4 Stocks to Buy for the Long-Term While They’re Still Undervalued
Plus, a deep dive on SpaceX’s bid to challenge US telecoms.
Key Takeaways
- How hot inflation data moved the market last week.
- Earnings to have on the radar: Meta Platforms META, Tesla TSLA, Western Digital WDC, and more.
- Takeaways from big bank earnings.
- What we think of chipmaker ASML’s ASML growth prospects.
- How SpaceX’s SPCX recent purchase of wireless infrastructure affects our view of US telecom giants Verizon VZ, T-Mobile TMUS, and AT&T T.
- Undervalued stocks to buy for the long term.
In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Sarah Hansen recap last week’s market activity, including the rotation out of growth stocks and how hotter-than-expected inflation data contributed to another spike in Treasury yields. They unpack what the market is now pricing in when it comes to monetary policy and economic growth.
They also cover what to watch in upcoming earnings reports from Meta, Tesla, Western Digital, and Nebius Group NBIS, and discuss the key takeaways from Progressive PGR, ASML, Taiwan Semiconductor Manufacturing TSMC, and Charles Schwab SCHW after earnings.
Tune in for a deep dive with Michael Hodel, director of communication services equity research for Morningstar, who explains SpaceX’s recent purchase of wireless spectrum infrastructure and what it means for the major US telecom firms. We wrap up the show with four stocks to buy while they’re still undervalued.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Transcript
Sarah Hansen: Hello, and welcome to The Morning Filter podcast. I’m Sarah Hansen for Morningstar, sitting in for Susan Dziubinski, who’s on sabbatical for a few more weeks. I’m here on Monday mornings to talk with Morningstar chief US market strategist, Dave Sekera, about key takeaways for investors in today’s market, what to keep on radar this week, some new Morningstar research, and a few stock ideas, as always. Before we get started, we have one programming note. We dropped a bonus episode of the podcast last week where Dave and Morningstar chief economist Preston Caldwell shared their forecasts for the fourth quarter. They covered a lot of ground, so if you haven’t tuned in yet, be sure to check it out wherever you get your podcasts.
OK, great to see you, Dave.
David Sekera: Good morning, Sarah. How are you doing?
Market Recap
Hansen: Doing great. It’s a beautiful, sunny, fall day here in New York. Let’s wrap up the action in the market from last week. We had some hot inflation data, some volatility in chip stocks, some motion in the Treasury market. So, talk us through what was most important.
Sekera: Well, I think the inflation metrics were pretty important last week. First of all, CPI came out hotter than what consensus expected. When that print came out, the yield on the 10-year initially spiked. It got as high as 5.32%. But then the thing was, as that yield was going up, the equity markets were falling, and as the equity markets were falling, that then drove a flight-to-safety bid, and the 10-year did come down after that.
Now, the day after CPI, we get PPI, and that also came in much hotter than expected. The real concern there is that PPI is often considered to be a leading indicator of CPI, meaning it’s showing that we still have hotter CPI yet to come as well. Now, it’s interesting that following these inflation metrics, the probability that the Fed hikes in October is still pretty low. It’s only 15%, but we did see that probability increase now up to 76% for a hike at the December meeting. Now, the other thing is that even after that hotter-than-expected PPI came out, the yield on the 10-year came down even further. I think the market’s currently pricing in two things.
First, that tighter monetary policy will end up slowing the economy down, and that will then contain future inflation past what we’re seeing right now. Secondly, there’s just a lot going on in the equity market. A lot of these commodity-oriented tech hardware names have really been getting crushed. We saw big rotation into value names, but I think we’re also probably seeing some rotation out of equity and into fixed income while the yields are still above 5% on the 10-year. Now, as far as what the Fed does, whether they hike in October or December, I don’t think really means that much in and of itself. Our economist is still only looking for one more hike by the Fed, and then he thinks they’ll be done tightening monetary policy after that point.
Hansen: OK. The other big piece of news, aside from inflation, we had last week was about Anthropic. They had their private investor day last week ahead of a very hotly anticipated IPO, which will be sometime this fall. Now, this was a closed-door meeting, but what did we hear, and what do you make of it?
