Woodside cracks Best Ideas list as Brambles, QBE exit
A local oil and gas major is the latest addition to Morningstar's monthly list of top stocks, as a general insurer and global logistics company exit.
Growing demand for liquefied natural gas and favourable international currency movements underpin Morningstar's positive outlook for Woodside Petroleum (ASX: WPL) – even amid the oil price uptick.
In mid-August, Morningstar increased its share price outlook for Woodside following its reported US$566 million ($786m) in profits for the half-year ended 30 June. This result was up 12 per cent on last year and 6 per cent higher than the previous half.
"Woodside Petroleum shares remain materially undervalued," says Morningstar senior equity analyst, Mark Taylor. "We think the market is insufficiently pricing for liquefied natural gas growth potential."
Taylor's decision last month to increase Woodside's fair value estimate by 3 per cent, on the back of this result, was based on currency movements rather than a change in long-term operating assumptions or oil and gas prices.
The reported 53 US cents a share dividend for the half was in line with expectations, "but the more favourable dollar translation sees our full-year dividend-per-share increased 3 per cent to $1.77, from $1.72," Taylor says.
After the company's strong fiscal 2018 performance, Woodside management increased its 2018 production outlook, particularly in the context of the Wheatstone and Pluto LNG projects.
Brambles is the world's largest pallet provider
Brambles no longer as palatable
Meanwhile, wide-moat Brambles (ASX: BXB) – the largest global provider of pallet and reusable plastic crates – has been removed from the 
best ideas lists due to its increasing share valuation.
"Shares have risen about 16 per cent since it was added to our Best Ideas list in April 2017, and more than 20 per cent since hitting near-52-week lows in October 2017," says Adam Fleck, Morningstar's director of equity and credit research.
"We see opportunities with greater margins of safety elsewhere."
Fleck notes his long-term outlook for the company is unchanged, and he continues to anticipate strong earnings gains from US growth, the associated benefits of higher pallet flows from emerging markets, and further consolidation.
Over the shorter term, management is expected to address recent underperformance in the company’s US pallet operations – which comprises about 40 per cent of earnings.
Brambles' announcement of plans to spin-off its $1.8 billion fresh produce container business dominated business news headlines around its full-year results in late August.
Though according to Fleck: "This has no impact on our valuation, given the independence of the segment, the uncertainty around the potential form of the transaction, and the lengthy associated timing in fiscal 2020".
"Morningstar retained its $11.20 fair value estimate, and after increasing more than 6 per cent, shares in Brambles screen as roughly fairly valued.”
QBE slips into three-star territory
Another notable exit from the Best Ideas list is QBE Insurance (ASX: QBE). Morningstar has removed the company on valuation grounds and sees more attractive opportunities elsewhere.
Since being introduced to the list last September, the general insurer's share price has risen 7 per cent, "but has rebounded 21 per cent since its 15-year low of $9.28 in mid-June 2018," says Morningstar's senior banks analyst, David Ellis.
Though its share price of $10.99 as of today is 12 per cent below Morningstar's $12.50 FVE, the stock has now slipped into Morningstar's three-star territory.
Ells is encouraged by the results handed down by QBE in mid-August, which "show there is light at the end of the tunnel for long-suffering QBE Insurance shareholders, with the insurer delivering a steady, no-frills result.”
"Importantly, there were no negative surprises, with clear evidence that remedial work initiated by new CEO Pat Regan is on track to deliver high-quality and consistent results going forward," Ellis says.
Ellis maintains his long-term positive view on QBE, noting it is also "benefiting from an improving external environment, with increasing premium rates, higher interest rates and improving global economic conditions".
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Glenn Freeman is senior editor, Morningstar Australia
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