Morningstar - Q1 2021 - 20

Dispatches

these attributes into our financial model, the
company's stock has a Morningstar Rating of 4
stars as of Dec. 18.
A 5-star stock as recently as November,
Nordstrom JWN is now rated 3 stars. We believe
its solid expense control, ownership of
the off-price Nordstrom Rack chain, and strong
e-commerce channel will offset some of the
impact of the pandemic and expect it to return
to profitability next year. Over time, we see
opportunities for Nordstrom to gain share as
some rivals are hampered by financial difficulties
and store closures. We continue to believe
Nordstrom has a brand-based intangible
asset, the source of its narrow Morningstar
Economic Moat Rating.
Shopping Malls
Retailers will continue to operate physical
storefronts, but they are becoming more selective.
In addition, those that primarily conduct
business digitally are beginning to open stores
in Class A malls (which attract the greatest
number of shoppers and highest sales per square
foot) to take advantage of the high foot traffic,
provide a showroom for products they want
to highlight, and offer another channel for sales.
As e-commerce growth outpaces in-store
sales, we expect a reduction in retail space will
occur almost entirely among lower-quality
(Class C and Class D) locations. When consumers
are comfortable returning to public venues, we
expect that Class A malls will quickly rebound.

In the near term, we have lowered our cash flow
estimates among the mall-focused REITs as
occupancy levels drop because of heightened
retailer bankruptcies and pressure to offer
rent concessions during mall closures. Over the
longer term, we expect the historical
correlation between e-commerce sales growth
and in-store sales growth to normalize.
Among the mall REITs, Simon Property Group
SPG is the largest and manages one of the
top retail portfolios in the country. With the stock
trading at 5 stars, we think Simon Property
Group is significantly undervalued. Macerich MAC,
also trading at 5 stars, has repositioned itself
over the past decade as a true owner and operator
of Class A regional malls.
Regency Centers REG, rated 4 stars, is the largest
shopping center REIT, with a portfolio filled with
high-quality assets focused on grocery store
tenants. Over 80% of its properties are anchored
by a grocery store, which provides a strong
draw to these locations.
Dining Out and Public Venues
We expect more restaurants to permanently
close as we enter winter and limitations on indoor
dining lead to reduced capacity. This opens
up opportunities for surviving businesses to take
share and increase earnings, and we anticipate
a strong return in 2021. For the most part,
across the restaurant sector, investors are already
pricing in the long-term recovery.

Worth Watching These companies will benefit as consumers get back to normal.
Name

Price ($)

Fair Value ($)

P/FV

Morningstar Rating

Anheuser-Busch InBev ADR BUD

71.50

96.00

0.74

QQQQ

Macerich MAC

10.51

34.00

0.31

QQQQQ

Macy's M

10.43

16.30

0.64

QQQQ

Molson Coors Beverage TAP

45.51

55.00

0.83

QQQQ

Nordstrom JWN

30.12

33.50

0.90

QQQ

Regency Centers REG

45.93

62.00

0.74

QQQQ

Sabre SABR

11.50

16.20

0.71

QQQQ

Simon Property Group SPG

85.43

152.00

0.56

QQQQQ

Source: Morningstar. Data as of 12/18/2020.

20

Morningstar Q1 2021

But stocks for the companies that supply
restaurants and other public events have lagged
in the rally. As patrons return to restaurants
and taverns as well as other public venues, such
as sports arenas, alcoholic beverage companies
should regain much of their lost consumption.
Wide-moat Anheuser-Busch InBev BUD
trades at 4 stars. While we forecast that this year's
sales and earnings before interest expense
and taxes will decline 10% and 15%, respectively,
we expect sales to rebound by 9.3% in
2021, primarily owing to a recovery in on-premises
consumption and the resumption of sporting
events. Beyond that, we assume the secular
industry growth rate returns, with revenue growth
averaging 4.4% over the medium term.
Similarly, we see upside potential for Molson
Coors TAP.
Travel
As restrictions are lifted and people become
comfortable with public transportation again,
we expect a return to travel, albeit in a slightly
different form than before the pandemic.
Our short-term outlook assumes that leisure,
local, and car travel rebounds ahead of corporate,
international, and air travel. In our long-term
outlook, we assume a full recovery in travel
demand, based on past demand shocks, by 2024
(with the exception of cruise lines, which may
take longer). Since the vaccines have started
to roll out, stock prices for the companies that will
be the primary beneficiaries of increased
travel (like airlines and hotels) have soared and
risen into 3-star territory.
Among the secondary beneficiaries of resumed
travel, we think Sabre SABR, trading at 4 stars, still
has upside potential. Sabre holds the number-two
share of global distribution system air bookings
(38.8% as of the end of 2019 versus 37.1% in 2018).
The company also has a growing IT solutions
division that focuses on the airline, hospitality, and
travel-agent end markets. Transaction fees,
which are tied to volume and not price, account for
the bulk of the firm's revenue and profits.
David Sekera, CFA, is chief U.S. market strategist at
Morningstar Research Services LLC.
Morningstar - Q1 2021

Table of Contents for the Digital Edition of Morningstar - Q1 2021