Sekera: What I’m hearing is there are a lot of arguments out there whether their revenue is growing as fast as what a lot of people had expected or not. I think the takeaway is whether or not they’re meeting it down to the last billion-dollar annual revenue run rate; they’re still growing extremely fast at this point, but I think just as important as the top line is that, reportedly, they’re free cash flow positive and profitable at the gross margin line. Now, as far as the operating margin goes, there are a number of different adjustments that they make. Once they make those adjustments, they’re also reporting to be profitable at the operating margin level as well. What we’re hearing is that the IPO is still likely scheduled in November, and that they’ll probably start the roadshow at the end of October. I think the other thing that our analyst team was hearing is that the current large language models out there are still seeing huge increases in the amount of usage.
That’s just going to bolster their fourth-quarter numbers and expectations going into the end of the year, specifically into the IPO as well. Now, as far as the underlying business itself, our analyst says he’s still very cautiously optimistic about their long-term prospects and that we’re still in the very early terms of enterprise adoption. Again, very long, very fast growth path here. But, of course, the question will always be all about valuation, and of course we won’t be able to put it into our model and really put our long-term projections in there to do our DCF analysis until that S-1 is released. A lot of discussion whether it’s worth $1.5 trillion-$2 trillion, but until we can actually get the numbers ourselves, we’ll see.
Hansen: Yeah. Something to watch there, and somehow I doubt that will be the last news reporting rumors that we hear about Anthropic before that S-1 comes.
META, TSLA: Big Tech on Deck
OK, let’s move on to earnings. We are really getting into the thick of it here with third-quarter earnings season. This week we’re going to hear from some of the heavy hitters in tech, from those mega-cap hyperscalers all the way to those data center infrastructure stocks that are really wrapped up in the AI trade. Let’s start from the top. Who’s on deck in Big Tech, and what are you watching for?
Sekera: The first two to watch closely are going to be Meta Platforms META and Tesla TSLA. Now, when it comes to Meta, I think it’s going to be much more about AI utilization than it is necessarily about the ongoing performance of the company with the ad business and so forth. Specifically, I think the market and investors are going to want to hear a lot more details and get a better idea of the outlook for Muse. Muse is their recently released AI personal assistant bot, I guess it is, that they released. When I think about the valuation for Meta, and I look at our model, it’s still really all about its ability to monetize AI across its huge subscriber base.
Now, interestingly, this stock was a 4-star-rated stock for pretty much most of the year. We had a very strong rally in September. It’s now moved up into the 3-star range; albeit it’s still at the bottom of the 3-star range, but at least following that rally, it’s now in that range that we consider to be fairly valued. I think that with this one, if there is positive guidance and a lot of good market sentiment regarding Meta and specifically Muse, I think there’s still some upside here left to come. Having said that, this stock is up 30% just since the beginning of September. I think there are very high expectations going into this call. If they’re not able to beat those expectations, then I’d say there is a potential we could see a good selloff here. I’m really looking for some high volatility in that one.
As far as Tesla goes, I think yes, we’re going to want to hear about the fundamentals for their EV sales and their battery storage business, and get an idea of the overall profitability. But again, this stock is really all about growth. I think the two big things people will be focused on will be the robotaxi rollout, whether or not they’re hitting their goals as far as the number of cities that they want to roll out into, and expanding the fleet in those cities. And then more ideas as far as the timing on when the Optimus robot will be ready for primetime and really be ready for large-scale. And then lastly, any free cash flow dynamics. Of course, this is a company that’s more than happy to be free cash flow negative as they’re growing out, but any discussion on when they might become free cash flow breakeven or positive, I think that could be a big positive catalyst to the upside.
Earnings Watch: AI Infrastructure
Hansen: OK. Now, so much of the market activity last week was driven by big moves in stocks that are kind of associated with the AI trade, like those infrastructure and hardware providers, semiconductors, all those things that have been so volatile. Among those companies, whose earnings should investors pay attention to this week?
Sekera: Well, I think there are a couple of things going on. So, it’s really trying to understand what the growth prospects and the dynamics are for a lot of the data centers. The one I think I’ll be watching probably most closely is going to be a company called Nebius NBIS. That was a sell recommendation as recently as Aug. 10, 2026. Now, here’s a question for you, Sarah. What’s the difference between being early and being wrong?
Hansen: That’s a really hard one in the stock market, Dave. I don’t know if it’s easy to tell.
