Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or plans for the week.
But before we get to that, let’s talk about the Trump administration’s tariffs that went into effect over the weekend on Mexico, Canada, and China. Now, you noted in your 2025 stock market outlook that tariffs were a wild card for the economy and the stock market this year. So now the tariffs have arrived. What’s your initial take?
David Sekera: Hey, good morning, Susan. Well, all I have to say is “strap in” because this could be a really highly volatile week coming up. As you mentioned, we have all the earnings coming up, but now we’ve also got to deal with what everyone’s going to think about the tariffs. Now, interestingly, stocks performed better last Friday afternoon after they were announced than I necessarily would have thought. The market was only down about a half a percent.
But taking a look at futures this morning—I know they were down as much as over 2% last night before I went to bed—looks like they’re down somewhere between 1.5% to 2% right now. So we’ll see where they open up this morning. The only good news, as I would say, is that probably leaves the stock market now only trading a couple percent above our fair value.
So not getting close to the overvalued territory that we’d warned investors about before. In addition to stocks, taking a look at Treasuries, we do see the flight to safety going on. It looks like the 10-year is about 5 basis points better this morning. So it takes that down to about 4.5%. And if you remember in our 2025 outlook we had recommended lengthening duration this year.
Our US economics team does forecast that the yield on the 10-year should drop over the course of this year and into 2026. And of course, while we think longer-term bonds are looking more attractive, we did actually think they should underweight corporate bonds. So it’ll be interesting to see what the corporate bond market does this morning, with as tight as credit spreads had gotten, in some instances getting to historical tights.
I’d expect to see a lot of pressure in the corporate bond markets and spreads to widen. Looking at oil here, oil prices also higher. Now, one of the reasons we had been overweight energy was not only because it was trading at below fair value, but we also noted it did provide a good natural hedge in your portfolio for geopolitical risk.
Although I have to admit, this wasn’t the geopolitical risk I was contemplating when we made that call. And then overall, it’s still just very hard to jump to any kind of definitive conclusions just yet. I don’t think the tariffs actually go into effect until Tuesday. So in my mind, I think what this does is just provides them more time to be able to negotiate.
In fact, as far as I think how things are going to go as long as negotiations are progressing, I would assume that they probably keep pushing those tariffs back. But of course, we’ll see. Now, of course, over the weekend, Canada and Mexico came out. They identified a number of retaliatory tariffs that they could put in place targeting very specific products.
And in fact, the news here does say they’re looking for products in more Republican-leaning states, as well as industry groups that have higher political influence. So, at first blush, it does appear this could be more of an opening salvo and potentially a wider, more protracted trade war. But as long as both parties, or all three parties, in this case, are still negotiating,
I think that is still a positive sign. However, if talks were to break off, then I will become increasingly more concerned that this could become a more protracted trade war.
Dziubinski: So, Dave, do you feel like there’s a more or less likely scenario when it comes to these tariffs, or maybe what the market’s expecting from these tariffs? Is there an expectation that they’re going to be this short-lived negotiating tactic or that they could be longer lasting?
Sekera: Yeah. To be honest, I just don’t think there’s any way of telling how long the tariffs are going to last. I mean, the general market consensus right now is definitely that this seems to be more of a negotiating tool than anything else. I think that’s the same view held by our US economics team. So as long as these negotiations are progressing, I’d expect that the implementation should get pushed back.
Just thinking about negotiating strategy in general—sometimes it’s the threat of using something like that is actually more effective than actually putting into place and utilizing it, because of course once you implement those tariffs, that then puts the other side into a position where they have to show to their constituents, they’re just not going to roll over.
So again, we’ll see. I mean, if tariffs are implemented, everyone does have an incentive to get them lifted as soon as possible. But with Canada and Mexico both readying their retaliatory tariffs, it seems like they’ve banded together. May indicate or at least indicates to me that I think they’ve joined like a united front to negotiate together.
And once tariffs and retaliatory tariffs are instituted, I think it makes it harder to find an agreement in which all three parties can agree upon at once. So we’ll see if the tariff actually gets put into place. That could end up being a definite negative tell for the marketplace.
