LARGE CAP GLOBAL CORE PICK LIST MAY 2019 - MEDIRECT

 
Large Cap Global Core Pick List
May 2019
Editor’s Note: We are revamping our pick lists to create           In the consumer cyclical sector, we added MGM Resorts         Elizabeth Collins, CFA
                                                                                                                                 Global Head of Equity and Corporate Credit
a more user-friendly resource for investment ideas. We             International MGM ($38 fair value estimate) as we removed
                                                                                                                                 Research
welcome any thoughts you have on aspects of our pick               LKQ LKQ ($38 fair value estimate). Analyst Dan Wasiolek
                                                                                                                                 Daniel Rohr, CFA,
lists you find most useful and what you’d like to see.             details:
                                                                                                                                 Director of Equity Research, North America
Ultimately, we want to know how you use our lists so that
                                                                                                                                 Lorraine Tan, CFA
we can better serve your needs. Please submit feedback to            “After its Profit Growth Plan drove $500 million in cost    Director of Equity Research, Asia-Pacific
arc@morningstar.com.                                                 savings over 2015-17 (exceeding initial targets of $300
                                                                                                                                 Alex Morozov, CFA
                                                                     million), MGM reiterated its goal to drive $300 million     Director of Equity Research, Europe
Sector Valuations                                                    in domestic EBITDA uplift from end of 2018 through
                                                                                                                                 Patrick Dunn
The market appears fairly valued, with the market-capital-           2021, driven by labor, procumbent, sales, digital, and      Director of Global Research Operations
ization-weighted average, uncertainty-adjusted price/fair            loyalty optimization. MGM has formed 18 center of
value ratio for S&P 500 index constituents that are under            excellence teams, or COEs, to set business strategy for
                                                                                                                                 This list surfaces large-cap global stocks within
active Morningstar research coverage at 101% as of April 30,         specific areas (like food or gaming floor layout) across    each sector that we believe warrants consideration.
slightly higher than last month’s ratio of 100%.                     all properties, allowing for faster implementation (fewer   Selection criteria are based on uncertainty-adjusted
                                                                     layers) and increased ability for property managers to      price/fair value ratios. The above-mentioned selec-
                                                                                                                                 tion criteria are applied against all constituents of
The S&P 500 rose by 3.93% in April, closing at 2,945.83 at           focus on guest engagement.”                                 the Morningstar rated universe.
the end of the month. Each of the 11 sectors appears fully
                                                                                                                                 Important Disclosure
valued, based on an uncertainty-adjusted price/fair value          In the consumer defensive sector, we omitted Ambev ABEV
                                                                                                                                 The conduct of Morningstar’s analysts is governed
basis. The utilities sector was the most expensive, trading        ($5.50 fair value estimate), while adding Walgreens Boots     by Code of Ethics/Code of Conduct Policy, Personal
at 109% of fair value. The energy sector was the cheapest,         Alliance WBA ($73 fair value estimate). Analyst Karen         Security Trading Policy (or an equivalent of),
                                                                                                                                 and Investment Research Policy. For information
trading at 93% of fair value. Please refer to the table later in   Andersen comments:
                                                                                                                                 regarding conflicts of interest, please visit:
the report for more details on sector valuation.                                                                                 http://global.morningstar.com/equitydisclosures
                                                                     “Walgreens has been one of the most successful retail
As of April 30, the Global Large Cap Pick List was priced            operators since its founding in 1901 and has remained
at 82% of fair value. Consumer defensive constituents pre-           a major player within the pharmaceutical supply chain
sented the greatest opportunity, with a market-capitalization-       for many decades. The firm processed approximately
weighted average price/fair value near 77%.                          20% of total U.S. prescriptions during fiscal 2017,
                                                                     which makes it one of the largest retail pharmacies.
Portfolio Commentary: Changes                                        With the acquisition of Europe-based Alliance Boots,
We made numerous changes to the list this month. Begin-              the firm is now a premier global retail powerhouse.
ning in the consumer services sector, we added shares of             Nevertheless, we believe Walgreens faces a pressured
CenturyLink CTL ($20 fair value estimate). Correspondingly,          operating environment, given the rapidly growing pric-
we removed KDDI KDDIY ($15 fair value estimate). Analyst             ing power of the large pharmacy benefit managers.”
Matthew Dolgin notes:
                                                                   Turning to the financial-services sector, we added shares
  “CenturyLink’s fiber holdings make it one of the biggest         of Alliance Data Systems ADS ($220 fair value estimate).
  communications infrastructure providers in the U.S.,             We dropped KeyCorp KEY ($21 fair value estimate). Analyst
  and its extensive network is matched by few other                Colin Plunkett notes:
  companies. While it is not the leader in the space,
  and we don’t expect it to close much ground on the                 “It should not be underestimated how high the switch-
  top players, the growing importance of our connected               ing costs are for retailers using Alliance Data Systems
  world gives us confidence that CenturyLink’s network               as their private-label card and loyalty program provid-
  will remain vital.”                                                ers. Private-label cards are store-issued credit cards
                                                                     that consumers can use only at the issuing store. When
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

