Morningstar assigns wide moat ratings to companies it sees as having competitive advantages that will last at least 20 years.
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The research firm has begun coverage of two companies to which it gave that top rating. Here’s its analysis of each of them. Caution: note that Copart is trading far above Morningstar’s fair value estimate.
Kenvue
Kenvue's (KVUE) Morningstar fair value estimate: $27.50. Tuesday price quote: $25.05.
Formerly Johnson & Johnson’s consumer segment, Kenvue is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales, Morningstar analyst Keonhee Kim wrote in a commentary.
He forecasts five-year compound annualized sales growth at 4.2%, and an increase in operating profit margin to just over 20% by 2027.
“Results from first quarter show Kenvue’s three segments posting high-single-digit sales growth solely from pricing, and we expect a similar trend for the remainder of the year,” though it might slow, Kim said.
“For 2024 onward, we expect pricing tailwinds to significantly come down, providing a low-single-digit contribution to sales growth,” he said.
“Macro trends, such as an aging population and a premiumization of consumer healthcare products, should provide tailwinds for Kenvue’s wide array of brands.”
In addition, “we expect Kenvue to benefit from an increase in digital investment -- 71% of its marketing spending was digital in 2022 versus 44% in 2019,” Kim said. “E-commerce sales will continue to rise faster than in-person store sales.”
The margin increase will stem from “continued improvements in its supply chain and an increased efficiency in operation,” Kim said.
Copart
Copart's (CPRT) -) Morningstar fair value estimate: $77. Tuesday price quote: $90.30.
Copart is a salvage vehicle auctioneer, with only one large competitor – RB Global’s (RBA) -) IAA unit. “We see the firm as a phenomenal business,” wrote Morningstar analyst David Whiston.
“Copart operates vehicle auctions after vehicles are declared totaled, providing an online-only marketplace.” That marketplace “optimizes liquidity for sellers, primarily insurance companies; buyers, such as dismantlers; used vehicle retailers, exporters, and private individuals,” Whiston said.
“This highly liquid marketplace helps create a network effect, as sellers benefit from a wide buyer network due to increased bidding competition, and buyers benefit from higher vehicle volumes.”
Further, “around 20%-25% of Copart’s owned acreage is likely sitting idle at any given time, allowing the firm to quickly absorb capacity after a major disaster,” Whiston said.
“For potential new entrants, obtaining land creates an initial capital and regulatory hurdle, and operating idle land creates a fixed-cost hurdle that is difficult to overcome without scale.
As for earnings, “the firm has grown its top line nearly five-fold since 2009, due to a combination of significant land expansion and robust service quality to drive higher salvage vehicle volume,” Whiston said.