Dziubinski: All right. So also last week we had the Fed leaving interest rates unchanged. And then we had the PCE coming out, which is the Fed’s favorite inflation gauge, and that came out as expected. So now we have tariffs in the picture. What’s the expectation in terms of interest-rate cuts for the rest of the year?
Or is it honestly kind of too soon to tell?
Sekera: Like anything else at this point I think it’s just too early to be able to give any kind of definitive answer. I mean, if anyone’s giving you a definitive answer—I think that would be crazy to try and make those forecasts at this point. But one of the things I’ve also been watching overnight is that, in the near term, we’ve seen some pretty large changes in foreign-exchange rates that may actually help offset some of the impact of the tariffs here in the short term.
And in fact, I was looking at some of the longer charts here for both the Canadian dollar and the Mexican peso. In fact, both are down versus the US dollar, anywhere from like 9% to 10% since the end of last September. So hopefully in the short term that would alleviate some of the impact of the tariffs.
I think that maybe importers and exporters can split the difference for some period of time here. So we would have some margin pressure on both sides of the border in the near term, but not the kind of pressure that’s really going to put anybody under. I mean, I think what we’d see is certainly going to be survivable for most parties here.
But the longer the tariffs last, the more incentive there is to look for domestic suppliers that may be viable alternatives, the more likely that we could see disruptions in the supply chain. So the longer this goes on the greater the effects that it has. So I think we’re all really kind of hoping that this is going to just be a short-term phenomenon.
Dziubinski: All right. Well, the tariff story is of course going to be on investors’ radars this week. Are there any economic reports you’ll be watching this week?
Sekera: To be honest, considering the full lineup of earnings that we have, a lot of different mega-cap stocks, a lot of AI-correlated stocks coming up, and then trying to determine what kind of potential havoc these tariffs may have on individual sectors and different stocks—I think economic metrics this week are just going to take a backseat to everything else.
I mean unless you’re really far off from consensus, I think people aren’t going to spend a lot of time taking a look at them. Really the only metric of consequence, in my opinion, is going to be nonfarm payrolls on Friday. Looks like consensus right now is for 154,000 in job growth. That is a slowdown from 256,000 last month.
So that would really just put us in line with our US economics team, which is a base case of that soft-landing scenario of the next couple quarters.
Dziubinski: All right. Well, let’s get on to those earnings that we’re watching this week. Alphabet reports earnings this week. And Alphabet was one of your stock picks for the first quarter of 2025. So how does the stock look head look heading into earnings, and what are you going to want to hear about?
Sekera: Now Alphabet is actually a stock we’ve been long behind—actually pretty much since we started the show. We recommended it multiple times over the past two years. In fact, I looked up our list here. And the first time we recommended it was all the way back in May of 2023. Stock’s up 89% since then.
But at this point it’s only trading at a 7% discount to fair value. So it is still attractive and I would say attractive on both a little bit on an absolute basis at that 7% discount, but especially compared to the rest of the market, especially compared to a lot of the other AI-related and technology names.
Just thinking about Alphabet and its earnings and what people are going to be looking for. Of course, most of Alphabet sells does come from advertising. So performance and guidance there are always important to listen to. YouTube remains a key driver in our valuation. So we’ll be listening for ad sales and subscription numbers.
But really I think all investors want to hear about it’s going to be generative AI monetization. They’re going to want to hear about it from three points of view. So first AI overviews, I think Alphabet had noted that was driving engagement for them. So we want to see those engagement numbers.
We want to hear more about Gemini adoption. What kind of market share are they seeing there versus other AI platforms? And then lastly the kind of growth that they’re going to expect in Google’s cloud.
Dziubinski: All right. We also have Amazon reporting this week. What do you think of this stock heading into earnings?
Sekera: Now, according to our fair values, it seems like the stock might be getting a little ahead of itself here in the short term. It’s a 19% premium to our fair value, so it does put it in that 2-star range. I talked to Dan Romanoff. He’s the equity analyst that covers that stock. So I know he’s going to be specifically listening for an update on the capex, especially in light of expansion for data center capacity here.