    retailers hire Alliance Data Systems to provide their                                                 Dynamics GD (currently under review), Fluor FLR ($46 fair
    private-label credit card, they are, in effect, outsourc-                                             value estimate, down from $50 after accounting for more
    ing their entire customer care and much of their digital                                              conservative midcycle operating margins), and Fanuc FANUY
    marketing to Alliance. In fact, Alliance Data Systems                                                 ($22 fair value estimate). We added Canon CAJ ($33 fair
    will not work with any retailer that does not hand over                                               value estimate), Johnson Controls International JCI ($46
    these functions. This is important because if Alliance’s                                              fair value estimate), and Caterpillar CAT ($169 fair value
    retail partners want to cancel their agreement, they                                                  estimate) in their place. Analyst Scott Pope explains:
    would have to construct their own customer service
    and digital marketing apparatus, which could take                                                         “Caterpillar’s wide moat rests heavily on its intan-
    several years.”                                                                                           gible assets, which include the strength of its brand
                                                                                                              and extensive dealer network that covers the globe.
In the healthcare sector, McKesson MCK ($130 fair value                                                       Interbrand ranked Caterpillar as the world’s 89th most
estimate, down from $210), Cardinal Health CAH ($55 fair                                                      valuable brand, worth $4.9 billion. The strength of the
value estimate, down from $82), and AmerisourceBer-                                                           brand is boosted by the large amount of Caterpillar
gen ABC ($86 fair value estimate, down from $106) were                                                        branded clothing and boots available on mainstream
removed from the list after we reevaluated their fair value                                                   online channels such as Amazon. To a lesser extent,
estimates in light of the evolving competitive and regulatory                                                 there is highly specific intellectual property that en-
environment in the pharmaceutical distribution segment. We                                                    hances the moat. Caterpillar stresses the lowest total
replaced these names with UnitedHealth UNH ($300 fair                                                         cost of ownership, which we believe to be thoroughly
value estimate), Medtronic MDT ($110 fair value estimate),                                                    engineered into its equipment, exists from design
and Pfizer PFE ($46 fair value estimate). Analyst Debbie                                                      through manufacture.”
Wang details:
                                                                                                          Concerning the real estate sector, we added shares of Simon
    “We’re pleased to see Medtronic’s diabetes franchise                                                  Property Group SPG ($195 fair value estimate). We dropped
    has a closed-loop insulin pump coming into view. The                                                  Vornado Realty Trust VNO ($76 fair value estimate). Analyst
    concept of an artificial pancreas has been around for a                                               Kevin Brown notes:
    long time in healthcare, and Medtronic’s 670g hybrid
    closed loop took one major step toward realizing the                                                      “Simon Property Group, the largest mall real estate in-
    goal for Type I diabetics. However, even the 670g                                                         vestment trust and second-largest U.S. REIT, manages
    required the pump user to intervene with the release                                                      one of the top retail portfolios in the country. It owns
    of insulin following meals or exercising. Now, the                                                        and operates Class A traditional regional malls and
    next-gen 780g is expected in fiscal 2020, and it would                                                    premium outlets in markets with dense populations and
    take another significant step toward closing the loop,                                                    high incomes; these malls frequently have domestic or
    that is, acting like a healthy pancreas that adjusts the                                                  international tourist appeal. The high-quality properties
    release of insulin with minimal input from the patient.                                                   will continue to provide consumers with unique shop-
    This means the management of insulin could be further                                                     ping experiences that are hard to replicate elsewhere,
    tailored to individual patients, and theoretically, this                                                  and as a result, we think Simon’s portfolio will be
    would keep blood glucose in healthier ranges more of                                                      sought after by retailers that are increasingly pursuing
    the time, which would minimize the long-term com-                                                         an omnichannel strategy.”
    plications of diabetes. The firm’s deep expertise and
    expansive data that goes into creating the algorithms                                                 In the technology sector, Sony SNE ($55 fair value estimate),
    in this device, along with its integration of Medtronic’s                                             NXP Semiconductors NXPI ($115 fair value estimate), and
    Guardian Connect continuous glucose monitors, will                                                    Microchip MCHP ($112 fair value estimate) were removed
    make it difficult for competitors such as Tandem to                                                   from the list. We replaced these names with Palo Alto Net-
    become a serious threat.”                                                                             works PANW ($305 fair value estimate), F5 Networks FFIV
                                                                                                          ($181 fair value estimate), and Western Digital WDC ($63
In the industrials sector, we removed shares of General                                                   fair value estimate). Analyst Mark Cash details:

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    2
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
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Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

    “We believe F5 can capitalize on enterprises requiring                                                    realize significant cost savings from the closure of its
    software to deploy and manage workloads securely                                                          existing data centers, we are increasing our fair value
    across multiple clouds and on-premises, while 5G and                                                      estimate to $133 per share from $119. Management
    NFV can catalyze the service provider segment, and                                                        stated that in 2021, once it fully migrates its operations
    the Nginx acquisition opens the developer market side                                                     to Amazon Web Services, it expects to achieve an op-
    of applications. For next quarter, management guided                                                      erating efficiency ratio of 42%, a more than 300-basis-
    a revenue range of $550 million-$560 million and a                                                        point improvement from 2018. To put this in perspec-
    non-GAAP EPS range of $2.54-$2.57. Guidance does                                                          tive, this implies that Capital One will achieve pretax
    not include any impact from the Nginx acquisition that                                                    costs savings in the neighborhood of $1 billion. For
    is expected to close in the second calendar quarter of                                                    now, our fair value estimate translates into a price/book
    2019. We expect the top line to be achieved through                                                       value of 1.2 and is 10.6 times our 2020 estimate. Over
    continued software strength, tempered system sales                                                        the next five years, we forecast credit card receivables
    declines, and service growth; also, we posit F5 can                                                       to grow on average by 3%-3.5%. This includes growth
    achieve the bottom-line target while ramping up devel-                                                    from the Walmart portfolio acquisition and includes our
    opment costs.”                                                                                            expectation that a recession will occur at some point
                                                                                                              over the next five years.”
Fair Value Changes
We made two significant fair value changes this month
among the list’s remaining constituents. In the technology
sector, we lowered the fair value estimate for Nokia NOK to
$7.20 per share from $8. Analyst Mark Cash comments:

    “After decreasing our margin profile for Nokia in the
    long term, we are lowering our fair value estimate to
    $7.20 per share from $8 (EUR 6.50 from EUR 7) and
    view the company as undervalued after the under-
    whelming quarter. Gross margin declined year over
    year to 31.4% from 36.7% while operating margin
    declined to a loss of 10.4% versus a loss of 6.8% in
    the year before. Margin declines were predominantly
    due to higher product costs and trial costs associated
    with launching new technologies for 5G, legacy radio
    product pressures, not releasing software on time,
    and cost overruns for services, which we think are
    near-term headwinds. Nokia did reel in selling, general,
    and administrative costs, which fell 2.7% year over
    year, and research and development decreased 1%.
    Additional increased short-term costs are expected
    as carriers turn to Nokia to run trials due to security
    concerns (which we interpret as carriers contemplating
    Huawei alternatives).”

In the financial-services sector, we raised the fair value
estimate for Capital One Financial COF to $133 per share
from $119. Analyst Colin Plunkett comments:

    “After Capital One’s announcement that it expects to

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    3
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Adjusted Price/Fair Value Ratio

                                                             Lower                Upper
Attractiveness                                               Bound                Bound                   Notes
Cheap                                                         0.000               0.800                   Assets are trading at or below Morningstar’s “Consider Buying” price.
Undervalued                                                   0.801               0.900                   Assets are trading above Morningstar’s “Consider Buying” price, but are still at a discount to our fair value estimate.
Fully Valued                                                  0.901               1.100                   Assets are trading within a band that is not materially different from Morningstar’s fair value estimate.
Overvalued                                                    1.101               1.250                   Assets are trading above Morningstar’s fair value estimate, but are still below our “Consider Selling” price.
Expensive                                                     1.251                   —                   Assets are trading at or above Morningstar’s “Consider Selling” price.

Fair Value Per Sector

                                                                                                          S&P Sector Weight                                                                  Sector P/V                                                              Pick List P/V
Sector                                                                                                                  (%)                                                                         (%)                                                                        (%)
Basic Materials                                                                                                              2.11                                                                  100.14                                                                      79.58
Communication Services                                                                                                       3.17                                                                   98.40                                                                      85.52
Consumer Cyclical                                                                                                          11.97                                                                   102.79                                                                      83.24
Consumer Defensive                                                                                                           7.45                                                                  104.55                                                                      77.42
Energy                                                                                                                       5.12                                                                   93.44                                                                      85.35
Financial Services                                                                                                         14.88                                                                    99.98                                                                      88.53
Healthcare                                                                                                                 13.18                                                                    98.80                                                                      84.22
Industrials                                                                                                                  9.50                                                                  104.02                                                                      89.81
Real Estate                                                                                                                  2.19                                                                  102.32                                                                      91.61
Technology                                                                                                                 23.14                                                                   100.65                                                                      88.08
Utilities                                                                                                                    3.16                                                                  108.96                                                                      94.69

Largest Negative and Positive Price Movements During April

                                                                                                                                                                                                        End Price Per Share                                                   Return
Company                                                                                                 Ticker                            Beg. Price Per Share (USD)                                                  (USD)                                                      (%)
Albemarle                                                                                               ALB                                                         81.98                                                75.06                                                 -8.44
Nokia Oyj ADR                                                                                           NOK                                                           5.72                                                5.28                                                 -7.69
Imperial Brands ADR                                                                                     IMBBY                                                       34.57                                                32.00                                                 -7.43
Macerich                                                                                                MAC                                                         43.35                                                40.14                                                 -7.40
L Brands                                                                                                LB                                                          27.58                                                25.64                                                 -7.03
Mattel                                                                                                  MAT                                                         13.00                                                12.19                                                 -6.23
British American Tobacco ADR                                                                            BTI                                                         41.72                                                39.20                                                 -6.04
AmerisourceBergen                                                                                       ABC                                                         79.52                                                74.76                                                 -5.99
Intel                                                                                                   INTC                                                        53.70                                                51.04                                                 -4.95
Roche Holding ADR                                                                                       RHHBY                                                       34.39                                                33.06                                                 -3.87
Volkswagen ADR                                                                                          VWAPY                                                       15.73                                                17.38                                                10.52
UBS Group                                                                                               UBS                                                         12.11                                                13.44                                                10.98
KeyCorp                                                                                                 KEY                                                         15.75                                                17.55                                                11.43
Siemens ADR                                                                                             SIEGY                                                       53.75                                                60.00                                                11.63
Daimler                                                                                                 DDAIF                                                       58.57                                                65.74                                                12.24
Capital One Financial                                                                                   COF                                                         81.69                                                92.83                                                13.64
Credit Suisse Group ADR                                                                                 CS                                                          11.65                                                13.30                                                14.16
Sony ADR                                                                                                SNE                                                         42.24                                                50.37                                                19.25
NXP Semiconductors                                                                                      NXPI                                                        88.39                                              105.62                                                 19.49
Microchip Technology                                                                                    MCHP                                                        82.96                                                99.89                                                20.41

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without         4
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Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)

                                                                  Economic            Uncertainty         Current Price           Fair Value        Adj. Price/       Morningstar Market Cap                                                                 Relative
Company                                              Ticker       Moat™               Rating                    (USD)                 (USD)         Fair Value        Rating       (USD Mil)                 Industry                                        Attractiveness

