Morningstar Advisor - October/November 2010 - 43

case—1970s stagflation—are you confident that these can be compounders over the next 10 years in such an environment? Romick: It depends on the company. In some cases, you have more comfort level than in others.

low prices relative to the competition for Wal-Mart customers, which will benefit them over the longer term with respect to cash flow. It could also increase transportation costs for their competitors. With Budweiser, I think that there’s a lot more moving parts in terms of commodity exposure—agricultural products, barley, wheat, etc. But they’re pretty well hedged for the next couple of years, so there’s less risk now, but higher risk down the road. Beer sales have tracked closely to what’s happening at the pump. If gas prices increase a lot, sales of six packs of these low-price beers decline. So a weaker economy will have an impact, as would higher commodity prices. In such a scenario, both sales and margins could get squeezed.
Inker: You’ve got to be careful asking about a

Johnson & Johnson’s margins are at an all-time high, and its P/E is at an all-time low. But its operating margin is about 60% higher than it was two decades ago. I do not currently have conviction that margins will not contract some. It’s a business that has been fairly well optimized. I think there is more risk there. But Kraft’s operating margin reflects the inverse. We’ve seen a decline in margins from two decades ago—running well below where they had peaked. So it could be a different case for Kraft. Certainly, they have more room to improve their business, I would argue, than Johnson & Johnson has. I’m less worried about a Wal-Mart, because Wal-Mart is not one of those companies that is a margin-taker. A margin-taker is a company that keeps cost savings for themselves through expanded margins, rather than passing on the savings to their customers. Wal-Mart has been unusually consistent in their margin over time by taking savings and returning those savings to their customers in the form of lower prices, so that they continue to attract people to their stores. There was an analyst report not too long ago about Wal-Mart and what they’re proposing to do with their suppliers. They’ve gone to their largest vendors and said, “We think that we can manage your supply chain logistics better than you.” This analyst came out with a report and made a bullish call on Wal-Mart because it would benefit Wal-Mart’s margins. Well, it’s the right bullish call but for the wrong reasons. I would argue that whatever cost savings they’ll capture won’t flow through Wal-Mart’s margins; it’ll be recycled in the form of lower prices. If they can do this successfully, it will just mean continued

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repeat of the 1970s. In the 1970s and early 1980s, the Kelloggs of this world saw declining margins because they didn’t react to higher input costs by raising their prices. It’s not entirely clear why they chose not to. They could have done it. They seemed to think that it was beneath them. They don’t think that way anymore. When agricultural prices increased in 2007 and 2008, food companies responded quickly. Again, we believe that high-quality companies should be in a decent position to defend their margins in the event of inflation. They can’t necessarily do it perfectly, but there’s no particular reason to believe that these guys are hurt worse than others. There are some reasons to believe they may be able to hold on to their margins. K
Ryan Leggio is a mutual fund analyst with Morningstar.

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Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
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