But of course then listening for AWS performance. He thinks that growth should be accelerating there, even if only modestly. He noted segment margins were really high last quarter. So he’ll be focused on margins to see if they can keep those same kind of margins there. Advertising performance: That’s really been kind of one of the keys to our long-term investment thesis on that company. And that was just a key driver for both growth and margins. The e-commerce platform: It’s kind of funny. I think that’s actually kind of taken a backseat to a lot of these other drivers for Amazon. But he noted as far as he can tell, all signs are pointing toward a pretty good performer for e-commerce.
And then lastly, just any discussion around margin improvement for the company overall and the other additional operational efficiencies that they’ve been gaining. He’s noted that over the past couple quarters, and really maybe past two years, it’s been a lot of different areas Amazon has been able to find to drive those efficiencies.
Dziubinski: Advanced Micro Devices was a pick on the show a few weeks ago, and it’s reporting earnings this week. Now AMD’s stock still looks quite undervalued. So Dave, could anything come out of earnings that would maybe act as a catalyst for the stock?
Sekera: Stock’s still trading at a 28% discount, puts it well into that 4-star territory. Generally, when I think about our long-term thesis for that stock, while we certainly acknowledge that Nvidia does have that first-mover advantage and will have that first-mover advantage for a while, according to Brian Colello, he’s our sector strategist for technology,
he still thinks that, over time, AMD does become that number-two player in AI GPUs. So in his view, he thinks the market’s really going to be most focused on their AI GPU business, specifically what their forecast for 2025 is. And he thinks that’s probably the wild card here that could move that stock pretty significantly one way or the other.
Other than that, just generally more fundamentally, any other color that they might give on market share gains versus Intel for both PC and server CPUs. And if so, how much additional market share are they gaining versus Intel?
Dziubinski: Now we have two big names in the obesity drug space reporting this week, and that’s Eli Lilly and Novo Nordisk. Both stocks are down off their highs from 2024. So how do they look from a valuation perspective today, and what will you be listening for in their results?
Sekera: It looks like Eli Lilly is down about 15% from their August highs. But it’s still at a 40% premium, puts it well into 2-star territory. Novo’s a bit of a different story. That’s down 40% from its highs last summer. So right now it’s trading pretty much right at our fair value. So it’s a 3-star-rated stock.
And I talked to Karen Andersen. She’s our equity analyst that covers that company. She’s the director for our healthcare team. Three different areas that she has really specifically mentioned that she’s going to be looking for some data here. So first for financials on the top line, she is forecasting Eli Lilly will gain market share in the GLP-1 market away from Novo here in 2025.
But overall still expects Novo will retain their leadership position. Can be very focused on operating margins. They’ve been pretty fairly steady in the mid-40% range. Her concern here is at Novo—are they going to need to step up their promotional efforts as Lilly expands that market share? Second, manufacturing—Just any commentary they have on capacity here.
More specifically, whether or not some newly acquired manufacturing sites can really start to have a meaningful impact on Novo’s global GLP-1 supply. And then lastly, just on their pipelines, specifically, CagriSema versus Zepbound. Just taking a look at some disappointing phase three 3 here for CagriSema efficacy back in December it didn’t meet kind of what the market was looking for there.
So she wants to hear maybe if there was like some issues with the trial design that led to those worse than expected efficacy results and then maybe any additional info on its safety data. And she wants to listen to whether or not Novo might be moving forward with any of its oral dose trials for that drug as well.
Dziubinski: All right. Let’s move on to some new research from Morningstar. Now, Dave, when you and I were streaming last week’s episode of The Morning Filter, news was breaking about DeepSeek’s new AI model, and that was rattling the market. So it’s one week later. What’s your take on what happened in the market last week following that DeepSeek news?
Sekera: I don’t want to say it was a nothing burger, but the market really shook that news off very quickly and very quickly turned its attention back toward earnings. I think the market and ourselves to some degree are pretty skeptical of the claims that DeepSeek is making. A lot of reports out there that it just isn’t what it was hyped up to be last weekend and last Monday. And in fact, when I look at the market action over the course of the week, by Friday morning, I think, the market pretty much regained most of the losses that we had on Monday. But then, of course, you on the markets did sell off in the afternoon, but that was following the news that Trump was going to institute the tariffs.