Basic Materials—Cheap
Albemarle                                            ALB          Narrow              High                         75.06                 130               0.79       QQQQ                  7,947.80         Specialty Chemicals                             Cheap

Communication Services—Undervalued
Vodafone Group ADR                                   VOD          Narrow              High                         18.52                  33               0.78       QQQQQ               49,442.19          Telecom Services                                Cheap
Telefonica ADR                                       TEF          Narrow              High                           8.30                 15               0.79       QQQQQ               43,159.80          Telecom Services                                Cheap
BT Group ADR                                         BT           Narrow              High                         15.09                  23               0.83       QQQQ                29,390.18          Telecom Services                                Undervalued
CenturyLink                                          CTL          None                Very High                    11.42                  20               0.83       QQQQ                12,453.06          Telecom Services                                Undervalued

Consumer Cyclical—Undervalued
Hanesbrands                                          HBI          Narrow              Medium                       18.07                  27               0.78       QQQQQ                 6,531.78         Apparel Manufacturing                           Cheap
Mattel                                               MAT          Narrow              High                         12.19                  21               0.79       QQQQQ                 4,210.73         Leisure                                         Cheap
Fiat Chrysler Automobiles                            FCAU         None                Very High                    15.41                  32               0.79       QQQQQ               30,372.47          Auto Manufacturers                              Cheap
L Brands                                             LB           Narrow              High                         25.64                  42               0.81       QQQQ                  7,056.47         Apparel Stores                                  Undervalued
Nissan Motor ADR                                     NSANY        None                High                         16.04                  26               0.81       QQQQ                31,270.42          Auto Manufacturers                              Undervalued
Bayerische Motoren Werke ADR                         BMWYY Narrow                     High                         28.39                  44               0.82       QQQQ                55,235.64          Auto Manufacturers                              Undervalued
Volkswagen ADR                                       VWAPY        None                High                         17.38                  26               0.83       QQQQ                88,368.16          Auto Manufacturers                              Undervalued
Daimler                                              DDAIF        None                High                         65.74                  96               0.84       QQQQ                69,754.48          Auto Manufacturers                              Undervalued
Volkswagen ADR                                       VWAGY None                       High                         17.88                  26               0.84       QQQQ                88,368.16          Auto Manufacturers                              Undervalued
MGM Resorts International                            MGM          None                High                         26.63                  38               0.85       QQQQ                14,304.48          Resorts & Casinos                               Undervalued
Expedia Group                                        EXPE         Narrow              High                        129.84                 183               0.85       QQQQ                19,321.19          Leisure                                         Undervalued

Consumer Defensive—Cheap
British American Tobacco ADR                         BTI          Wide                Low                          39.20                  59               0.66       QQQQQ               88,686.46          Tobacco                                         Cheap
Imperial Brands ADR                                  IMBBY        Wide                Low                          32.00                  48               0.67       QQQQQ               30,137.38          Tobacco                                         Cheap
Kraft Heinz                                          KHC          None                Medium                       33.24                  60               0.70       QQQQQ               40,534.01          Packaged Foods                                  Cheap
Anheuser-Busch InBev ADR                             BUD          Wide                Low                          88.94                 118               0.75       QQQQQ                                  Beverages - Brewers                             Cheap
                                                                                                                                                                                         173,445.05
Walgreens Boots Alliance                             WBA          None                Medium                       53.57                  73               0.82       QQQQ                48,979.00          Pharmaceutical Retailers                        Undervalued
Kellogg                                              K            Wide                Medium                       60.30                  78               0.85       QQQQ                20,726.25          Packaged Foods                                  Undervalued

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    5
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)
                                                                                                                    Total Return            Total Return                     Div.                     Div.                     Div.             EPS Est.
                                                                      52 Week                  52 Week                      YTD                     1-Yr               Per Share                  Yield %                  Yield %             Growth %                   Forward
Company                                         Ticker                    High                     Low                    (Daily)                 (Daily)                   TTM                   Current                 Forward              Mean 5-Yr                  EPS Est.

Basic Materials
Albemarle                                       ALB                      108.74                    71.89                    -2.13                  -21.17                     1.34                    1.83                    1.96                   12.87                    6.70

Communication Services
Vodafone Group ADR                              VOD                        29.60                   17.05                    -3.94                  -31.11                     1.85                    9.40                    5.89                   14.67                    1.17
Telefonica ADR                                  TEF                        10.21                     7.70                   -1.89                  -13.62                     0.46                    5.63                    5.49                   17.74                    0.97
BT Group ADR                                    BT                         17.38                   13.53                    -0.72                   -6.89                     1.06                    6.43                    6.43                     4.63                   1.86
CenturyLink                                     CTL                        24.20                   11.40                  -22.97                   -28.47                     2.16                  16.37                     8.76                    -3.22                   1.16