Sekera: The answer for that is nothing. In this case, I was a little early on the sell recommendation. We said sell on Aug. 10. That stock then went up 40% just that week alone, right up into my face. Then, on the Aug. 17 episode of The Morning Filter, we came back out and reiterated our sell recommendation at that point. The stock is down 40% since then, and of course it’s coming down at that same percentage on a higher dollar amount. The stock is now down about 10% from when we first said to sell, but of course we’ve missed that huge runup just that week alone. But then again, even after being down 10% from when we said to sell, it’s still a 2-star-rated stock. It’s a stock with a Very High
The reason being that we saw not only huge volatility to the downside on that stock and some of its competitors last week, but with a lot of these hardware—especially the commodity hardware and the AI trade—is that a company called Gartner published a report last week, and essentially what their conclusion is that, based on their assumptions of spending on AI and the potential revenue base that they see over the next five years or so, they expect that there could be capital write-downs of over $4 trillion by 2032. That really hit a lot of these stocks very hard, but it wasn’t just limited to the stock market.
In the bond market, a company called CoreWeave CRWV—their senior bonds fell to below 80 cents on the dollar, which means that they were trading at a 15% yield. Using that yield in the maturity debate, in their maturity date, depending on what you want to assume for loss given default, now the market there is saying the cumulative probability of default by 2031, which is the maturity date on those bonds, is now about 50%. In my mind, that just tells me that the debt markets are now closed to this company, and in fact, not just CoreWeave, but all of their close competitors until something changes. Now, what is that something? Remains to be seen. I just note that Nvidia NVDA does own 10% of CoreWeave’s stock, so maybe they’re able to step in with some sort of guarantees, which of course would then allow those bonds to trade up pretty substantially and then also probably bolster the stock price. But we’ll see. I mean, the market, especially the fixed-income market, is very leery about the near-term prospects for those companies.
The last one I’m going to watch will be Western Digital WDC. Western Digital is just one of these ones I think is pretty emblematic of that commodity-oriented tech hardware theme that we’ve been talking about. This stock started the year at $150 a share, rose all the way up to $750 by June, but it’s been on a downward trend ever since. It’s currently $370 per share; puts it in 3-star range. I’m just concerned that at this point there’s such strong momentum to the downside. The company really needs to come out with a very strong outlook to be able to reverse that downward momentum. I think, depending on how this one trades after earnings, it probably likely impacts all of the other commodity-oriented tech hardware stocks as well.
On Radar: Healthcare and Defense Earnings
Hansen: Yeah, makes sense. Everything’s kind of tied up together these last couple of weeks. OK. Outside of tech and AI, what earnings are you watching this week?
Sekera: The other two, I think, should be Gilead GILD and Thermo Fisher Scientific TMO. Both of those stocks have been prior picks on The Morning Filter over the past year or so. At this point, they’re now up so much they are 2-star-rated stocks. I think what I really wanted to hear from our analyst team is whether there’s enough reason in these conference calls for them to maybe reevaluate some of their forecasts and adjust their model to see whether or not they increase their fair values. If we don’t see any fair value increases, it might be time to ring the bell, at least on partial positions here, lock in some of those profits because they have run up into 2-star territory.
Then the other ones I think to watch are going to be the defense stocks. We’ve got RTX RTX, we’ve got Northrop Grumman NOC, we’ve got Lockheed Martin LMT, and these are stocks have been pretty volatile since the beginning of the conflict with Iran. We had the initial runup, the selloff, and they’ve kind of gone back and forth several times. But at this point, there’s really been no change in our long-term investment thesis for the defense sector overall. We still see a very long tailwind behind defense spending, not just in the US, but in the EU, Middle East, a number of our other allies as well. They still look very undervalued across the board to us.
I think the big concerns in the marketplace are just how will drone warfare change defense spending over the longer term? How might midterms impact spending over the next couple of months? Neither of those are anything that we think changes the overall level of defense spending over the next couple of years. In this case, I’m just going to be listening for a lot of the ongoing fundamentals, maybe new resupply orders, capacity expansions, maybe some new platform contracts. Overall, when I look at these companies, they just look like they have pretty reasonable valuations, pretty attractive dividends, a fundamental tailwind. These are still that I think look very good for your portfolio.
