At Morningstar we think that buying high quality companies at a discount to intrinsic value is a sound two-pronged approach to investing.

We think that high quality companies – which we will define here as ones that benefit from a durable competitive advantage or Moat – are more likely to appreciate in value over time. This is because the Moat stops other companies from competing away their profits.

Meanwhile, we think that being patient and waiting for a bargain purchase price makes you less dependent on things going perfectly in the future. Because let’s face it, they rarely do. Benjamin Graham christened this as a “margin of safety”.

The following 11 shares – one in each sector – have been assigned a Wide or Narrow Moat rating by our analysts. Even better, they all command a four- or five-star Morningstar rating at the time of writing. This means our analysts think the shares offer a compelling discount to their opinion of Fair Value.

If these shares are aligned with your investment strategy, they could provide an opportunity to complement your Australian holdings with high quality global equity exposure. Please see this article by Mark LaMonica for a step-by-step guide to crafting your investment strategy.

Here are the shares by sector:

Syensqo - Basic materials

  • Economic moat: Narrow
  • Fair Value estimate: EUR 110 per share
  • Share price October 30: EUR 73
  • Star rating: ★★★★★

Syensqo makes specialty polymers and composite materials that are used to make everything from car and plane components to semiconductors. The company listed in December 2023 after being spun out from Solvay, and the shares have struggled for most of that time amid weak demand in key end markets like automotive and construction.

Our analyst Diana Radu has assigned Syensqo a Narrow Moat rating supported by switching costs and intangible assets in the form of deep customer relationships. Most of Syensqo’s products are tailor made for a client’s exact use case and requirements. The deep integration of these products into customers’ manufacturing processes (not to mention strict testing requirements) make it costly to change supplier.

Looking beyond the current downturn in some important customer markets, Radu expects that Syensqo can achieve healthy organic growth in the mid-single digits while enjoying profit margins of over 20%. These expectations underpin her Fair Value estimate of EUR 110 per share, almost 50% higher than current prices.

Alphabet - Communication services

  • Economic moat: Wide
  • Fair Value estimate: USD 209 per share
  • Share price October 30: USD 171.14 (Class C shares)
  • Star rating: ★★★★

Our analyst Ahmed Khan views Alphabet as a collection of several world-class businesses. The key cash generator at the moment is Google’s online search and display advertising business, with YouTube and Alphabet’s fast-growing Google Cloud business completing a triad of Wide Moat segments.

Khan concedes that AI disruption and anti-trust cases against the search business are bound to make plenty of headlines, however, he does not see either of these things dislodging Google’s dominant position in this vertical. Furthermore, Google has invested heavily in strong AI solutions of its own.

Taken together, Khan thinks that Google's continued dominance in search, strong growth in Cloud and double-digit growth at YouTube could underpin 10% annual revenue growth at Alphabet over the next five years.

These underpin Khan’s Fair Value estimate of US 209 per share for the company, and suggest that current prices of around US 170 could be an opportunity to buy a great business at a more than reasonable price.

Adient - Consumer cyclical

  • Economic moat: Narrow
  • Fair Value estimate: USD 68 per share
  • Share price October 30: USD 21.21
  • Star rating: ★★★★★

Adient builds seats for automotives, a market in which it has a leading share of around 33% globally.

Our analyst David Whiston thinks that Adient has been overlooked by investors for two main reasons: 1) auto parts firms are deeply out of favour and 2) investors mistakenly think that Adient provides a commodity product.

On the contrary, Whiston stresses that success in the seating business requires patents, decades of trust built up with customers, and an ability to play their part in worldwide just-in-time manufacturing regimes.

Automakers do not select seating suppliers on price alone and seek innovation, product quality, and reliable partners with a proven ability to service them globally. As Whiston puts it in his research report on Adient, “this is not something that just anyone who gets a loan to start a new seating company could do easily or quickly”.

Whiston says that only Lear competes with Adient at a truly global level, which means the auto industry’s shift to more global manufacturing platforms is a positive for these two firms. Whiston’s seemingly variant view on the quality of Adient’s business is reflected in his Fair Value estimate of USD 68 per share versus a recent price of around USD 21.

Dollar General - Consumer staples

  • Economic moat: Narrow
  • Fair Value: $130 per share
  • Share price October 30: $79.80
  • Star rating: ★★★★★

Dollar General’s 20,000+ stores in the US aim to fill the gap between consumers’ weekly or biweekly trips to the nearest discounter or grocery chain. The company is virtually omnipresent in US towns that have smaller populations, less affluent residents and less scope to support several retailers.

Our analyst Noah Rohr’s research states that around two-thirds of Dollar General’s customers earn USD 35,000-40,000 per year, with many of them receiving some kind of government assistance. These factors underpin Dollar General’s focus on low-ticket consumable products and go some way to explaining its average basket size of around $15 per visit.

