3 Stocks to Buy and 3 Stocks to Sell After Earnings

Susan Dziubinski: Hello and welcome to the Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services chief US markets strategist Dave Sekera to discuss what’s on his radar this week, some new Morningstar research, and a few stock picks or pans for the week ahead. So hi there, Dave. We’ve made it through a good chunk of earnings season, many of the biggest names in the market have reported.

But you have a few companies that you’re watching this week ahead of earnings. Some interesting stories here. The first one is Realty Income. Why is this one on your radar?

David Sekera: Hey, good morning, Susan. You know, we’ve talked about Realty Income, I think, a number of times over the past year. Now, first of all, the real estate sector is still the most undervalued sector and the most undervalued sector by far, according to our valuations. The sector trades at a 17% discount to our fair value.

Now, personally, I’d still steer clear of urban office space. I am still concerned that there could be downward valuation adjustments there. But I do like a lot of real estate that has defensive characteristics and that includes the triple-net lease providers, which Realty Income is one of. They’re able to pass through all of their inflationary cost increases directly to tenants.

They have very long leases, so there’s really not a lot of risk of near-term lease reductions here. And generally, tenants are in the defensive area themselves: gas stations, drugstores, and so forth. Realty Income was actually one of our top picks by our analyst team in the second quarter. It’s a 5-star rated stock, trades at a 29% discount to fair value, and has a 5.7% dividend yield.

Dziubinski: We also have a couple interesting stories from the basic materials sector reporting this week. I think they both report today after close, and that’s FMC and International Flavors & Fragrances. Why are these two companies on your earnings radar this week?

Sekera: First of all, FMC was a top pick by our equity analyst team in our first quarter outlook. It’s currently a 5-star rated stock, trades at a 47% discount, nice healthy dividend yield at 4%. It’s a company we rate with a narrow moat, although it does have a high uncertainty. Essentially, the thesis here is that during 2021 and 2022, the agricultural industry just overordered crop protection chemicals in response to shipping bottlenecks and supply constraints.

So that of course then artificially boosted sales those years. And then in 2023, they used up those excess inventories, which of course kept sales low last year. Now we think sales are normalizing here in 2024. We’re forecasting recovery in these same crop production products. Specific to FMC, the other part of the story here is that they are losing patent protection in 2026 on the manufacturing process for their diamides, and that is one of their more important products.

But our analyst team does think that there’s enough strength in the research and development pipeline, a number of different new products that will be coming online. Those will help offset that patent protection. IFF, they’ve suffered what I consider both to be some self-inflicted wounds as well as some industry volatility. It’s a 4-star rated stock, trades at a 35% discount, and a 1.9% dividend yield.

This company made a number of acquisitions over a couple of years; these acquisitions just have not really panned out as they planned. That also led to a lot of management turnover. So they’re going through, they’re now divesting a number of these business lines, just trying to get back to their core competencies. And then they’ll use those proceeds in order to really fix their balance sheet, which just got to be overlevered.

To some degree, it’s a similar story to FMC. The Consumer Food Packaging Company had a lot of excess demand in 2021 from the pandemic that rolled through into 2022 a little bit as well. And so that really caused a lot of issues in the supply chain there, and a couple of bottlenecks. Now in 2023, households have been using up those same products, destocking their pantry.

But we’ve also seen consumption patterns go back to historical norms. A lot of people going back out and eating at restaurants again. So this destocking, we think, probably comes to an end here in 2024. And we’re looking for much more normalized growth patterns probably end of this year and going into 2025.

Dziubinski: Another firm we talked about on the show before that still looks undervalued is Energy Transfer. It reports this week, too.

Sekera: Yeah, I’m still keeping my eye on this one. I think we first recommended this stock on our Aug. 21 show last year. Since then, the stock’s up 19%. Plus, you’ve clipped a couple of pretty high dividends since then. Still 4-star rated stock, 26% discount, 8.2% dividend yield. And generally, it still feels like the market just doesn’t like the pipeline business.

Overall, I think the market’s very concerned about volume decreases over the long term as the economy switches to more renewable fuels. They’re concerned that you’ll see volume decreases among the pipelines. I would just note that when I look at our model and talk to our equity analysts, we do take that into account in our valuation.