Big Bank Recap
Hansen: Great. Let’s rewind a tiny bit to last week. We talked about what to watch from the big banks, and now we have a bunch of those results in. What’s your takeaway there, Dave?
Sekera: Really, unfortunately, I was kind of expecting to hear more, but there’s really nothing that came out that was all that interesting or all that different from what our analyst team expected. I’d say generally the underlying banking businesses are doing pretty well. We did see some weaker-than-expected revenue from their fixed-income trading desks, but again, there was really nothing there that was meaningful enough to change our longer-term intrinsic valuations.
The only other part I was really listening for was what’s going on with the consumer and how their corporate credits are doing. I’d say the takeaway from discussions there on credit provisions and losses is they’re in just a normalized range. They’re not really building for any extra consumer or corporate credit stress, so nothing really to report there. We made a couple of slight reductions in our fair value on Bank of America BAC, Citi C, and Wells Fargo WFC, a slight increase in JPMorgan Chase JPM, but nothing that really changed our views on those stocks and the valuations. At this point, both JP and Citi are 3-star-rated stocks. Bank of America and Wells Fargo, a little on the undervalued side at 4 stars, but nothing that I’d really pound the table on right now.
PGR Sell Off After Earnings
Hansen: Well, one other stock that we have to return to this week is Progressive PGR. That was a sell recommendation last week. It fell about 8% after earnings, though it did make up a little bit of ground following the report in the later half of the week. What’s your takeaway there, and do you want to take a victory lap at all?
Sekera: Well, it’s not so much that I’d take a victory lap on this one. I mean, this is one that we highlighted as being a good tax-loss sale candidate last week when we were highlighting those that we thought would be good places to take your money off the table, lock in those tax losses so you could use those against capital gains elsewhere in your portfolio. I would say that what we expected kind of came to fruition.
In this case, the earnings were strong. Our analysts expected continued strong earnings. But as we talked about, what he’s seeing is further signs that the favorable conditions that a lot of these insurance companies have had for the past couple of years is really starting to come to an end. Now, specifically with Progressive, he noted the growth in personal auto policies and force is starting to decelerate. He thinks the opportunities for them to continue to keep taking market share is also probably coming to an end. And then he also noted that pricing and personal auto insurance is declining.
Overall, our fair value was unchanged. The stock is now trading, I think, in the very top of that 3-star range, right between 3 stars and 2 stars. I still think this is one that’s something you could use if you own it or maybe some of the other insurance companies where you have tax losses. And then I think you can reinvest those proceeds into other businesses that are trading at a much greater margin of safety below our fair value.
ASML’s Growth Prospects
Hansen: OK. We also heard from ASML ASML, which is one of those stocks you were watching to get an early read on the state of the semiconductor industry. What happened there with their results, and what does it tell you about that kind of “picks-and-shovels” AI trade more broadly?
Sekera: Yeah, it’s actually interesting. I mean, the stock really didn’t do all that much after the earnings announcement, and we ended up leaving our fair value unchanged as well. Last week, what you and I talked about was how investors would be really focused on growth in the backlog of their business. But I think what I’m really hearing now is that the biggest problem that they’re having is that they’re just capacity constrained. My understanding is, for 2027, they’re already completely booked up. If you look into 2028, I mean, it sounds like they’re very well booked, and what capacity they have there in 2028 is also filling up fast.
I think this is emblematic of what we’ve talked about on The Morning Filter for quite a while now, is that with a lot of these AI equipment manufacturers and what you call the “picks-and-shovels” of AI, the market, and ourselves, we’re already pricing in just tremendous growth for 2027 and 2028, but we really need to have much better clarity on the outlook for 2029 and 2030 for these stocks to really appreciate any much more from where we are right now.
I took a quick look at our model. We are forecasting high 2027 and 2028 growth, but then looking for it to slow pretty quickly thereafter. So, just to call out a couple of numbers here, for 2026, we’re looking at revenue growth of 34%. We’re looking for 28% growth in both 2027 and 2028, but then for revenue growth to slow to only 11% in 2029 and 2030. I mean, that’s still a huge dollar expansion. We’re looking for a company that did $33 billion of revenue in 2025, going all the way up to $88 billion by 2030. We’re still looking for ongoing margin expansion. They did, I think, a little over 35% last year, going all the way up to 39% this year, expanding even further to 43% next year, but then really only getting to about 44% thereafter. Again, kind of seems like as far as margin goes, after next year, they’ve kind of gotten as far as they can push it there.
