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2 Stocks We Find Attractive

2 Stocks We Find Attractive

Speaker 1: Early in July, Morningstar's equity analysts updated their list of attractive ideas. Here's a look at two of the new additions.

Newcomer Carrier, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. We initiated coverage of Carrier in late June with a narrow moat rating, stable moat trend, and a $32 per share fair value estimate. In our view, Carrier has the strongest overall product portfolio of the major HVAC players, which also includes Johnson Controls, Trane Technologies, and Lennox. Carrier has historically had the strongest profit margins in its peer group. And its growth prospects have greatly improved now that it's a stand-alone company with complete control over its capital allocation decisions. We see no reason that Carrier should trade at a discount to Trane, which has a similar, yet less comprehensive product portfolio and lower profit margins. While Carrier's stock price has appreciated significantly since it's spun off from United Technologies, we think the market hasn't fully appreciated the company's growth and free cash flow generation potential. We still see plenty of upside.

New addition Merck's combination of a wide lineup of high margin drugs and vaccines, along with a pipeline of new drugs, should ensure strong returns on invested capital over the long term. We assign Merck a wide moat rating, stable moat trend, and a $100 fair value estimate. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small cell lung cancer market with excellent data.

Also, we expect Keytruda to gain approvals in early treatment settings, which should open up underappreciated sales potential. Additionally, Merck's vaccines look ready to drive further gains, led by human papilloma virus vaccine, Gardasil, which continues to generate excellent clinical data. While the firm's late-stage pipeline lacks several new blockbusters, we expect early stage assets focused on cancer to move through trials rapidly. Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products like Keytruda and Gardasil to more than offset generic competition.

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