We do project that oil volumes will peak later this decade and then start kind of a slow and steady decline thereafter. And then lastly, I would note for investors, the stock is actually an MLP, a master limited partnership. It’s a little different than a regular stock. It does have some differences in its tax purposes and for some investors there are some advantages to that.

But of course, consult with your own tax consultant beforehand.

Dziubinski: And then on the economic front this week, Dave, not much on your radar, is there?

Sekera: There’s a number of different Fed officials giving speeches, so I’ll listen to what they have to say as far as their outlook for inflation and their thoughts on monetary policy. But, other than that, unless I really missed something out there, there’s just nothing of real importance to me this week anyways. Next week we’ll start getting busy again.

Now we do have CPI, API, and I think retail sales and housing starts. So this week, quiet on the economic front. Next week we’ll start picking back up again.

Dziubinski: Yeah, we can enjoy the quiet. So before Dave moves on to some new research from Morningstar, we’d like to welcome a special guest to this week’s episode of the Morning Filter. It’s Gregg Warren. Gregg is Morningstar’s analyst covering Berkshire Hathaway, and he’s here to share with us a few of his key takeaways from the Berkshire Hathaway meeting this weekend.

Welcome to the morning filter, Gregg.

Greggory Warren: Good morning, Susan.

Dziubinski: So first, tell viewers how long you’ve been the analyst covering Berkshire Hathaway for Morningstar.

Warren: Well, I’ve been with Morningstar since 2005, and I started covering Berkshire in 2010. So it’s, what, 14 years now?

Dziubinski: Yeah. So let’s get to some meeting highlights. First, we learned over the weekend that Berkshire was a net seller of equities during the first quarter, which means that already huge cash position just got bigger. Gregg, how big is that cash stake? What did Buffett have to say about it? And what do you make of it?

Warren: Selling $20 billion worth of Apple during the quarter didn’t help them draw down cash balances. They ended the quarter at $189 billion, about $182 billion of that was in the insurance segment, and that includes MSR. And Buffett did note during the meeting that that insurance portion is probably going to surpass $200 billion at the end of this quarter.

So a large, large, large amount of cash sitting on the books. It is interesting. I think Buffett’s kind of thrown in the towel a bit here. If you remember back in 2017, he said, Charlie and I can’t sit here with $150 billion in cash three years hence and look like we’re doing something brilliant. But I think at this point, it’s just the reality of the situation.

You know, it’s one of those areas within Berkshire when you start to critique the firm: Hey, you know, you have too much cash on the books. It ends up turning into a compliment. They have that cash because free cash flow is still strong. They’re being very disciplined. They’re not chasing stocks. They’re not chasing acquisitions. And they’re being very frugal when it comes to share repurchases because they don’t want to overpay for their own stock.

So it is what it is at this point. And, you know, they’re earning 5.5%. A lot of that is short term, you know, T-bills. It’s not such a bad problem to have.

Dziubinski: As you mentioned, Buffett confirmed during the meeting that Berkshire sold off about 13% of its stake in Apple during the first quarter. And Buffett seemed to suggest during the meeting that the sale was for tax purposes. Is that how you interpreted it? And what do you make of the reduction in this position?

Warren: Yeah, I think he may have confused shareholders a little bit because he didn’t really elaborate. You know, Berkshire’s subject to the alternative minimum tax. So they have to pay 15% on some of these unrealized gains and other stuff as well. I think it’s just a matter of them locking in some of that that they’d have to pay anyway.

It’s an unfortunate situation to be in. But Berkshire has also benefited historically from a lot of bets in renewables, other things that have kept their tax rates low. So they don’t want to be in a situation where they’re having to pony over cash for taxes that aren’t related to anything that they were doing. And he did make the point, too, if we’re going to pay 21% more on this, if taxes go up in the next few years, then we’d be better doing it here than there.

Our take is Apple’s such a huge position. It was 50% of the 13F portfolio at the end of last year. Any sort of diversification, any sort of drawdown, is positive in our view. And when we look at where Buffett likes to have positioning as far as outstanding ownership in a company, he likes to be in for that 5% to 10% range.