Now, as far as the valuation for the stock, this company did $24.50 in EPS last year. We’re projecting $37.12 this year. The stock’s trading at a very high P/E ratio of 46 times. That drops to 33 times our 2027 earnings expectation of $52.88, and then gets down to 24 times based on our 2028 earnings expectation of $70.77. Even 24 times a two-year forward multiple is still a relatively high multiple for two years forward. I think the stock is pretty fully valued here based on those expectations. And again, you’re going to need much better visibility into 2029 and 2030 for these stocks really to take any kind of second leg upward.
TSMC Boosts Capital Expenditure
Hansen: OK. Staying with the semis and speaking of growth, we heard from Taiwan Semiconductor Manufacturing TSM too last week, which signaled much more aggressive capex spending in the coming years. Curious what you make of that, and what did you make of the report in general?
Sekera: Well, I think you’re absolutely correct that the biggest focus really was on the capex plans. I mean, this is a company that typically has been pretty conservative with its capex spending. They’re not going to be spending capex unless they really know that they’re going to be able to utilize it. And I think that’s why there was such a focus here. Essentially, the short-term capex spending for the remainder of this year was unchanged, but as you noted, they signaled a much more aggressive capex beyond that. I think, to some degree, that just confirms our projections with this company. Our 2028 capex estimate in our model is $98 billion. That’s up 53% versus what we’re expecting here in 2026.
Now, as far as the fundamentals go, fourth-quarter revenue guidance was a little bit above our forecast. We incorporated that into our model, but overall, for now, our longer-term estimates are unchanged. Our value on the stock is still a 4-star-rated stock at a 23% discount. To some degree, I think this also kind of supports the theme that we’ve talked about as far as AI, still sticking with those that we consider to be the technology leaders in AI and still steer clear of those that are the followers for AI.
SCHW Results Review
Hansen: Great. Thank you, Dave. Let’s switch sectors. We’ll get a little breather from AI and let’s move over to financials, and we’ll talk about Schwab SCHW. How did Schwab fare in the third quarter, and what does Morningstar think of that stock now?
Sekera: Another one where I’d say there was really just not a lot, really, to say. I mean, we did note that we planned to lower our fair value, but they’re only going to lower it by a low-single-digit percentage. Overall, he noted that the core business is still healthy, but we are modeling in a higher amount of longer-term debt, which we think will slightly compress the net interest margin over time. That is one reason that we brought down, or will be bringing down, our fair value by a little bit. I think this is one that, even though it is a 4-star-rated stock, I’d probably put it more on the one-to-watch list than necessarily having to buy the stock now. I just don’t necessarily like buying into a situation where the stock is falling, and we’re lowering our fair value at the same point in time. Even though it’s probably going to be in that low kind of 20% discount to fair value, this might be one where you want more of a discount before you start getting involved.
SPCX: Threat to Telecoms?
Hansen: OK. Thank you, Dave. All right, we’re going to move on to our question of the week. As a reminder, if you have a question for The Morning Filter, you can reach us at themorningfilter@morningstar.com. This week’s question, or I should say questions probably, are all about SpaceX. We had a lot of reader interest in that stock after news that SpaceX SPCX had purchased wireless spectrum infrastructure, seemingly with the aim of challenging those legacy telecoms like Verizon VZ, T-Mobile TMUS, and AT&T T. With all that interest, Dave sat down with our analyst, Michael Hodel, last week, who’s the director of communication-services equity research here. In this great video, they unpack what that acquisition means and how it impacts Morningstar’s view on these stocks. Let me throw it to Dave and Mike.
Sekera: Hey Mike, thank you very much for joining us. As you can imagine, we’ve gotten a lot of questions on The Morning Filter regarding what SpaceX is doing following the reports that they started buying some wireless spectrum. The first question I have for you is what do you think that they’re doing in the wireless space, and how does that then relate to their satellite network and some of the coverage that they’re already able to provide there?
Hodel: I think it’s important first to distinguish what Starlink is doing on the broadband side versus the wireless side. On the broadband side, that’s where the company’s probably gotten the most attention. It’s where you’re putting a dish on a house or on a portable RV, and you’re getting broadband service from the satellite.