Dollar General is trying to increase this by introducing fresh produce to stores and equipping more stores with coolers to boost refrigerated and frozen food sales. However, the outlook has been clouded by rising costs (notably wages) and low-income shoppers feeling the squeeze.

Over the longer term, Rohr thinks Dollar General can grow its revenues at a mid-single digit clip thanks to higher sales per store and a small expansion in store footprint. Given the abundance of Dollar General, Family Dollar and Dollar Tree stores in the US today, there are definitely some doubts about the white space left for new locations.

Rohr has assigned Dollar General a Narrow Moat rating based on scale-based cost advantages versus smaller grocery and discounter peers, combined with an intangible asset in the shape of its dense store network in underserved rural areas. At recent prices of around USD 80 per share, the company trades materially below Rohr’s USD 130 Fair Value estimate.

Halliburton - Energy

  • Economic moat: Narrow
  • Fair Value: USD 39.00
  • Share price October 30: USD 27.50
  • Star rating: ★★★★

Halliburton is one of the three largest oilfield service firms in the world, and our analyst Joshua Aguilar notes the firm’s exceptional record of innovation and maximizing value for its customers.

He awards the company a Narrow Moat rating thanks to its robust patent portfolio and elements of a cost advantage through economies of scale, which allow Halliburton to reap more value from its R&D investments across service and product lines than smaller peers. The firm’s brand and solid reputation also help the company win an outsized share of contracts.

Aguilar expects that strong investments in oil and gas projects to meet high demand worldwide will result in healthy demand for Halliburton’s services. He think the company’s Halliburton’s annual revenue growth can average 5% over the next five years and that reduced capital expenditures and increased digital services revenue can boost profitability.
These assumptions underpin his USD 39.00 per share Fair Value estimate for the company, compared to a current price of around USD 27.50.

Singapore Exchange - Financial services

  • Economic moat: Wide
  • Fair Value: SGD 12.70 per share
  • Share price October 30: SGD 11.42
  • Star rating: ★★★★

Singapore Exchange holds a legal monopoly for equity listings in Singapore, of which around 40% comprise of foreign companies attracted by the country’s strong legal system and stable regulatory environment.

SGX has also carved out a strong position in several derivative products based on licensed equity indices and successful iron ore and freight derivative markets to which SGX owns the intellectual property outright.

Our analyst Roy Van Keulen thinks SGX has a Wide Moat thanks to network effects in its trading and clearing businesses (which include the derivatives products mentioned above). Once a market establishes itself as having the most liquidity and lowest bid-ask spreads for a certain contract, new upstarts have a very hard time tempting traders elsewhere.

Van Keulen also assigns a Wide Moat to SGX’s market data business, which sells access to the unique and proprietary data generated by its exchanges. Our Fair Value estimate of SGD 12.70 per share bakes in Van Keulen’s forecast of 8% annual revenue growth and an expansion in pre-tax margins.

This reflects his expectation that SGX’s recent struggles to attract new listings will continue, but derivatives and trading revenues will remain strong. The latter could be helped by increased market volatility as the era of globalization and low interest rates unwinds.

Humana - Healthcare

  • Economic moat: Narrow
  • Fair Value: USD 425 per share
  • Share price October 30: USD 257 per share
  • Star rating: ★★★★★

Humana is a leading provider of Medicare Advantage (MA) health insurance in the US. Under this arrangement, insurers like Humana are paid a fixed fee per policyholder by the government to provide policies equivalent to federal health insurance. The insurer can then make a profit by providing care more efficiently or by encouraging healthier choices for members that reduce the need for care altogether.

Humana shares have dipped after a strong post-pandemic recovery in elective surgeries led to a fall in underwriting profits. This was compounded in early October when it was revealed that a lower Medicare star rating would hit revenue and profits in the coming years.

Utterback’s Fair Value estimate of USD 425 per share assumes that Humana can achieve mid-single digit revenue growth annually to 2029. While she now expects flat profits until 2026, she thinks that margins can improve significantly beyond that. At a recent price of USD 257 per share, the stock screens as undervalued.

Utterback has awarded Humana a Narrow Moat rating. The company is generally the biggest or second biggest provider of Medicare Advantage insurance in territories it operates within, sometimes accounting for a third of members in a county. This gives Humana significant bargaining power with local service providers which provides it with a cost advantage.

In areas where Humana is especially dominant, this can translate into a network effect as more policyholders are attracted by the offer of cheaper or more available services. In turn, the growing number of policy holders attracts further service providers while also boosting Humana’s bargaining power further.