Apple’s position is about 6% of the outstanding stock at the end of the last year; after this transaction, it’s probably 5%. Apple keeps buying back a ton of stocks, so it’s going to keep creeping back up again.

Dziubinski: Now, Buffett revealed during the meeting that Berkshire has also completely sold off its stake in Paramount Global, and Buffett took responsibility for that purchase. Were you surprised either by the sale or by Buffett taking responsibility for the purchase and the sale at a loss?

Warren: I wasn’t too surprised by the sale. He was kind of dour on the name last year at the annual meeting, and then they dropped a 50% stake in Paramount down to a 10% stake at the end of last year. So we’ve been noting throughout the year that we’d be surprised if they held on to this very much longer.

I was surprised, though, that he took 100% responsibility. I mean, our assumption had always been that this was a Todd or Ted position, likely more Ted than Todd. But I think at some point, because of the size of the position, Ted may have initiated it, but Buffett probably took complete ownership because once they get past a billion, overall, it tends to be more sort of in his realm.

He has to authorize it, give the OK for them to do it. So, you know, it’s nice to see, I think from a CEO and leadership perspective, taking full ownership for that is really sort of a high point as far as I’m concerned.

Dziubinski: Now, of course, this was the first annual meeting since Charlie Munger’s death in late 2023. Not surprisingly, Buffett spent some time talking about succession planning, and he seemed to indicate that Greg Abel would take control of the investing decisions once Buffett was gone. Did that surprise you? And what’s your take on what this could mean for shareholders?

Warren: Yeah, that was a bit of a surprise. I mean, they’ve been bringing Greg Abel and Ajit Jain up to the forefront the past several years. So the shareholder is going to get comfortable with them and get to hear their take on the firm. I know Greg has been really, really involved the past few years going around, meeting all the subheads, getting a better understanding of the business.

And I always felt that he was going to be leading the capital allocation decisions but working closely with Ted and Todd. So this did come off as a slightly different bent on that. That said, he did clarify it a little bit, and he said that it is the board’s decision. And it was interesting because a few days before the meeting, one of the board members did say that they’re not sure if they’re going to give Greg as much leeway as Warren has historically had when it comes to capital allocation.

So we’ll see how this plays out. I think it’s important, though, that they’re pointing to somebody that’s going to be fully responsible for the capital allocation decisions down the road. But it does raise some questions about Ted and Todd, because he did say that Greg would be responsible for stock investments as well.

Then what’s the point of Ted and Todd, if he’s going to be doing that? We know Todd’s running Geico now. Ted’s still running his parts of the stock portfolio. So we’ll see how that pans out. But I think it is good on one hand for shareholders because you know who’s really in charge of the capital allocation.

How we get there down the road is really going to be up to them and the board.

Dziubinski: So to wrap up, Greg, what do you think of Berkshire’s two share classes today from a valuation perspective? What’s your fair value estimates on them, and do they look undervalued today?

Warren: Our fair value estimate on the A and B shares is $640,000 for the A’s, it’s $427 for the Class B. The stock’s trading around a 5% discount, maybe 6% relative to our fair value estimates. You’re looking at a price to multiple basis, it’s a little bit under 1.4 times book. Historically, we’ve looked at 1.4 or 1.5 as being the norm for Berkshire.

So a slight discount. It is interesting, the stock has had a really good year this year. I think a lot of that is because Berkshire is considered a defensive position for a lot of investors. And we’ve had a lot of uncertainty related to where rates are going to go this year. So we’ve gone from a real high to the end of last year as far as your expectations for five rate cuts this year to where we are now, where it’s maybe one or two.

So that needs to be taken into consideration a little bit. I think it may be a drag on the shares as we move forward, if rates do come down faster. But I think for investors, it pays to remember, too, that there is a little bit of a difference between the A and B shares: the A’s have all the voting rights, the B’s are just sort of an economic stake.

But Buffett’s always said when the B’s are trading at a 1% or more discount relative to the Class A shares, you should buy the B shares.