What we’re talking about here is something a little bit different. This is direct to the cell, direct to your cellphone, your smartphone, your iPhone, what have you, service from a satellite. What this service has been marketed as traditionally is infill for places where terrestrial networks don’t reach, so a national park or somewhere in the wilderness. There’s been a lot of talk that SpaceX wants to offer a more comprehensive wireless service, and to do that, they need network coverage in more densely populated areas. A satellite service doesn’t have the capacity to serve lots of people in a small space, and it also doesn’t have the ability to penetrate walls.
If you’re indoors, that signal from a satellite’s going to have a hard time getting to you in a building somewhere. What this latest move is intended to do is to provide Starlink with the spectrum that it would need to build a network to get that in-building coverage in particular. And this isn’t likely to be spectrum that’s used from satellites. It’s more likely, and SpaceX has said as much, that they’ll build an actual network with towers and rooftops and that sort of thing to use this spectrum, again, to provide that coverage layer that can reach consumers in buildings or in rural areas.
Why that’s interesting is we think Starlink has most likely been trying to negotiate a wholesale agreement with one of the wireless carriers, AT&T, T-Mobile, or Verizon, because that’d be a much more efficient way for Starlink to fill in where its satellites can’t reach. The prospects of building a wireless network from scratch are extremely daunting. You’re talking billions of dollars for more spectrum, more than what SpaceX has already purchased, billions, tens of billions of dollars to actually build the network, and then billions upon billions of dollars to acquire customers, provide them with phone financing, and the sorts of things that customers expect today. We think right now SpaceX is most likely trying to build up assets to make itself a credible entrant into the wireless market as a way of negotiating aggressively with one of the existing wireless carriers for capacity in those areas where its satellite can’t reach.
Sekera: So, you think this is actually just more a negotiation ploy than it is necessarily them really looking at we’re going to go head-to-head against the incumbent wireless providers and build out our own complete network?
Hodel: It could be a little bit of both. I think for Starlink and SpaceX, they need to have some sort of fallback plan if they can’t get an agreement with one of the major wireless carriers. And the reason why that’s important is that all three of the major US carriers, again, AT&T, Verizon, and T-Mobile, have formed a joint venture for dealing with satellite providers where they’ve basically said, “We’re not going to negotiate independently and provide network access to somebody like Starlink who can then just turn around and compete with us.” By collaborating in that way, they’ve ensured that one of the companies, one of the carriers, doesn’t break off and sign an agreement with Starlink and leave the other two behind. And so, SpaceX, Starlink, they need to have some kind of credible fallback plan to enhance their negotiating position and also to potentially go it alone if the telecom companies don’t ultimately come to the table and agree to some sort of wholesale arrangement for Starlink.
Sekera: So, thinking about where the three stocks, AT&T, Verizon, T-Mobile, are trading today, and based on your view as far as you think this is most likely going to be them collaborating with Starlink as opposed to competing directly head-to-head, any of those stocks look interesting to you today? And if so, why?
Hodel: Yeah, so the big thing we did in light of Starlink’s latest spectrum purchase, and it does make the company much more credible as a fourth entrant into the wireless market, we increased our Morningstar
When I look at the three carriers today, T-Mobile actually looks the most interesting to me. It’s trading at about a 35% discount to our fair value estimate, which is a wider discount than AT&T or Verizon. The stock’s actually offering a decent yield for the first time in its history, above 3%, and they have the financial capacity to buy back stock pretty aggressively as well. And I like T-Mobile’s position in the fixed-line business a little bit more than most people might expect. I think that some of the investments that AT&T and Verizon are making to expand their fiber networks actually will struggle to generate attractive returns on capital. But again, I don’t think T-Mobile is quite yet at a large enough margin of safety to really pound the table on it, but it’s the one that I think looks the most attractive here.
Sekera: Understood. Well, thank you very much. I really appreciate your time.
Hodel: Of course. Thank you.
Stock Pick: MDLZ
Hansen: All right. That was a great conversation. Thank you so much. A lot to chew on. Thanks again to both the analysts. Moving on, our final section: our picks. Dave, this week you’ve brought us four undervalued stocks to buy, and I know that you want to emphasize that these names are long-term buys, not just stocks to rent. Let’s jump right in with Mondelez MDLZ. Could you walk us through some of the key metrics there?
