of the world’s remaining resources in government hands, opportunities for the company to expand its large production base are limited. However, we believe Exxon Mobil’s experience and expertise, particularly with large projects, should allow it to successfully compete for resources. Novartis NVS years, but it also extends the life cycle of in-house products as patents expire. Also, the vaccine division (largely created by the 2006 acquisition of Chiron) offers the company a substantial footprint in an area where pricing power is increasing with innovative vaccines and fewer competitors. Further, the acquisition of Alcon in 2011 greatly boosts Novartis’ consumer and drug segments with additional sales from the fast-growing eye-care business. Spectra Energy SE In 2007, Duke Energy DUK split its electricity and gas businesses by spinning off Spectra Energy, which retains all of Duke’s natural gas gathering, processing, transmission, storage, and distribution assets. Spectra is one of the largest midstream companies in North America, with a favorably positioned asset footprint that should continue to foster attractive internal growth opportunities for years to come. Spectra is a pure play on natural gas demand. Its operations stretch across all links in the natural gas value chain, with the exception of riskier exploration and production. With positions in gathering and processing, transportation and storage, and distribution, Spectra collects a large portion of economic rents paid to move gas to end users. Vincent Yu is an equity analyst with Morningstar. On the foundation of a wide lineup of patent-protected drugs, a leading diagnostics business, a strong nutritional division, and a top-tier vascular group, Abbott Laboratories has dug a wide economic moat. We expect these operating lines will continue to generate strong returns and drive growth. Further, the company’s decision to split itself into two is likely to result in two well-positioned companies (a drug company and a diversified health-care company) with strong competitive advantages. Existing drugs and new pipeline products should propel long-term growth. Abbott’s pharmaceutical division contains a diverse set of growing blockbusters across many therapy groups. Autoimmune agent Humira, HIV/AIDS drug Kaletra, and cardiovascular treatments Tricor and Trilipix lead the group with more than $8 billion in annual sales (27% of total sales). Humira continues to be the workhorse of the group with 21% growth in 2011, as new indications help propel the drug. The company’s In an industry plagued by stagnant growth, Novartis is a juggernaut with diversified operating platforms and an industry-leading number of new potential blockbuster drugs. Strong intellectual property supporting multi-billion-dollar products combined with an abundance of late pipeline products create a wide economic moat. While the 2012 patent loss on Diovan and manufacturing problems in the consumer division will weigh on near-term growth, the company’s strong strategic position should lead to robust long-term growth. Novartis derives its strength from a diversified operating platform that includes branded pharmaceuticals, generics, vaccines, diagnostics, eye-care products, and consumer products. Although the majority of Novartis’ competitors focus solely on the high-margin branded pharmaceutical segment, Novartis runs five complementary operations that reduce overall volatility and create cross-segment synergies. For example, not only does its generic business, Sandoz, serve to grab a portion of the billions of dollars in competitive branded products losing patent protection during the next 10 MorningstarAdvisor.com 71 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Contents
Contributors
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012