Dziubinski: Now did Morningstar make any fair value estimate changes to the companies it covers as a result of the DeepSeek news? Any changes to direct AI plays like Nvidia or to other companies like those electric utilities that we expect to benefit from data center growth?
Sekera: Nope. No changes. Fundamentally, it’s still too much unknown, too much uncertain as to what DeepSeek’s real capabilities and costs are. For now, we’re still on our same base case. GPU demand still exceeds supply here in the short term. We still think the hyperscalers are going to build out their data centers and their cloud capability.
So we still expect technology firms are just going to buy all the GPUs that they can get their hands on as part of their AI buildout. From a valuation point of view, generally all of those AI hardware names such as Nvidia, Broadcom, Arista, Marvell, I mean, before the DeepSeek news came out, they were all 2-star.
Some of them are even in 1-star territory, meaning that we thought they’re all overvalued fundamentally anyways. So the selloff just brings them to the point where they’re less overvalued at this point in time. Although I do see that Nvidia did fall enough that it’s now in that 3-star territory, as opposed to 2-star.
Dziubinski: All right, so let’s get Morningstar’s updated takes on some notable companies that reported earnings last week. And let’s start with Microsoft. Microsoft has been a pick of yours this year. And the stock fell after earnings on lower than expected revenue forecast. So what did Morningstar think of the report, and were there any changes to our fair value estimate on the stock?
Sekera: Broadly speaking, I think our takeaway here was that the earnings results in and of themselves were good. I mean, nothing really necessarily to write home about, but we did note that the guidance was somewhere between our expectations and maybe slightly light. And I think it was light enough to disappoint the market. And that’s why we saw the stock drop on Thursday.
It did try to recover a little bit on Friday, but then failed once the Trump tariffs came out. So really again, like anything else looking forward, talking to Dan Romanoff, who’s the equity analyst that covers the company. What’s interesting here is he noted that he thinks the stock is actually set up pretty well for 2025, especially over the second half of the year.
He looks at Azure. That has grown significantly over the past couple quarters. But specifically he thinks that growth has been limited from capacity constraints. Microsoft has been building out that capacity. And he’s forecasting that added capacity will really help that company accelerate growth in Azure in the second half of 2025. And that’s what he thinks will probably be a good catalyst for the stock later this year.
Dziubinski: And then from a valuation perspective, Dave, still looks undervalued after the pullback, right?
Sekera: It does. So there is no change to our fair value. Still at $490 a share. It’s a 15% discount to fair value. Puts it in that 4-star territory. And in fact considering how much of the rest of the technology sector is overvalued, Dan noted in his write-up that he thinks wide-moat Microsoft is actually among our top technology stock picks today.
Dziubinski: All right. Now Apple reported good earnings and revenue, but it fell short on iPhone sales. Any surprises in that?
Sekera: I wouldn’t say necessarily any surprises. Total revenue for the quarter was up 4% year over year. As you mentioned, iPhone sales revenue was down 1%. But that’s more than offset by the 14% increase in service revenues. So generally, I’d say it’s no surprise to our analyst team. A big portion of our forecast has been that we have expected soft iPhone sales, kind of a soft growth cycle over the next two years is what we’re modeling in.
It seems to us Apple intelligence isn’t really boosting iPhone 16 sales in any kind of material way. And more importantly, when we look at revenue in China, I think that declined now for the sixth straight quarter. So again, a lot of market share erosion that we’ve seen there. And that has been kind of a key piece in our thesis as far as kind of that slowing long-term iPhone growth.
IPhones have just been losing market share in China to a lot of different domestic competitors there. We did see the stock tried to trade up. But it did lose momentum and fell throughout the day on Friday.
Dziubinski: So any changes to Apple’s fair value estimate after earnings, and is the stock attractive today?
Sekera: So no change overall. Again it’s still a company with a wide economic moat, medium uncertainty. But our fair value is that $200 a share. With the stock closing last Friday at $236, puts it at a 18% premium. So still a 2-star-rated stock, one that we think is just trading on a risk-adjusted basis too high compared to our intrinsic valuation.