Dziubinski: Well, thanks for joining us today, Gregg. Viewers interested in reading Gregg’s earnings recap and takeaways from the meeting can find his article on Morningstar.com. All right, Dave, we’re back to you. And some new research from Morningstar but some other notable companies. Let’s start with Amazon. Amazon reported earnings last week, and Morningstar raised its fair value estimate on the stock by a hair.

Give us the highlights and tell viewers how the stock looks today.

Sekera: It was just a solid beat on both the top line and the bottom line. However, revenue guidance for next quarter was slightly lower than what was expected. Now, we raised our fair value. We only bumped it up by 4% to $193 per share. And really it was twofold. One, just AWS demand, the web or the cloud service really still is very high.

So there’s a long runway for growth there. But then also I think we added in some additional cost savings on the fulfillment side, and that’s what drove the fair value. Now, as we noted last week, the company did not announce a dividend. At this point, it’s still a 3-star rated stock. I think it trades at a couple percent discount to fair value, a company that we rate with a wide moat, although a high uncertainty.

In my mind, I’d still like to see the stock trading at a little bit more of a discount before I probably either buy or add to a new position. But either way, it’s still in my view a core holding kind of stock.

Dziubinski: Apple, which we’ve talked about already on the show, also reported earnings last week, and there weren’t many surprises, it doesn’t seem like. So what did Morningstar think of the results and were there any changes to the fair value estimate on this stock?

Sekera: You know, there’s really no new news in my mind. The earnings did just slightly beat consensus. The stock did pop, I think it’s up 6% afterwards. But to be honest, I really think that was probably more like a relief rally than anything else. I think the market is prepared for them to come in below expectations.

We did bump up our fair value slightly by 6% to $170 per share. I think the two reasons there is just an increase in our 2025 iPhone sales projection. And then also an increase in our forecast sales growth numbers for the services division. So I did take a quick look at our model. When we look at this company over the next five years on the top line, we’re looking for compound annual growth for revenue of 6.1%.

Your five-year EPS growth is 12.7%, so good earnings leverage on that revenue. The stock’s trading at 26 times our fiscal year 2024 EPS and 22 times our fiscal year 2025 EPS. So right now, it’s a 3-star rated stock, trades a couple percent above fair value. I think really the next catalyst we’ll be looking for here is some sort of announcement on what they’re doing in generative AI at the Developers Conference in June.

Dziubinski: Eli Lilly reported last week, and the stock just continued to rally. Morningstar raised its fair value estimate on the stock by about 8%. What’s behind our fair value boost, and does the stock still look overpriced today? I’m guessing yes.

Sekera: Yeah, the stock still looks overpriced. As you mentioned, we did bump up our fair value because the company has been able to increase their pricing here in the short term. It’s just demand outstrips supply. So that did lead us to increase our near-term margin assumptions. However, it’s a 2-star rated stock, trades at a 40% premium to our fair value.

Talking to our analyst here, he just doesn’t think that the current share prices really properly account for some of the risks here. I mean, there’s always the risk that patients discontinue the therapy because of tolerability, cost, or other potential long-term safety issues. But also just because we do expect to see price declines and more competition over time.

So, for example, anyone that owns or watched Amgen’s stock last week saw that stock took a pretty good pop after they announced that they’re moving to phase three trials on one of their new weight-loss drugs. So, again, more competition over the next couple of years in that specific space.

Dziubinski: Got it. So now Starbucks’ stock cratered after the company issued weak results. And Morningstar said that it plans to reduce its fair value estimate on the stock by a high-single-digit percentage. What’s the story here? Is there an opportunity for long-term investors in this wreckage?

Sekera: I would just say, we as well as I think the entire market were really surprised by the weakness in the results here. If you look at Sean Dunlop’s write-up, he even just said he thought the results were just shocking. So comp store sales or comparable store sales fell 4%.

And that was based on traffic falling by 7%. So to some degree, I think it’s almost we’re seeing a tale of two consumers here. We’re seeing the lower- and the middle-income consumers just not coming in, just stopping altogether. Usually, you would expect to the downside that maybe they still come in and just buy products at lower price points.

