At Morningstar, our approach to stock-picking is simple: We advocate investors buy the stocks of companies with competitive advantages when they’re undervalued. We wrap up a company’s competitive advantages in our Morningstar Economic Moat Rating. Companies that we expect to successfully compete for 20 years or more earn wide economic moat ratings.
Today, we’re talking about two companies whose moat ratings were recently upgraded to wide. But just because a company’s moat rating has been upgraded doesn’t make the company’s stock a buy. The stocks of upgraded companies can still be overvalued. Put another way, good companies aren’t always good stocks to buy.
2 Wide-Moat Stocks to Consider
Air Products & Chemicals APD
Linde LIN
On to the companies. Morningstar upgraded the economic moat ratings for industrial gas companies Air Products & Chemicals and Linde to wide from narrow. Both Air Products and Linde serve end markets in a variety of industries, including chemicals and healthcare, to name just two.
Public industrial gas companies have consistently delivered lucrative returns on invested capital. Even though industrial gases usually account for a relatively small fraction of customers’ costs, they’re vital to production. As a result, customers are often willing to pay a premium and sign long-term contracts to make sure their businesses run smoothly. And those long-term contracts and subsequent high switching costs help these companies generate predictable cash flows that can withstand such macroeconomic headwinds as volatility in energy prices and fluctuations in global industrial production.
We think Linde stock is worth US$420 per share. Meanwhile, Air Products & Chemicals has a US$303 fair value estimate. Air Products is the more attractive stock of the two from a valuation perspective today.
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Morningstar analyst Krzysztof Smalec provided the research behind this segment.
The author or authors do not own shares in any securities mentioned in this article.
