Morningstar Advisor - June/July 2010 - 67

Our screen, which can be performed in Morningstar Office (or Principia, via the Field Builder function), is as simple as it gets. We start by screening for companies with a wide moat rating.

added seeds for corn, soybeans, cotton, fruits, vegetables, and other crops. The agricultural-productivity segment produces a number of herbicides, including Roundup. Our fair value estimate for Monsanto’s shares is $122 apiece. We believe Monsanto can compound its top line at a high-singledigit rate over the medium term. Growth will be driven by the continued success of the firm’s seed portfolio, which will benefit from further penetration of higher-value products and continued expansion into international markets.
Apollo Group APOL P/FV: 0.54

$6 per share of value from carbon caps or other carbon-restricting regulations starting in 2014.
International Speedway ISCA P/FV: 0.60

Economic Moat

5 Wide

This yields 167 companies. Out of the 1,800 companies our analysts cover, these are the only ones we deem deserving of the label. They’re the only ones that qualify for inclusion in the Wide Moat Focus.

International Speedway benefits from barriers to entry that prevent other track operators from competing in its markets, as well as substantial intangible assets that keep fans loyal to its tracks. These competitive advantages give the firm a wide economic moat. Our fair value estimate is $51 per share. We believe the company will be able to increase revenue at an annual rate of 5.2% during the next 10 years despite a short-term drop in revenue of 11% in 2009.
Applied Materials AMAT P/FV: 0.63

Domestic/Foreign

5 Domestic

We limit the holdings of the Wide Moat Focus to U.S. firms, which takes our investable universe down to 132 companies. Given our growing coverage of international firms, though, we’re getting close to being able to construct a non-U.S. version of the Wide Moat Focus. Next, we simply rank the resulting companies by P/FV. (If you use Principia, you can use the Field Builder function to create this data point by combining last stock price and Morningstar fair value estimate.) Below are the five cheapest wide-moat stocks as of early May. If you’re curious, the other holdings, in ascending order of P/FV, would be: Pfizer PFE, Western Union WU, Weight Watchers International WTW, St. Joe JOE, Genzyme GENZ, Paychex PAYX, Eli Lilly LLY, Abbott Laboratories ABT, General Electric GE, Lowe’s LOW, KLA-Tencor KLAC, Merck MRK, BlackRock BLK, DeVry DV, and ExxonMobil XOM.
Monsanto MON P/FV: 0.52

Apollo Group is a leader in for-profit education. Its University of Phoenix, which makes up about 95% of its total revenue, has experienced strong growth recently, partially due to the weak economy. However, long-term secular growth trends in education, as well as international opportunities, bode well for the company. Our fair value estimate is $106 per share. We model compound annual revenue growth of 11% during the next five years. This is made up of a 7% enrollment CAGR and annual revenue per student growth in the 2%-4% range. We estimate that operating margins will decline slightly before returning to 28% by the end of our forecast.
Exelon Corporation EXC P/FV: 0.60

Applied Materials is the behemoth of the semiconductor equipment industry, with unmatched scale and a broad product portfolio. The firm has steadily been establishing its solar-equipment business in an effort to drive growth. Our fair value estimate is $22 per share. Applied and its chip-equipment peers are in the midst of a severe cyclical slowdown, but business conditions have been improving. After revenue declined 38% in fiscal 2009, we forecast sales will rebound by more than 50% in fiscal 2010 and by 40% in fiscal 2011 in our model.
Haywood Kelly, CFA, is vice president of equity research at Morningstar.

In an era of concerns about global warming and rising fossil fuel prices, Exelon maintains an enviable position as the largest nuclear plant operator in the United States. Its ability to produce low-cost, carbon-free electricity should produce substantial, sustainable, and growing shareholder value for many years, regardless of what path power prices take. This is why we consider it the only utility in our coverage universe with a wide economic moat. Our fair value estimate is $73, which includes

Monsanto is the world’s leading producer of seeds. The company’s seed and genomics division combines advanced breeding and biotechnology traits to produce high-value-

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Morningstar Advisor - June/July 2010

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