But I don’t think we were even seeing that. Whereas, of course, the more affluent customers are still coming in and still buying the higher-margin premium beverages. So in my opinion between Starbucks’ results and actually some weak results out of McDonald’s, I’m starting to wonder if this might be the canary in the coal mine, that we’re just starting to see the compounded impact of inflation over the past year or two years finally starting to cause consumers to pull back on discretionary purchases, especially those purchases that I think people are considering to be more on the indulgent side.

Having said all that, on a long-term basis, we do still think that there’s going to be a lot of value in Starbucks. It’s a 4-star rated stock that trades at a 24% discount. Taking a look at our financial model here, the compound annual growth rate for the next 10 years that we project is 7% for revenue and 15% for earnings.

But as Sean opined in his write-up, I think investors are going to need to, quote unquote, fasten their seat belts for the next 18 months. I think this just feels like it’s going to be pretty rocky for a while here in the short term.

Dziubinski: Now, Clorox stock tumbled after earnings, but Morningstar held firm on its $169 fair value estimate. And Morningstar sector director Erin Lash suggested that investors would be wise to “stock up” on Clorox stock. Why do we like it?

Sekera: Yeah, Erin’s always got a great little quip on the stocks here. Like a lot of consumer companies, Clorox did see a decrease in their unit volumes, but they were able to still generate sales growth. And that was really from a combination of higher pricing as well as a mix shift into higher price point items. However, that was offset by a step up in promotional activity, and that limited the amount that margins were able to expand like what we have projected.

But I would just say, Clorox, when you look at this company, they have a long history of brand strength and innovation. So to some degree, our investment thesis here is what the company is experiencing right now is cyclical—it’s not structural. The negative impact from inflation on unit sales and margins will decrease over time.

And we expect that Clorox will be able to rebound back towards more normalized historical margins and growth patterns. It’s a 4-star rated stock, trades at an 18% discount, 3.5% dividend yield. A company with a wide moat and a medium uncertainty. So, again, another good candidate for a core holding, in my opinion.

Dziubinski: Estee Lauder is another name that Morningstar analysts have liked as a long-term investment, but the stock was hammered after earnings. How does the stock look to Morningstar after earnings—still one we like?

Sekera: It’s interesting. Estee did beat consensus both on the top line and the bottom line, but to some degree, I think investors are just starting to get impatient with the story here. They’re really getting impatient with waiting for the business in China to begin to rebound. And when you look at their sales, one third of the sales for the company are in that Asia-Pac region.

And China continues to be a drag on the performance here in the short term, and that did cause us to lower our 2024 revenue forecast. But according to our valuation model, we do think 2024 should be the low point for both sales and earnings and begin to grow again in 2025. To some degree, I still think Estee is a long-term play on the growing middle class and the emerging markets.

But I think the stock is really going to need that Chinese economy and Chinese consumer really to start spending and pick back up again before the stock starts to work. It’s a 5-star rated stock at a 37% discount, 2% yield. But we do rate the company with a wide economic moat.

Dziubinski: Tesla stock rallied last week after reports that the Chinese government would allow the company to begin selling its full self-driving driver assistance software in China. What did Morningstar think of this news, and did it have any impact on our fair value estimate on Tesla stock?

Sekera: In our view, it really didn’t change the overall story here. There was no change to our $200 fair value. It’s a 3-star rated stock at a 9% discount. I think Seth just noted on this one, that just supports our 2024 forecast for delivery growth in China. We think that the benefit here will be that it will help Tesla compete in China where specifically it has a lot more competition from lower-priced electric vehicles.

And we do think that full self-driving is a differentiator for Tesla over their competition.

Dziubinski: You’ve talked about Johnson & Johnson a couple of times on the Morning Filter during the past few months. And last week the stock rallied after news that the company had firmed up its strategy for resolving most of the outstanding talc litigation. What does Morningstar think of the news?

Sekera: I should also just note, I think this is a good example of why I recommend to go to Morningstar’s website and read more about the stocks that you and I talk about on the show. You and I cover a lot of ground every Monday morning, and we just don’t necessarily always have the time to get into much analytical depth and discuss what’s going on with those companies.