Just to put it a little bit into context, as far as our earnings growth, our model right now shows about a 12.5% forecast for a compound annual growth rate over the next five years. Stock’s trading at about 32 times our 2025 earning estimate whereas our fair value would put it only 27 times forward earnings.
Dziubinski: Now the market liked what it saw in Meta Platforms’ results, and it looks like Morningstar did, too. Stock rallied, and Morningstar substantially raised its fair value estimate. So why was the market’s so excited? What what drove that rally?
Sekera: Really strong quarter, I mean, revenue up, reported 21% operating margins, expanded by 700 basis points. And it’s really based on a combination of strong growth at both ad impressions and the price per ad that they’re able to charge. In our view, we think that this is probably proof that investments in AI is improving both content recommendation and ad monetization model.
So a big portion of why we actually had increased our fair value on this stock not that long ago.
Dziubinski: All right. Let’s talk a little bit about that fair value estimate increase on Meta. It was pretty significant. Walk us through the rationale.
Sekera: Yeah. So the fair value increase stems from a revised growth outlook. We’ve recently increased our revenue growth here. And we’ve brought them higher for both over our five-year forecast period as well as even longer in really the phase two and phase three portion of our discounted cash flow model. Generally, I’d say we’re just taken a much more optimistic view of their generative AI investments than what we had in the past.
And we’ve also increased our operating margin assumption as well. So it’s really that combination of top-line growth higher for longer and expanding the margins over a longer time period. The combination of those two just provides a levered effect on our earnings growth over the long term.
Dziubinski: And we increase that fair value to 770 from 590. So it was pretty pretty big boost. OK, so is Meta stock a buy after that fair value increase?
Sekera: At this point, it really kind of is just going to depend on the individual investor and how much of a margin of safety out there they’re looking to. So right now as you mentioned, our fair value is at 770. So it’s trading at about a 10% discount, I think the stock closed at 689 last Friday.
So according to our risk adjustment, that leaves the stock in that 3-star territory. But it is a company with a wide economic moat. Although the stock does have a high uncertainty. So again I think it really just is going to depend on how much risk an investor’s willing to take today. I mean, ideally we’d like to see it at a larger discount to our risk adjustment. But, at 10%, it is looking better than a lot of other things we’re seeing in the market today.
Dziubinski: Now, Tesla looked quite overvalued heading into earnings. It reported last week. How did results look, and did Morningstar make any fair value changes to the stock after earnings?
Sekera: I think one of the things that we really geared on this earnings was that we were actually pretty happy to hear that Tesla maintained their timeline for launching the more affordable vehicles later this year. That’s been one of our key drivers for our valuation for 2025 and longer. And we did bump up our assumptions for higher autonomous driving software adoption and a little bit faster growth rate in energy generation and our storage business here.
So net net, we did raise our fair value estimate up to 250 share from 210.
Dziubinski: So then how does the stock look from a valuation perspective after that fair value boost? Is it still overvalued?
Sekera: It is. I mean, it’s trading at over a 60% premium to fair value. So puts it well into 2-hour territory. And when I think about the stock, there’s just too much going on today to get into our long-term assumptions and our financial model. So this is one that maybe we can come back to when we’ve got a slower show in the future, maybe have Seth on the program?
Seth Goldstein is our analyst that covers the name here. And we do have a lot of Tesla fans, a lot of email that we’ve gotten regarding this stock specifically. So I do think we need to do a deeper dive into our assumptions here on a future show.
Dziubinski: So all right, we’ll talk about a little bit of a deeper dive. We’re going to take some time here to talk about IBM. Morningstar has for several years thought IBM stock looked overvalued. and then after IBM reported solid results this week, one of our viewers, Sam, sent us an email wondering if Morningstar was going to take a new look at the stock in light of those results.
So, Dave, first, start with the results. What did IBM have to say?
Sekera: Generally, I’d say when I look at the consensus numbers here, revenue was in line to a slightly softer. But under the cover when we look at revenue, Red Hat showed much more robust demand for hybrid solutions than I think what we had expected. That was partially offset by a decline in the consulting revenue.