Consumer Cyclical
Hanesbrands                                     HBI                        22.57                   11.57                   45.41                     1.08                     0.60                    3.32                    3.32                     8.46                   1.87
Mattel                                          MAT                        17.98                     9.09                  22.02                   -17.64                     0.00                      —                        —                   10.00                    0.36
Fiat Chrysler Automobiles                       FCAU                       23.29                   14.01                   11.61                   -26.07                       —                     4.70                    4.70                     2.74                   4.09
L Brands                                        LB                         38.14                   23.71                     1.05                  -20.54                     2.40                    8.19                    4.68                     7.55                   2.65
Nissan Motor ADR                                NSANY                      21.22                   15.28                     0.60                  -21.45                     1.02                    6.14                    6.23                     2.53                   2.57
Bayerische Motoren Werke ADR                    BMWYY                      37.36                   25.33                     5.27                  -19.02                     1.54                    5.53                    5.53                     5.32                   4.11
Volkswagen ADR                                  VWAPY                      43.50                   14.97                   10.59                   -55.62                     0.88                    5.39                    3.16                    -5.07                   3.38
Daimler                                         DDAIF                      80.97                   50.64                   24.58                   -16.51                     0.00                    6.84                       —                     2.13                   9.43
Volkswagen ADR                                  VWAGY                      20.87                   14.70                   14.58                    -9.74                     0.44                    2.58                    3.08                    -5.07                   3.38
MGM Resorts International                       MGM                        33.68                   21.62                   10.31                   -13.69                     0.48                    1.84                    1.95                   26.52                    1.91
Expedia Group                                   EXPE                     139.77                  108.11                    15.54                    13.86                     1.24                    0.97                    0.99                   15.28                    7.72

Consumer Defensive
British American Tobacco ADR                    BTI                        55.77                   30.67                   25.16                   -23.37                     2.57                    6.77                    6.88                     4.92                   4.23
Imperial Brands ADR                             IMBBY                      38.87                   28.70                     7.64                   -5.33                     2.30                    7.60                   10.65                     7.92                   3.50
Kraft Heinz                                     KHC                        64.99                   31.53                  -21.84                   -37.01                     2.50                    6.84                    4.81                     3.39                   2.93
Anheuser-Busch InBev ADR                        BUD                      106.86                    64.55                   35.15                    -7.84                     3.30                    3.71                    2.28                   14.37                    4.90
Walgreens Boots Alliance                        WBA                        86.31                   52.25                  -20.96                   -16.79                     1.72                    3.21                    3.29                     4.30                   6.51
Kellogg                                         K                          74.98                   53.14                     6.75                    6.15                     2.20                    3.68                    3.71                     4.79                   4.14

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without       6
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)

                                                                  Economic           Uncertainty          Current Price          Fair Value        Adj. Price/        Morningstar Market Cap                                                                 Relative
Company                                              Ticker       Moat™              Rating                     (USD)                (USD)         Fair Value         Rating       (USD Mil)                Industry                                         Attractiveness

Energy—Undervalued
Energy Transfer                                      ET           None               Medium                        15.12                  22               0.79       QQQQQ               39,605.20         Oil & Gas Midstream                              Cheap
Enterprise Products Partners                         EPD          Wide               Low                           28.63                  36               0.81       QQQQ                62,552.94         Oil & Gas Midstream                              Undervalued
Total ADR                                            TOT          None               Medium                        55.67                  77               0.82       QQQQ              144,943.20          Oil & Gas Integrated                             Undervalued
MPLX Partnership Units                               MPLX         Narrow             Medium                        32.26                  44               0.82       QQQQ                25,619.56         Oil & Gas Midstream                              Undervalued
Marathon Petroleum                                   MPC          Narrow             High                          60.87                  89               0.84       QQQQ                40,944.28         Oil & Gas Refining & Marketing                   Undervalued

Financial Services—Undervalued
American International Group                         AIG          None               Medium                        47.57                  76               0.75       QQQQQ               41,373.36         Insurance - Diversified                          Cheap
Mitsubishi UFJ Financial Group ADR                   MUFG         None               Medium                          4.96                   7              0.80       QQQQ                63,613.70         Banks - Global                                   Cheap
Capital One Financial                                COF          Narrow             Medium                        92.83                133                0.80       QQQQ                43,592.97         Credit Services                                  Cheap
UBS Group                                            UBS          Narrow             High                          13.44                  21               0.82       QQQQ                51,715.49         Banks - Global                                   Undervalued
Credit Suisse Group ADR                              CS           Narrow             High                          13.30                  20               0.83       QQQQ                33,448.19         Banks - Global                                   Undervalued
ING Groep ADR                                        ING          None               Medium                        12.76                  17               0.83       QQQQ                49,458.68         Banks - Global                                   Undervalued
Alliance Data Systems                                ADS          Narrow             High                        160.10                 220                0.86       QQQQ                 8,386.21         Credit Services                                  Undervalued
Wells Fargo                                          WFC          Wide               Medium                        48.41                  60               0.87       QQQQ              218,423.39          Banks - Global                                   Undervalued

Healthcare—Undervalued
CVS Health                                           CVS          Narrow             Medium                        54.38                  92               0.73       QQQQQ               70,607.27         Health Care Plans                                Cheap
Bayer ADR                                            BAYRY        Wide               High                          16.79                  31               0.77       QQQQQ               61,894.00         Drug Manufacturers - Major                       Cheap
Roche Holding ADR                                    RHHBY        Wide               Low                           33.06                  42               0.79       QQQQQ             224,606.26          Drug Manufacturers - Major                       Cheap
DaVita                                               DVA          Narrow             Medium                        55.24                  79               0.80       QQQQQ                9,191.79         Medical Care                                     Cheap
Bristol-Myers Squibb                                 BMY          Wide               Medium                        46.43                  65               0.81       QQQQ                75,945.82         Drug Manufacturers - Major                       Undervalued
Cigna                                                CI           Narrow             High                        158.84                 231                0.84       QQQQ                60,307.15         Health Care Plans                                Undervalued
Biogen                                               BIIB         Wide               High                        229.24                 327                0.85       QQQQ                44,448.12         Drug Manufacturers - Major                       Undervalued
UnitedHealth Group                                   UNH          Wide               Medium                      233.07                 300                0.85       QQQQ              221,939.63          Health Care Plans                                Undervalued
AbbVie                                               ABBV         Narrow             Medium                        79.39                102                0.85       QQQQ              117,351.50          Drug Manufacturers - Major                       Undervalued
Celgene                                              CELG         Narrow             Medium                        94.66                120                0.86       QQQQ                66,759.87         Drug Manufacturers - Major                       Undervalued
Medtronic                                            MDT          Wide               Medium                        88.81                110                0.87       QQQQ              119,107.62          Medical Devices                                  Undervalued
Pfizer                                               PFE          Wide               Low                           40.61                  46               0.88       QQQQ              225,458.79          Drug Manufacturers - Major                       Undervalued