For the most part, I can only really provide a synopsis of our investment thesis or any kind of catalysts here. And this one is interesting. In fact, I was looking through the comments last week, and one of the viewers did specifically ask about the talc liability here. So in this case, I guess probably the reason I hadn’t really talked about it in-depth before is I know that Damian, the analyst who covers the stock, had already accounted for that, had his own estimate for the damages in his valuation.

So the $11 billion that they’re talking about now is only slightly higher than what we modeled in, but it’s not enough to change our fair value here. And as you mentioned, I do think that removing this talc litigation really does take a lot of overhang out of the stock. It’s a 4-star rated stock at a 9% discount and a 3.3% dividend yield.

Dziubinski: All right. It’s time for everyone’s favorite part of the program, and that’s your picks of the week, Dave. This week, you’ve brought viewers Picks and Pans: three stocks to sell after earnings and three stocks to buy after earnings. We’ll start with the sells. The first name on your sell list is Meta Platforms. Now the stock doesn’t look crazy overpriced. So what’s your case against it?

Sekera: Yeah, Meta has dropped pretty good. It’s dropped enough from its April peak that it’s now in 3-star territory. But it’s still up there. It’s still pretty close to the border of being a 2-star stock, trades at a 13% premium to fair value. So while technically it is in that range of being considered fair value, it’s at that top of the range.

My concern here is that if the market does sell off further in the short term, in my opinion, I still think there’s enough negative sentiment on that name in the marketplace that, in a selloff, I do think that Meta could be poised to fall further and faster than the broad market.

Dziubinski: Your next “sell after earnings” is a stock that looks really overpriced by our metrics: Caterpillar.

Sekera: Yeah, Caterpillar has just been a thematic stock. Really what happened here is the stock was able to ride the wave of investor enthusiasm following what I would consider to be the misnamed Inflation Reduction Act. And of course, that act had a huge amount of funding, a huge amount of infrastructure spending in it, which of course will require a lot of heavy equipment, a lot of machinery, in order to build that infrastructure.

So the stock went from being undervalued in the fall of 2022 to being now significantly overvalued. So even after selling off from its peak, it’s still a 1-star rated stock at a 37% premium. So we do agree with the market that, yes, Caterpillar will benefit from increasing infrastructure spending over the next couple of years.

In the short term, we look for that construction spending to be relatively stable here in 2024. But looking at our write-up, we do note that machinery sales will increase 3% before rising in that mid-single-digit percentage range between 2025 and 2028. The stock trades at a 16 times multiple of our 2024 estimated earnings.

But the thing is, we don’t really foresee earnings growing by that rising sales. We think that’s going to be offset by decreasing gross margin, coming back down more towards historical averages. So in 2023, that gross margin was 33%. Historically it’s been 26.6%. So it’s currently high right now. But we do think that that gross margin will be coming down over time.

Dziubinski: And your final sell is even more overpriced than Caterpillar: It’s Chipotle. This is one of those stocks, though, that has looked overpriced more often than not during the past several years. Right?

Sekera: Yeah. And again, this is a story of, it’s a product I may like, but I don’t like the stock. And we just think the market is pricing in too much growth for too long. So let me just run you through what our assumptions are here. And you can judge on your own whether you think they’re overly conservative or not.

We’re looking for unit new unit growth to more than double over the next decade. So essentially, I think at the end of last year, Chipotle had about 3,400 units outstanding. We’re expecting that to grow to over 7,700 by 2033. When you look at same-store sales, we’re expecting that to increase on average 5% per year over the next 10 years.

So, well ahead of our inflation expectations. And we’re also looking for the operating margin to expand. It was 15.8% last year. We’re expecting good leverage on the sales to be able to get them up to 20.7% by 2033. But even with those assumptions, it’s a 1-star rated stock that trades at a 54% premium.

I guess I’ve just got to say, I’ve seen this, I think, too many times in the past: Markets pay up. They pay up a lot for near-term growth, especially in the restaurant industry. So when you look at it, yes, new unit growth is high. Look at valuations that were applied to Shake Shack when the new unit growth there was really high.