Sekera: Of course. Mondelez stock is currently right at 5 stars. It trades at a 17% discount from our long-term intrinsic valuation, has a nice healthy dividend yield at 3.3%. We rate the company with a Low Uncertainty Rating. We assign it a wide
Hansen: Why is the stock a buy?
Sekera: Well, it’s not just a buy today. This is one we’ve talked about a number of times. It’s been a pick multiple times on The Morning Filter over the course of this year. In my opinion, when I look at the food sector—and generally I think the food sector is trading at some pretty large discounts from our fair values—I think, with Mondelez, it has the best combination of undervaluation, dividend yield, and, more specifically, probably the best outlook from a fundamental point of view because of the way they’re positioned in more emerging markets than just in developed markets. Now, fundamentally, this company has also been performing a lot better than a number of the other food names that we cover.
For example, last quarter they did 2.2% organic sales growth. A lot of other companies had negative sales growth. In North America, they still had 3.4% organic sales growth. A lot of the other North American food names really have been struggling to stay positive. We’re also seeing sequential improvement into that second quarter number from the first quarter number. I really like the fundamental point of view there.
Now, Europe was still probably weaker than what we had liked to see, but that wasn’t necessarily enough to dissuade us from this name. But as I said, the real attraction of Mondelez is its emerging-market exposure. That’s about 40% of the total sales of the company. It was up 7.4% in the second quarter. The real reason that I like that emerging-market exposure is because it’s not hampered by the GLP-1s and the growth in the GLP-1s and the negative impact that has on caloric intake that we’ve been seeing here in the United States.
As far as what we’re pricing in here, I think it’s probably a pretty modest forecast in our model. For revenue, we’re only looking at a five-year compound annual growth rate of 3.3%. Essentially, inflation plus just a little bit of volume increase. We’re looking for an operating margin this year, 14.1%, expanding to 15.1% next year, and then up to 16% in 2028. Pretty good margin expansion, but really that just gets you back to normal historical operating margin levels. If I look at the 10-year average for this company, it was 15.9%. I don’t think we’re expecting really the company to do that much better than what they’ve done historically. And then after this year, we’ve got an average 9.2% earnings growth. The way it all lines up, I still think this is a very attractive candidate even after we’ve already recommended it a number of times.
Stock Pick: BMY
Hansen: OK. Second on your list is Bristol-Myers Squibb BMY. What does Morningstar think of that stock?
Sekera: Bristol-Myers’ stock is currently rated 4 stars, trades at a 15% discount, and has a 4.2% dividend yield. We rate the company with a Medium Uncertainty. We assign a wide economic moat based on its intangible assets and, even more specifically, going to be based on its patents in its drug portfolio.
Hansen: Now, this isn’t the first time that you’ve recommended Bristol-Myers. Why is it still a buy in your book?
Sekera: Yeah, I mean, it’s been a pick a number of times over the past two years. It’s really been one of my go-to picks for pharmaceuticals. I mean, unfortunately for investors today, it’s not nearly as much of a discount as where it’s traded over the past couple of years, but again, it’s still enough that it looks attractive when we look at a lot of the other pharmaceutical stocks. Now, what’s going on with this one that you have to understand before you get involved is the stock market always hates stories where earnings are projected to decline. But then the good point about that is it also means that valuations are going to be really low.
In this case, the market is certainly very focused on and pricing in the risk that as drugs come off patent over the next couple of years, the market’s worried that they’re not going to be able to replace that revenue. In fact, to some degree, that’s what we’re modeling in as well. For this year, we’re looking for earnings per share of $6.18, getting up to $6.70 in 2027, but then starting to decline as a number of their drugs come off patent. We’re looking for earnings in 2028 to drop to $5.82, fall further to $4.89 in 2029, but then start expanding again as they have some drugs coming out by 2030. We’ll start looking for $5.04 of earnings and growth thereafter.
I’d say generally, according to our analysts, we think the market is just underestimating the strength of their pipeline of next-generation drugs. In fact, there was some good news recently. They announced a phase 3 trial for one of their drugs that met its primary endpoint for idiopathic pulmonary fibrosis. I think that’s a good indication of their pipeline.
