Two New 5-Star Stocks on the Menu
Plus earnings updates on other recent 5-star picks.
Plus earnings updates on other recent 5-star picks.
Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.
To get our full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.
Newest 5-Star Stocks
Panera Bread
In Morningstar analyst John Owens' opinion, Panera Bread has carved out a lucrative niche between fast food and casual dining thanks to distinctive menu items and a compelling dining experience. Owens has been impressed with the chain's ability to grow sales beyond the busy lunch period via new menu introductions such as egg souffles and hand-crafted pizzas. He sees ample opportunity for expansion, as the company's density is only a fraction of the dominant fast-food and casual-dining players' density. Its success, however, has not gone unnoticed, and rivals are now responding more aggressively. For instance, McDonald's (MCD) continues to promote its "premium" items and has sought to recast its restaurants in a more-upscale decor. Nevertheless, those risks appear to be factored into Panera's stock price, which remains well below Owens' fair value estimate.
Full Analyst Report: Panera Bread
Ruth's Chris Steak House
Ruth's Chris is a leader in the growing upscale steakhouse segment of the restaurant industry. The chain has a respected and well-known brand, built over the last 42 years, and is also the largest upscale steakhouse chain. In the U.S., the company leverages its size and coast-to-coast footprint with national advertising, complemented by targeted local media, which has helped to boost average unit volumes at company-operated restaurants. With these attractive unit economics and an in-house development team, Ruth's Chris is well positioned for growth, in Morningstar analyst John Owens' view. Management believes the chain could ultimately expand up to 250 domestic restaurants, including an additional 75-100 steakhouses in the 50 most populous cities and a further 25-50 in smaller markets. And this is to say nothing of the company's growth potential abroad. While there are risks to management's expansion aims, not the least of which are eroding operating standards, lost brand equity, and intensifying rivalry with competing chains, Owens thinks these risks have been discounted into the stock and then some.
Full Analyst Report: Ruth's Chris Steak House
* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, April 20, 2007.
Recent Updates on 5-Star Stocks
Raising Washington Mutual's Fair Value
We are raising our fair value for Washington Mutual (WM) to account for the firm's repurchase of more than 60 million shares during the first quarter. We recognize that the mortgage business will drag on results in the near term, but we believe there is value in WaMu's diversified business platform and strong retail banking operations that will enable it to weather the current issues in the housing market.
Erin Swanson
Amgen Buoyed by New Safety Data
Amgen (AMGN) has released new Aranesp data that support the safety of its erythropoiesis-stimulating agents (ESAs); this alleviates some of the recent concern that has weighed on the biotech's stock. However, the news has a neutral effect on our fair value estimate, as we've stood by our belief that the drug is safe for approved uses.
Karen Andersen
eBay Reports Strong First-Quarter Results (Maintaining)
After reviewing eBay's (EBAY) first-quarter results, we're sticking with our fair value estimate. The company delivered another strong performance, with revenue rising 29% from the prior-year quarter. On the back of this growth, non-GAAP earnings per share (excluding stock-based compensation expense and amortization of acquired intangible assets) soared 39%, boosted by positive leverage in marketing, product development, and infrastructure costs. Given its strong cash flow, solid balance sheet, and, in our opinion, still deeply undervalued stock, we were encouraged that eBay repurchased about $333 million of its shares. The company may buy as much as an additional $2 billion of stock through January 2009 under its current program. Finally, we were pleased that eBay once again raised its forecast for 2007.
John Owens
Ugly First Quarter for Motorola, But Making Headway (Maintaining)
Although Motorola's (MOT) first-quarter earnings weren't pretty, the company showed some signs of stabilization in its handset business, in our opinion. While we reiterate our belief that a turnaround at the company will take some time, we continue to believe that Motorola can emerge from its troubles a stronger company. Our fair value estimate remains unchanged.
John Slack
Raising Our Wal-Mart Fair Value Estimate
After revising our discounted cash flow model for Wal-Mart (WMT) to account for 2006 results, we have boosted our fair value estimate. We are assuming approximately 6% annual store expansion in the U.S. Wal-Mart business, 3% expansion for the Sam's Club chain, and about 8% annual international store expansion. In light of recent results, we aren't comfortable assuming that the company will be able to boost same-store sales above the low single digits, but if that were to happen, our fair value estimate would rise. Historically, the company has been able to offset higher selling, general, and administrative spending by squeezing its suppliers. However, this has not been as strong in the past couple of years, so we are assuming minor margin deterioration over the next five years.
Joseph Beaulieu
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