Rentokil Initial - Industrials

  • Economic moat: Wide
  • Fair Value estimate: GBX 620 per share
  • Share price October 30: GBX 384.10
  • Star rating: ★★★★★

Rentokil Initial’s two biggest businesses are pest control services (roughly 80% of revenue according to Pitchbook) and hygiene services (around 16% of sales).

Both of these are highly localised, route-oriented businesses where greater scale brings substantial savings on a per-job basis and therefore a cost advantage. And it is the scale of the Rentokil pest control segment, which is the market share leader in over 50 of the 87 countries it operates, that underpins the combined firm’s Wide Moat rating.

Despite Rentokil’s substantial size, the global pest control business is still fragmented and is the target of roll-up acquisition strategies from several players. Rentokil is very active in this regard and has spent an average of GBP 300 million per year on tuck-in deals between 2018 and 2023.

That number excludes the much larger 2022 deal to buy Terminix, which propelled the group to market share leader in the US – a market in which the company has struggled recently. Lacklustre sales growth well below that of the broader US pest control market’s growth has weighed heavily on the shares, and investors seem to have little hope of the situation reversing.

Our Rentokil analyst Grant Slade thinks this is overly pessimistic, and he is optimistic on the group’s overall growth prospects. He thinks Rentokil Initial can grow its pre-tax profits at a 10% annual clip over the next decade, helped by more pest control M&A and robust organic growth in both the pest control and hygiene services markets.

His Fair Value estimate of GBX 620 per share is some 60% higher than the current market price.

Cellnex - Telecommunications

  • Economic moat: Wide
  • Fair Value estimate: GBX 620 per share
  • Share price October 30: GBX 384.10
  • Star rating: ★★★★★

Cellnex operates wireless towers in Europe that accommodates mobile network operators’ equipment. It is the continent’s only large-scale tower pureplay, as other major tower owners in Europe are controlled by mobile network operators.

Tower firms like Cellnex generally rent the land underneath the tower and then sublease space on the towers to mobile network operators. Most expenses are fixed in nature (land rental being the major cost) and ongoing capital requirements are low. Most tower owners therefore try to host as many tenants as they can on each tower, which causes revenue to increase while expenses remain almost flat, increasing profits and returns on investment.

Cellnex had overexpanded in recent years and bought towers with lower potential to rent out to more tenants. The company seems to have realised its error, though, and hired a new CEO that is focused on optimising the portfolio and returning cash to shareholders.

Our analyst Javier Correonero thinks Cellnex is worth EUR 52 per share and deserves a Narrow Moat rating thanks to the fact that most European mobile network operators rely on the company’s network of 100,000 towers to run their businesses.

Nexi - Technology

  • Economic moat: Narrow
  • Fair Value Estimate: EUR 10.40
  • Share price October 30: EUR 5.77
  • Star rating: ★★★★★

Nexi is an Italy based payments business that has grown into a vertically integrated company serving several European countries.

Nexi could benefit from a tailwind of increasing card payments in its home market of Italy, as well as a continent wide shift from national debit schemes to international debit and credit schemes offered by firms like Visa and Mastercard. The latter generally make more use of newer payment technologies and auxiliary services that Nexi excels in providing.

Kammer thinks Nexi has a Narrow Economic moat stemming from scale based cost advantages and emerging switching costs.

Payment processing is a highly scalable, low-fee business where larger players like Nexi can enjoy material cost advantages to competitors as their fixed costs are spread over far more fee-generating payments. More advanced point-of-sale terminals and auxiliary services may also integrate providers deeper into a merchants’ processes and cut the chance of them switching.

Kammer thinks that a cyclical improvement in consumer sentiment could help Nexi to average annual revenue growth of around 7% over the next five years. Due to the firm’s high proportion of fixed costs that we mentioned earlier (also known as operating leverage), he also thinks that higher revenues could bring higher profit margins.

Taken together, Kammer thinks Nexi is worth EUR 10.40 per share versus a current price of below EUR 6.

E.On SE - Utilities

  • Economic moat: Narrow
  • Fair Value estimate: EUR 17
  • Share price October 30: EUR 12.63
  • Star rating: ★★★★

E.On is a European power utility. After several notable transactions in recent years it has emerged as a firm exposed mostly to power networks (around 75% of the group’s adjusted profits, retail power businesses (around 20% of the group’s EBITDA), and energy infrastructure solutions (around 5%).

Europe's need to modernise its electrical grid has led to favourable regulation that paves the way for firms like E.On to 1) invest more capital into their infrastructure and 2) benefit from higher allowed profits or returns on those investments.

Our analyst Tancrede Fulop thinks that E.On is worth EUR 17 per share and deserves a Narrow Moat rating as higher regulated returns look set to maintain its returns on capital above the cost of capital for a sustained period of time. 

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.