If you look at the stock today, it’s only trading at 10 times its 2026 earnings projection. It trades at 12.5 times the low point in 2029. That’s when we expect earnings to bottom out and then start rebounding thereafter. As far as our dividend risk, we don’t foresee any cuts. The dividends in our model are expected to increase slightly every year over our forecast period. Again, another one where I think you have to just understand the dynamics that, yes, over the next couple of years you might see some earnings decline, but as that drug portfolio and the pipeline there starts getting approvals, it will start to rebound in 2030 and thereafter.
Stock Pick: LHX
Hansen: That’s one of those where long-term becomes very important, buying for the long haul and not renting. All right, let’s move to the defense industry. You’ve brought us L3Harris LHX. Can you walk us through the basics of that stock?
Sekera: L3Harris is currently rated 4 stars, trades at a 27% discount from fair value, and has a 2% dividend yield. We rate the company with a Medium Uncertainty. We assign a narrow economic moat, that narrow economic moat being based on switching costs and intangible assets.
Hansen: Now, you’ve never recommended this one before. Why is it on your radar right now?
Sekera: I would say probably because it was maybe not quite on my radar in the past because it’s much smaller than what we see from Lockheed or Northrop, which is really where my focus on some of my prior defense picks have been. It’s just a company where I like the portfolio setup the more that I look into it. A lot of what they work on are uncrewed aerial vehicles, sensors, avionics, space-based systems, missiles, solid rocket motors. I think overall, when you think about the change in how defense spending over time may evolve based on how using drones and modern warfare tactics is also evolving, especially with the missiles and missile defense programs, I think this is a company that is going to be well positioned to be able to benefit from that change in defense spending over the longer term.
When I look at our model, our five-year compound annual growth rate for revenue is 5.8%. We’re looking for margin expansion from 11.6% this year to 14.7% by 2030. That’s a little bit faster expansion than what we’re currently modeling in for a company like Lockheed Martin. I like that extra margin expansion on the type of products that they manufacture. Overall, it leads us to a five-year earnings growth of 13%, trades at about 20 times our 2026 earnings estimate, and drops down to 19 times our 2027 earnings estimate. Again, when you put that all together, it’s trading at a pretty good discount, but I think it’s not only that; I think it’s getting a lot more attention from the marketplace as the market is looking at how defense spending evolves.
Stock Pick: LNT
Hansen: All right. Now, last on your list is a utility. Tell us about Alliant Energy LNT.
Sekera: Alliant is trading at an 11% discount. It’s enough to put it in 4-star-rating territory, being a utilities stock. 3.1% dividend yield, Medium Uncertainty, with a narrow economic moat. Like all the other utility stocks, that narrow economic moat is based on efficient scale.
Hansen: Why do you like Alliant for the long term?
Sekera: I like this one. I mean, I think this is actually, you’re getting a second bite at the apple on this one. It was a recommendation at the beginning of the year. The stock initially went from $65 to $78. That’s enough to put it in 3-star territory. Now, with interest rates having risen over the past couple of months, the stock has backed off, now down to $67. Overall, I still think that from a utility point of view, it’s well set up to be able to benefit from not only ongoing growth within their regulated utilities, but still also be able to benefit from data centers and growth in data centers in the regulated areas over time.
Right now, we’re forecasting earnings growth at the high end of management’s guidance range of 5%-7%. We’re expecting growth to accelerate beyond 2027. The company has a four-year capital investment plan of $13.4 billion, that’s up 24% from its prior plan. That indicates just how much more growth expansion they have. There are three different data centers under construction, and a fourth with a signed agreement within the areas that they operate. That’s a total of 3 gigawatts of extra demand. That should drive 12% annual sales growth from 2025 to 2030. Even from there, I mean there’s an additional 2-4 gigawatts that we think could materialize beyond 2028. Overall, that really operates in some very constructive regulatory environments, which we think benefits for investors over the longer term as well.
Hansen: Great. Well, Dave, thank you so much for your time. It was great to be here with you this morning. Viewers and listeners who’d like more information about any of the stocks that Dave talked about today can visit morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter at 9 a.m. Eastern and 8 a.m. Central. In the meantime, please like this episode and subscribe. Hope everybody has a great week. Cheers, Dave. Thank you.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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