But at the end of the day, earnings beat and it beat by a pretty significant margin. And I think that’s probably the real reason why the stock traded up as much as it did. Plus, I think the market was geared on the company’s projection for 5% year-over-year growth and further margin expansion from here.
And, of course that combination of higher year-over-year growth going forward and margin expansion is going to bolster that earnings-growth rate for quite a while now.
Dziubinski: Sam did ask if Morningstar was going to take a new look at the stock. And in fact, IBM stock is now under coverage by a new analyst at Morningstar. As a result of that, Morningstar raised its fair value estimate substantially on IBM to $250 from $139 per share. So that’s a pretty big jump. Walk us through the rationale behind that increase, Dave.
Sekera: As you mentioned, when a new analyst is going to take over coverage of a stock, they just really take a fresh look at the company, and they’ll just completely reevaluate our forecasts and projections. In this case, I did speak with Eric Compton. He’s a sector director for technology. So he was the one that made the coverage change here.
And really just wanted to get from him that download as to what he changed and why. So there’s a couple of different things going on here. So first of all, from a qualitative point of view Eric is really starting to see the benefit in the current results of the strategic shift that IBM started when the new CEO took over in mid-2020.
And I think we’ve revised our investment thesis and our longer-term outlook just in general. But to some degree, I think the prior analyst probably focused too much on the legacy mainframe and consulting business and really didn’t focus enough on the potential for IBM’s software business. So I know Eric is looking at the software business and really just thinks that they’ve been able to significantly benefit from their positioning to support the hybrid cloud environment.
Eric thinks that we probably didn’t fully appreciate the potential growth rate in the software business in the past. Specifically, Eric pointed out one of the biggest differences is now taking into account how much better the acquisition Red Hat has performed than what we originally expected in our long-term investment thesis. Now that it’s been integrated into IBM, we’re seeing much better growth prospects there.
And of course, that’s also a much higher margin business than the legacy businesses at IBM. And so he noted that he didn’t think that we properly accounted for the mix shift in software becoming increasingly a larger percentage of the total revenue and how much that would increase the company’s margins over time.
Dziubinski: Dave, give us a quick summary about each of IBM’s businesses today and where specifically our thinking has shifted.
Sekera: As far as like the mainframe business, we still think that’s the legacy technology. We still think that that’s a business that will probably languish over time. But it appears IBM is really using that business really as a source of cash in order to buildout their other business lines. Taking a look at the consulting business, Eric kind of joked it’s no Accenture, but he also noted it’s really not any worse than what he’d seen in the general consulting space. More recently, he thinks going forward, that probably performs in line with general consulting demand. And lastly, there is the software division. And this is where our big fair value increase really comes from.
So we did significantly increase our top line growth rate. We’re now modeling in a 9% growth rate. That’s the main driver of our change to total IBM revenue going forward. In fact, that change almost doubled our five-year compound annual growth rate for all of IBM across the board. In addition to generating a higher top-line growth rate assumptions, we did also significantly increase our margin assumptions.
So taking a look at our model over the weekend, I just would note that our projection for operating margin year out in 2028 used to only be 17.7%. That assumption is now 20.8%. That is a 300-basis-point increase in our margin forecast. Now, there’s a lot of other things going on here. We, of course, only have so much time here to discuss.
So I do recommend going to Morningstar.com or whichever Morningstar product you use in order to read Eric’s note. Read more about the business and how we’ve shifted our thinking here and get a lot more detail in those notes.
Dziubinski: Yeah. And with that fair value increase to 250, stock looks about fairly valued as of Friday’s close. So that’s where we stand with IBM right now. All right, let’s pivot. It’s time for the stock picks portion of this week’s program. This week we’re talking about three stocks that you like that have pulled back but that look undervalued today.
The first pick is a favorite of yours that we’ve actually talked about earlier in the show. And it’s Microsoft. So remind viewers of some of the key metrics on Microsoft.
Sekera: So, Microsoft stock is currently rated 4 stars. Was trading at a 15% discount as of Friday’s close. Although it’s really not necessarily a stock for dividend investors—that dividend yield is under 1% today. But a stock we rate with a medium uncertainty. Company we rate with a wide economic moat. That wide economic moat primarily coming from switching costs.