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    7
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)
                                                                                                                    Total Return            Total Return                     Div.                     Div.                     Div.             EPS Est.
                                                                      52 Week                  52 Week                      YTD                     1-Yr               Per Share                  Yield %                  Yield %             Growth %                   Forward
Company                                         Ticker                    High                     Low                    (Daily)                 (Daily)                   TTM                   Current                 Forward              Mean 5-Yr                  EPS Est.

Energy
Energy Transfer                                 ET                         19.19                   11.68                   16.77                     3.42                     1.22                    8.07                    8.07                     3.54                    1.65
Enterprise Products Partners                    EPD                        30.05                   23.33                   19.98                    13.13                     1.72                    6.06                    6.11                     7.49                    2.07
Total ADR                                       TOT                        65.69                   49.70                     8.06                   -6.45                     2.90                    5.21                    5.15                   14.41                     6.20
MPLX Partnership Units                          MPLX                       39.01                   28.32                     8.61                   -1.53                     2.49                    7.84                    8.15                   12.07                     2.73
Marathon Petroleum                              MPC                        88.45                   54.29                     4.05                  -16.19                     1.84                    3.14                    3.48                   11.86                     8.20

Financial Services
American International Group                    AIG                        56.79                   36.16                   21.52                   -12.77                     1.28                    2.69                    2.69                   12.33                     5.13
Mitsubishi UFJ Financial Group ADR MUFG                                     6.75                     4.64                    1.85                  -24.29                     0.19                    3.78                    3.78                     3.40                    0.70
Capital One Financial                           COF                      101.26                    69.90                   23.34                     4.20                     1.60                    1.72                    1.72                     0.20                   12.18
UBS Group                                       UBS                        16.94                   11.61                     8.56                  -16.14                     0.66                    4.83                    5.22                   13.90                     1.44
Credit Suisse Group ADR                         CS                         17.17                   10.23                   22.47                   -19.14                     0.26                    1.95                    1.99                   20.60                     1.49
ING Groep ADR                                   ING                        16.91                   10.21                   19.70                   -22.38                     0.68                    5.54                    5.54                     3.40                    1.62
Alliance Data Systems                           ADS                      250.27                  142.58                      7.10                  -20.00                     2.28                    1.46                    1.57                   13.69                    22.41
Wells Fargo                                     WFC                        59.53                   43.02                     6.03                   -3.56                     1.64                    3.51                    3.72                     7.30                    5.23
AbbVie                                          ABBV                     121.45                    75.77                  -12.89                   -28.18                     3.59                    4.98                    5.40                   14.59                     8.66

Healthcare
CVS Health                                      CVS                        82.15                   51.77                  -15.48                   -19.26                     2.00                    3.68                    3.68                     6.73                    7.25
Bayer ADR                                       BAYRY                      32.80                   15.67                     0.05                  -38.50                     0.80                    4.70                    4.70                     7.65                    2.19
Roche Holding ADR                               RHHBY                      34.98                   26.30                     9.83                   22.79                     1.05                    3.25                    3.25                     4.20                    2.50
DaVita                                          DVA                        79.11                   48.25                     7.35                  -12.02                       —                       —                        —                   15.67                     4.86
Bristol-Myers Squibb                            BMY                        63.69                   44.30                    -9.10                   -7.83                     1.62                    3.49                    3.53                   11.82                     4.63
Cigna                                           CI                       226.61                  141.95                   -16.34                    -7.53                     0.04                    0.03                    0.03                   10.21                    18.42
Biogen                                          BIIB                     388.67                  216.12                   -23.82                   -16.21                       —                       —                        —                     0.60                   30.04
UnitedHealth Group                              UNH                      287.94                  208.07                     -6.08                    0.11                     3.45                    1.54                    1.54                   12.08                    16.58
AbbVie                                          ABBV                     107.25                    75.77                  -11.56                   -13.57                     3.59                    5.11                    5.39                     3.80                    9.50
Celgene                                         CELG                       95.44                   58.59                   47.70                     8.68                       —                       —                        —                     9.53                   13.96
Medtronic                                       MDT                      100.15                    78.29                    -1.81                   13.33                     1.96                    2.25                    2.25                     9.65                    5.47
Pfizer                                          PFE                        46.47                   34.37                    -6.14                   14.70                     1.36                    3.40                    3.55                     3.74                    3.06

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without        8
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)

                                                                  Economic           Uncertainty          Current Price          Fair Value        Adj. Price/        Morningstar Market Cap                                                                 Relative
Company                                              Ticker       Moat™              Rating                     (USD)                (USD)         Fair Value         Rating       (USD Mil)                Industry                                         Attractiveness

