All this week, Morningstar.co.uk will be bringing you a Guide to Investment Ideas for 2017; stock picks, market reactions and political forecasts from the investment professionals.
Weatherford International (WFT)
Return in 2016: 7.2%
Weatherford provides a portfolio of oil and gas equipment and services, with offerings catering to all geographies and different types of oilfields.
Since the golden years for oil services in the 2000s effectively ended with the global financial crisis, Weatherford has been in total disarray, said Stephen Simko, senior equity analyst at Morningstar. Simko admitted that analysts are sceptical whether Weatherford can ever get its cost structure and execution to levels where it is not destroying shareholder value in a $50 to $70 per barrel oil price environment.
This is because two years into the downturn, its cost-reduction efforts have been far less effective than peers' at stabilising results, said Simko. Another worry is the firm’s mountain of debt, which as of late 2016 had reached $8 billion. The firm’s annual interest cost is set to head north of $500 million in 2017. This is an albatross for a firm of its size and profitability, and will likely prevent it from making needed investments in its portfolio, Simko added.
The stock is rated three-star by Morningstar analysts, meaning analysts believe the stock is trading at their fair estimate for the share price.
CenturyLink (CTL)
Return in 2016: 6.6%
CenturyLink's volatile performance over the past few years has damaged the firm's credibility with investors, said Alex Zhao, equity analyst with Morningstar. Execution in the business-services unit, especially in the data centre and hosting segment, has been consistently lacklustre, Zhao said. Analysts like the steps management was taking to put CenturyLink on stronger path, cutting costs while exploring the sale of the data centre business.
Recent results have fallen short of expectations, however, as the firm has struggled to properly align its salesforces, Zhao said. Zhao added that the company has also been distracted by an attempt to build out a cloud computing business that faces long odds of success in the face of stiff competition from giants like Amazon and Microsoft.
The stock is rated four-star by Morningstar analysts, meaning they believe that the stock is trading below their fair estimate for the share price.
Gap (GPS)
Return in 2016: 5.7%
Gap is an iconic American brand, selling basics at affordable prices.
Morningstar’s Zhao said Gap's adjusted return on invested capital has declined from 17% in 2013 to 13% in 2015 and is expected to be about 10% in 2016. The challenge the company now faces is to minimise fashion misses and inventory mismatches through a responsive supply chain, become more technologically sophisticated for younger consumers, and maintain a differentiated and relevant brand identity in the face of growing fast-fashion competition. Consumer preference has shifted to value over brand in general apparel retail, and competition has flooded the space, namely through fast-fashion retailers H&M, Zara, and Uniqlo, Zhao added.
The stock is rated three-star by Morningstar analysts, meaning analysts believe the stock is trading at their fair estimate for the share price.
AmerisourceBergen Corp (ABC)
Return in 2016: 5.7%
The presidential election of Donald Trump combined with the Republicans retaining majorities in Congress leads to greater uncertainty for healthcare stocks. While Trump and the Republicans have been clear on the desire to repeal the Affordable Care Act, there is less clarity on their healthcare policies, except for the focus on reducing regulations. Morningstar senior equity analyst Vishnu Lekraj says he suspects as plans take shape to repeal the Affordable Care Act, the likely outcome will be more of a modification than a complete repeal as several groups have benefited from the legislation.
Being one of the most powerful players within the pharmaceutical supply chain, AmerisourceBergen plays a critical role among manufacturers and retail outlets, which solidify the company’s long-term outsized returns, said Lekraj. Lekraj added that as specialty drug spending continues to increase, AmerisourceBergen as the largest specialty drug distributor in the US has an opportunity to capture value from this nice market and grow both top- and bottom-line results.
Pharmaceutical spending will continue to grow robustly over the next several years given demographic shifts and the expansion of medical insurance coverage to the currently uninsured, said Lekraj. The company is rated an undervalued four-star stock by Morningstar analysts.
United States Steel Corp (X)
Return in 2016: 5.2%
This company is the second-largest steel producer in the US by production volume. It has over 19 million tons of steelmaking capacity in the United States and Slovakia. In addition to that the company operates a business unit that produces oil country tubular goods for the energy industry, which provides the company with a greater degree of diversification than many of its peers. In the automotive and appliance end markets, this company is a major supplier to nearly all major North American manufacturers.
Facing significant headwinds in an ongoing low steel-price environment, the company’s management has done an impressive job executing its cost-cutting initiatives in hopes of boosting margins and generating economic profit for shareholders, said Andrew Lane, equity analyst with Morningstar.
In addition to announcing the permanent closure of the Hamilton Works steelmaking facility, the chief executive officer of the company Mario Longhi indicated that the company will actively investigate the possibility of building out direct-reduced iron production capacity and constructing one or more electric arc furnaces, said Lane. Despite it is too early to access the efficacy of Longhi’s tenure, early returns of Longhi's Carnegie Way cost-cutting initiative have been encouraging, as the plan led to $575 million of benefits in 2014 and $815 million of benefits in 2015, said Lane. The stock is rated three-star by Morningstar analysts.