But our analyst team has noted that network effects and cost advantages also provide secondary moat sources here as well.
Dziubinski: Now, the stock pulled back about 6% after earnings last week. Now, given that Morningstar didn’t make any fair value changes to Microsoft stock after earnings, does this simply mean that here’s an undervalued stock that we liked before earnings, and it’s now an even more undervalued stock that we like after earnings?
Sekera: Yeah, I would say that’s a good way to characterize it. And in fact just taking a look at the stock and the trading pattern here, I think this is really just some natural market volatility. Just things getting shifted around between who’s probably the marginal buyer of the stock today. In my mind, this is actually probably a pretty good opportunity to start layering into a position, or if you already have a position and you’ve got the room, maybe layer into a little bit more. What I really like about this stock is, going forward, I just would note that Dan Romanoff, who’s the equity analyst that covers the stock, has noted he thinks the stock is pretty well set up for 2025.
Probably relatively stagnant performance over the last 12 months, but the investment thesis here is that if as much as Azure has grown significantly over the past couple quarters, that growth has been capacity-constrained. Company’s been spending a lot of money on capex, building out that capacity. And right now we forecast that added capacity as it comes online will allow the Azure division to grow even faster for that growth to accelerate in the second half of this year.
And that could be a pretty good catalyst for earnings growth to help push that stock higher over the second half of the year.
Dziubinski: Now Lockheed Martin is your next pick this week. So give us the key statistics on this one, Dave.
Sekera: Lockheed is trading at a 13% discount. It puts in 4-star territory. A pretty decent dividend yield at 2.9%. Stock we rate with a medium uncertainty, and a company that we rate with a wide economic moat.
Dziubinski: Now Lockheed Martin stock fell about 9% after earnings. Yet, Morningstar edged up its fair value estimate on the stock after earnings. So what does Morningstar thinks the market’s missing here?
Sekera: I think the market is just very focused on a couple of things: One, the market was just unhappy with cost overruns in two classified programs. And a lot of other people really have taken a look at some fixed cost contracts that they have that have been underperforming from higher than expected costs and engineering challenges.
But it wasn’t enough in order for us really to make any kind of changes to our long-term view on the company. I think just generally and looking at all of the defense contractors, I think there’s a general feeling in the marketplace that military budgets maybe either constrained and or that they might be under a lot of focus and scrutiny from the new Department of Government Efficiency that may limit your future programs.
But we haven’t changed our long-term view on defense overall. Now the stock, it was a 4% increase in fair value. So I would say that, yeah, I mean, it was a bump up, but that was really only a result of some minor changes here and there. Nothing really changed all that much in our long-term forecasts.
Dziubinski: And then your last pick this week is ASML. So run through the figures on it.
Sekera: Stock’s at a 16% discount. So 4-star-rated stock. Only a 1% dividend yield. A stock with a high uncertainty rating, but we do rate the company with a wide economic moat. It might not be a name that a lot of people know. ASML: They’re the company that makes the equipment that actually makes semiconductors.
And they also make the semiconductor equipment used for the high-end semiconductors and for the AI semiconductors out there as well.
Dziubinski: Now, unlike your other two picks, ASML stock actually rallied after earnings. But the stock is still really well off its mid-2024 highs. So, what do you like about it Dave?
Sekera: I think this quarter ASML just exceeded all the expectations that people had out there for the quarter. The company came out, they reaffirmed their guidance. And I think to some degree that was a big relief to the market. They had lowered their guidance last quarter. Generally we did up our 2025 revenue estimate, taking it up to EUR 34.2 billion from EUR 32.5 billion.
And I’d say we do see some potential for some upside later in the second half of this year, just looking for some room to our current forecast for Taiwan Semi’s orders, maybe showing us some increase in bookings in the second half of the year that could provide a good catalyst for the stock maybe in the third or fourth quarter.
Dziubinski: All right. Well, thank you for your time this morning, Dave. Those who would like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. So we hope you’ll join us for The Morning Filter next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe! Have a great week!
Got a question for Dave? Send it to themorningfilter@morningstar.com.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