Industrials—Undervalued
Siemens ADR                                          SIEGY        Narrow             Medium                        60.00                  78               0.85       QQQQ                96,708.85         Diversified Industrials                          Undervalued
Rolls-Royce Holdings ADR                             RYCEY        Narrow             Medium                        12.11                  15               0.87       QQQQ                22,524.47         Aerospace & Defense                              Undervalued
ABB                                                  ABB          Wide               Medium                        20.66                  25               0.88       QQQQ                43,844.87         Diversified Industrials                          Undervalued
Stericycle                                           SRCL         Narrow             High                          58.39                  77               0.88       QQQQ                 5,300.17         Waste Management                                 Undervalued
Canon ADR                                            CAJ          None               Medium                        27.68                  33               0.89       QQQQ                29,858.03         Business Equipment                               Undervalued
Emerson Electric                                     EMR          Wide               Medium                        70.99                  83               0.90       QQQQ                43,631.86         Diversified Industrials                          Fully Valued
Johnson Controls International                       JCI          Narrow             High                          37.50                  46               0.91       QQQQ                34,117.41         Engineering & Construction                       Fully Valued
Caterpillar                                          CAT          Wide               High                        139.42                 169                0.91       QQQQ                79,730.89         Farm & Construction Equipment                    Fully Valued

Real Estate—Fully Valued
Macerich                                             MAC          Narrow             High                          40.14                  57               0.85       QQQQ                 5,669.12         REIT - Retail                                    Undervalued
Simon Property Group                                 SPG          Narrow             Medium                      173.70                 195                0.93       QQQ                 53,672.19         REIT - Retail                                    Fully Valued

Technology—Undervalued
Baidu ADR                                            BIDU         Wide               High                        166.23                 262                0.82       QQQQ                58,072.36         Internet Content & Information                   Undervalued
Intel                                                INTC         Wide               Medium                        51.04                  65               0.86       QQQQ              228,506.08          Semiconductors                                   Undervalued
DXC Technology                                       DXC          None               High                          65.74                  91               0.86       QQQQ                17,636.15         Information Technology Services                  Undervalued
Nokia Oyj ADR                                        NOK          None               High                            5.28                   7              0.87       QQQQ                29,300.09         Communication Equipment                          Undervalued
Tencent Holdings ADR                                 TCEHY        Wide               High                          49.24                  64               0.88       QQQQ              470,901.57          Internet Content & Information                   Undervalued
Activision Blizzard                                  ATVI         Narrow             High                          48.21                  62               0.89       QQQQ                36,928.73         Electronic Gaming & Multimedia                   Undervalued
Palo Alto Networks                                   PANW         Narrow             High                        248.83                 305                0.91       QQQQ                23,618.19         Software - Application                           Fully Valued
F5 Networks                                          FFIV         Narrow             Medium                      156.90                 181                0.91       QQQQ                 9,366.15         Software - Infrastructure                        Fully Valued
Skyworks Solutions                                   SWKS         Narrow             High                          88.18                105                0.92       QQQ                 15,255.28         Semiconductors                                   Fully Valued
Western Digital                                      WDC          None               Very High                     51.12                  63               0.92       QQQQ                14,868.30         Data Storage                                     Fully Valued

Utilities—Fully Valued
Dominion Energy                                      D            Wide               Low                           77.87                  84               0.93       QQQQ                62,249.14         Utilities - Diversified                          Fully Valued

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    9
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Large Cap Global Core Picks (Data as of April 30, 2019)
                                                                                                                    Total Return            Total Return                     Div.                     Div.                     Div.             EPS Est.
                                                                      52 Week                  52 Week                      YTD                     1-Yr               Per Share                  Yield %                  Yield %             Growth %                   Forward
Company                                         Ticker                    High                     Low                    (Daily)                 (Daily)                   TTM                   Current                 Forward              Mean 5-Yr                  EPS Est.

Industrials
Siemens ADR                                     SIEGY                      70.90                   51.51                   10.87                    -1.99                     2.15                    3.62                    3.62                     3.89                    4.61
Rolls-Royce Holdings ADR                        RYCEY                      14.55                     9.50                  16.73                     4.09                     0.15                    1.26                    1.55                  -21.00                     0.46
ABB                                             ABB                        24.72                   18.05                     8.68                  -11.22                     0.00                    4.00                    3.89                   11.19                     1.38
Stericycle                                      SRCL                       71.43                   34.36                   59.14                    -0.55                       —                       —                        —                     7.60                    3.85
Canon ADR                                       CAJ                        34.78                   26.37                     0.29                  -15.12                     1.45                    5.21                    5.21                    -0.06                    2.04
Emerson Electric                                EMR                        79.70                   55.39                   19.63                     9.83                     1.95                    2.75                    2.76                     9.14                    4.06
Johnson Controls International                  JCI                        40.33                   28.30                   27.35                    13.79                     1.04                    2.77                    2.77                   11.79                     3.10
Caterpillar                                     CAT                      161.60                  112.06                    11.07                    -1.04                     3.28                    2.47                    2.47                   16.66                    12.97

Real Estate
Macerich                                        MAC                        60.95                   39.71                    -5.52                  -25.16                     2.97                    7.42                    7.47                    -7.52                    0.36
Simon Property Group                            SPG                      191.49                  152.50                      4.62                   16.22                     7.90                    4.61                    4.72                     6.76                    7.66