For older viewers, you might remember Rainforest Cafe. So yes, in the restaurant industry, when you have that new unit growth in the market, values are that high. But I would just say once that new unit growth starts to slow, look out, because oftentimes there is a huge risk to those stocks gapping down pretty hard and pretty fast.

Dziubinski: I do remember Rainforest Cafe. Anyway, let’s move on to your three stocks to buy after earnings. The first is Biogen. What makes this wide-moat drugmaker stand out today?

Sekera: We’ve highlighted Biogen a couple of times over the past few weeks. Now, that stock did move up about 12% following earnings, but we still think it has further to go. Trades at a 28% discount to fair value, puts it in that 4-star territory. As you noted, it does have a wide moat, has a high uncertainty, but I think you would expect a high uncertainty for something in the biotech industry.

Just again, to review the quick synopsis here, the stock had been under pressure for quite a while. I mean, everyone knows that it is losing its patent protection in a couple of key drugs coming up. But we do think that the market underestimates Biogen’s pipeline. Biogen is in the midst of expanding its portfolio beyond multiple sclerosis into things like neuromuscular diseases and Alzheimer’s.

And when I look at our write-up, I think Karen here noted specifically this past quarter, we’re starting to see some new product launches. We’re seeing the benefits of some cost-cutting programs, and we think both of that will counter some of the headwinds that we’ll see from a declining portfolio of those older drugs when they come off patent.

Lastly, I’d say Karen also just said it’s pretty encouraging to her that they’re seeing some signs of growth accelerating in these new products. And she think that that points toward just pretty solid growth profile beyond 2024. So with the stock really only trading at 14.4 times this year’s earnings, we do think this one’s pretty attractive here.

Dziubinski: Your next “buy after earnings” is ServiceNow. This one isn’t crazy cheap, but it is an undervalued technology stock. Looks like first quarter results were good. The stock is still struggling for the year to date, though. What’s going on there?

Sekera: This is one that we’ve kept our eye on for a long time. I think you and I first recommended the stock in May of 2023. You know the story back then. According to Dan Romanoff, who is the equity analyst that covers this one in the technology sector, he just thought this company had the best combination of growth, valuation, and a strong balance sheet.

As the prices rose last year and beginning of this year, that rating did move into 3-star territory. And really, I’ve been watching this one for a pullback to recommend once again. The stock did sell off a little bit after earnings. We didn’t really think there was a good reason for it.

Maybe there was some disappointment that management only reiterated their guidance and didn’t increase it. But we did raise our fair value to $790 from $770. Now, I will note that stock did pop pretty good last Friday. So it’s at a 9% discount after that pop, still kind of barely in that 4-star territory.

As you note, it’s really just one of the very few large-cap tech growth stocks that we still see selling at somewhat of a discount in the market today.

Dziubinski: Your last stock pick this week is also a tech stock. It’s NXP Semiconductor. There’s a big hike in the stock’s Morningstar fair value estimate after earnings. Why, and why is the stock a buy after earnings?

Sekera: Yeah, this was actually the single largest fair value increase that we had across our coverage this earnings season. We did raise our fair value by 20% to $290 a share from $240. And when I talked to Brian Colello, the sector director here, he noted that we boosted our medium- and our long-term profitability assumptions for the company.

Specifically, he noted that this company has been able to maintain its gross margins through this down period. They’ve really been able to generate a lot of manufacturing efficiencies. So in his view, as we start to go into an upturn for their products, they should be more profitable, get better operating leverage, to the upside.

The other part that he noted here, too, is that the company’s already exceeded its three-year target that they established in 2021. So he thinks it’s probably pretty likely that in November of 2024, when they establish their next three-year target, that they’ll probably boost their margin expectations again. So I do think that could be a pretty good catalyst for the stock here.

Lastly, I’d just say long term, Brian’s still very bullish regarding the company’s opportunities here in the automotive sector. That’s where they have one of their highest exposures in the semi industry. It’s a 4-star rated stock that currently trades at a 11% discount.

Dziubinski: Well, thanks for your time this morning, Dave. We hope you’ll join us for the Morning Filter again next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this video and subscribe to Morningstar’s channel. Have a great week.