Morningstar offered interesting analysis this week about two stocks it rates as having wide moats, which means competitive advantages that will last at least 20 years.
Home Depot Analysis
First, Morningstar analyst Jaime Katz looked at Home Depot (HD), the home improvement giant, ahead of its May 16 earnings report. She puts fair value for the stock at $267. It closed Friday at $290.47.
Here’s what she says to look for in first-quarter earnings.
1. “Was Home Depot able to defend against a colder start to spring (a factor that had an impact on first-quarter sales at Malibu Boats and Tractor Supply)? This is relevant for the sizable outdoor garden category Home Depot [serves].
2. “How have backlogs for the professional-contractor client base changed? Have they started to work down with rising interest rates and macro concerns?
3. “Is the sales mix still trending toward premium products?”
Katz recently lowered her fair value estimate from $270 “to account for both a slowing top line and operating margin compression, as the firm invests in the employee base,” she said.
“We contend that such an investment is imperative to elevate the customer and employee experience.” That, in turn, should “generate goodwill from both parties, which will support the brand’s intangible asset,” Katz said.
“Under an updated store-team structure, new career paths that provide pay upside could help retain employees, allowing for continuity of knowledge at the store level.”
Further, Home Depot could benefit from focus on supply-chain efficiency and better penetrating the pro business with market delivery centers that leverage its delivery capabilities.
Analysis of ServiceNow
Meanwhile Morningstar analyst Dan Romanoff delved into ServiceNow (NOW), a business software company that he labels “a cheap growth stock for 2023 and beyond.”
He puts fair value for the stock at $600. It closed Friday at $455.20.
“ServiceNow has been successful thus far in executing a classic land-and-expand strategy,” Romanoff said. “It built a best-of-breed software-as-a-service solution for IT service management based on:
- Being modular and flexible,
- Having a superior, familiar user interface,
- Offering a way to automate a wide variety of workflow processes;
- Becoming a platform to serve as a single system of record for the IT [information technology] function within the enterprise.”
Further, “having established itself in IT service management and then the much larger IT operations management market, the company moved beyond the IT function,” Romanoff said.
“The same set of product design features and technologies has allowed ServiceNow to bring its process automation approach to human resources service delivery, customer service, finance, and operations.”
In addition, “more recently, ServiceNow has been offering higher-priced tiers with an increasing array of features, along with industry-specific solutions, which … help drive revenue growth.”
As for earnings, “ServiceNow exceeded our expectations for both revenue and profitability for its first quarter, provided solid guidance and raised its full-year outlook approximately in line with outperformance in the quarter,” Romanoff said.
