Apple supplier Skyworks Solutions has burst into Morningstar’s Global Best Ideas list, alongside Chinese sportswear group ANTA Sports and Japan’s second largest bank Sumitomo Mitsui Financial Group.

Several big-names have been removed from the list because they are trading near what Morningstar analysts considers fair value. They include wide-moat companies such as telecommunications group Comcast, US multinational Procter & Gamble, beverage stalwart PepsiCo, and pharmaceutical company McKesson Corporation.

Skyworks topped the new entrants on the strength of its competitive advantage in its radio frequency chips. It is trading at a 37 per cent discount to Morningstar’s $113 fair value estimate.

Stocks in Skyworks have sold recently because of tepid iPhones sales in late 2018 - Skyworks earned almost half of its revenue from Apple in 2018.

The time it takes consumers to replace devices is of greater concern for Morningstar than the forecast slowdown in iPhone sales.

“We don’t foresee iPhone unit sales falling off such a cliff, although lengthening replacement cycles may provide some modest headwinds over time,” analysts say in the December 2018 Global Best Ideas list.

“We think the Skyworks’ radio frequency chip content within the iPhone is safe, as Skyworks is one of small handful of RF suppliers that have the capacity and expertise in RF chip design, manufacturing and packaging needed to supply billions of parts worldwide.”

Leading the Chinese entrants in the December list is the country’s largest sportswear company ANTA Sports Products. The five-star, narrow-moat play is trading at a 35 per cent discount to Morningstar’s fair value estimate of 55 Hong Kong dollars (US$7). 

Anta’s book is looking stronger than ever, Morningstar says, rebutting to a recent attack by short sellers. Sales of its core brand Fila are on track to deliver 44 per cent CAGR over the next three years, which adds to Morningstar’s belief that the Chinese sportswear market will boom over the next decade as disposable income rises and more people play sport.

Apple iPhone

Skyworks topped the list of new entrants to the global top stocks list

Leading the Chinese entrants in the December list is the country’s largest sportswear company ANTA Sports Products. The five-star, narrow-moat play is trading at a 35 per cent discount to Morningstar’s fair value estimate of 55 Hong Kong dollars (US$7).


Anta’s book is looking stronger than ever, Morningstar says, rebutting to a recent attack by short sellers. Sales of its core brand Fila are on track to deliver 44 per cent CAGR over the next three years, which adds to Morningstar’s belief that the Chinese sportswear market will boom over the next decade as disposable income rises and more people play sport.

Rounding out the top three on the best ideas list is Sumitomo Mitsui Financial Group. It is the standout of the six Japanese banking groups Morningstar covers, and has a 42 per cent upside to its fair value estimate of 5960 Japanese yen. 

SMFG's dividend yield of 4.1 per cent compares favourably with 3.5 per cent for rivals Mitsubishi UFJ Financial Group and 4.0 per cent for Mizuho Financial Group.

Morningstar expects SMFG's dividends to rise substantially more than Mizuho's over the next five years owing to what it sees as SMFG's “superior profitability and more ample capital cushion”.
Two Swiss companies are among other notable entrants to the list, including luxury goods holding company Cie Financiere Richemont, which is trading at 28 per cent discount to fair value. Travel and retail company Dufry is trading at 26 per cent discount to fair value.

Australian names on the best ideas list include incumbents Telstra, the A2 Milk Company, InvoCare, G8 Education, Woodside Petroleum, Pendal Group, Westpac, Link Administration, Macquarie Group and AVEO Group.

Big-name wide moats reach valuation

Comcast is one of the companies removed from the list for December. The resolution of the bidding wars surrounding Fox and Sky has cleared a key source of uncertainty for Comcast.
“While we were disappointed that Comcast was willing to pay a high price to win Sky, we believe management still showed discipline in walking away from Fox while pushing up the price Disney was required to pay for the firm,” Morningstar says.

Comcast’s shares have rallied on these developments and now trade at only a small discount to its $42 fair value estimate.

“We continue to believe that Comcast is very well positioned competitively and would gladly
reinstate the stock as a Best Idea should another bout of uncertainty or renewed fears around the future of the television business present a buying opportunity.”

Beverage maker PepsiCo from has exited the list as the shares no longer trade at a meaningful discount to Morningstar’s $122 fair value estimate. The shares have increased roughly 19 per cent since we it was added the list in June, versus about 2 per cent for the S&P 500 index.

Similarly, wide-moat Procter & Gamble has been removed as its recent appreciation in the share price brings it in line with Morningstar’s valuation.

P&G is poised for improved top-line prospects following 4 per cent sales growth in its fiscal first quarter, a big improvement from the flat to low-single-digit gains recently.

“Despite this, we don't believe the path to sustainable top-line gains will prove linear, and as such, we think the shares could retreat if sales falter in the near term, creating a more attractive entry point for shareholders. As such, we think investors would be wise to keep this wide-moat name on their radar.”

Also on the removals list is wide-moat pharmaceutical company McKesson Corp. Although Morningstar insists the company remains undervalued but that it is focusing on other undervalued companies within healthcare.

 

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