Technology
Baidu ADR                                       BIDU                     284.22                  153.78                      4.81                  -33.75                       —                       —                        —                     9.73                    9.31
Intel                                           INTC                       59.59                   42.36                     9.43                    1.23                     1.22                    2.38                    2.47                     6.54                    4.62
DXC Technology                                  DXC                        96.75                   49.19                   24.00                   -27.02                     0.75                    1.16                    1.16                     6.11                    8.73
Nokia Oyj ADR                                   NOK                         6.65                     5.07                   -9.28                   -8.21                     0.23                    4.48                    4.48                   15.94                     0.43
Tencent Holdings ADR                            TCEHY                      54.84                   31.54                   24.75                     0.46                     0.11                    0.23                    0.26                   19.50                     1.81
Activision Blizzard                             ATVI                       84.68                   39.85                     4.32                  -26.78                     0.34                    0.77                    0.77                     7.58                    2.33
Palo Alto Networks                              PANW                     260.63                  160.08                    32.11                    29.26                       —                       —                        —                   19.86                     6.33
F5 Networks                                     FFIV                     199.71                  148.91                     -3.17                   -3.80                       —                       —                        —                     9.39                   11.24
Skyworks Solutions                              SWKS                     104.20                    60.12                   32.14                     3.32                     1.40                    1.66                    1.72                   11.23                     7.47
Western Digital                                 WDC                        88.62                   33.83                   39.63                   -32.58                     2.00                    3.91                    3.91                    -3.48                    5.61

Utilities
Dominion Energy                                 D                          77.91                   61.53                   10.25                    22.13                     3.34                    4.40                    4.71                     5.87                    4.42

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without       10
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Fair Value Changes

                                                                                                                                                     Old Fair Value                                       New Fair Value                                                      Change
Company                                                                                  Ticker                                                              (USD)                                                (USD)                                                          (%)
McKesson                                                                                 MCK                                                                     210                                                     130                                                  -38.10
Cardinal Health                                                                          CAH                                                                       82                                                     55                                                  -32.93
AmerisourceBergen                                                                        ABC                                                                     106                                                      86                                                  -18.87
Nokia Oyj ADR                                                                            NOK                                                                        8                                                   7.20                                                  -10.00
Fluor                                                                                    FLR                                                                       50                                                     46                                                   -8.00
Wells Fargo                                                                              WFC                                                                       65                                                     60                                                   -7.69
KeyCorp                                                                                  KEY                                                                       22                                                     21                                                   -4.55
Volkswagen ADR                                                                           VWAGY                                                                 26.50                                                      26                                                   -1.89
Volkswagen ADR                                                                           VWAPY                                                                 26.50                                                      26                                                   -1.89
Capital One Financial                                                                    COF                                                                     119                                                     133                                                   11.76

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without        11
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Research                                                                                                  Four key components drive the Morningstar rating: (1) our
                                                                                                          assessment of the firm’s economic moat, (2) our estimate

Methodology for
                                                                                                          of the stock’s fair value, (3) our uncertainty around that fair
                                                                                                          value estimate and (4) the current market price. This process
                                                                                                          ultimately culminates in our single-point star rating.
Valuing Companies                                                                                         Economic Moat
Overview                                                                                                  The concept of an economic moat plays a vital role not
At the heart of our valuation system is a detailed projection                                             only in our qualitative assessment of a firm’s long-term
of a company’s future cash flows, resulting from our                                                      investment potential, but also in the actual calculation of
analysts’ research. Analysts create custom industry and                                                   our fair value estimates. An economic moat is a structural
company assumptions to feed income statement, balance                                                     feature that allows a firm to sustain excess profits over a
sheet, and capital investment assumptions into our globally                                               long period of time. We define economic profits as returns
standardized, proprietary discounted cash flow, or DCF,                                                   on invested capital (or ROIC) over and above our estimate of
modeling templates. We use scenario analysis, in-depth                                                    a firm’s cost of capital, or weighted average cost of capital
competitive advantage analysis, and a variety of other                                                    (or WACC). Without a moat, profits are more susceptible to
analytical tools to augment this process. Moreover, we think                                              competition. We have identified five sources of economic
analyzing valuation through discounted cash flows presents                                                moats: intangible assets, switching costs, network effect,
a better lens for viewing cyclical companies, high-growth                                                 cost advantage, and efficient scale.
firms, businesses with finite lives (e.g., mines), or companies
expected to generate negative earnings over the next few                                                  Companies with a narrow moat are those we believe are
years. That said, we don’t dismiss multiples altogether but                                               more likely than not to achieve normalized excess returns for
rather use them as supporting cross-checks for our DCF-                                                   at least the next 10 years. Wide-moat companies are those in
based fair value estimates. We also acknowledge that DCF                                                  which we have very high confidence that excess returns will
models offer their own challenges (including a potential                                                  remain for 10 years, with excess returns more likely than not
proliferation of estimated inputs and the possibility that the                                            to remain for at least 20 years. The longer a firm generates
method may miss short-term market-price movements), but                                                   economic profits, the higher its intrinsic value. We believe
we believe these negatives are mitigated by deep analysis                                                 low-quality, no-moat companies will see their normalized
and our long-term approach.                                                                               returns gravitate toward the firm’s cost of capital more
                                                                                                          quickly than companies with moats.
Morningstar’s equity research group (we”, “our”) believes
that a company’s intrinsic worth results from the future                                                  To assess the sustainability of excess profits, analysts
cash flows it can generate. The Morningstar Rating for                                                    perform ongoing assessments of the moat trend. A firm’s
stocks identifies stocks trading at a discount or premium to                                              moat trend is positive in cases where we think its sources of
their intrinsic worth—or fair value estimate, in Morningstar                                              competitive advantage are growing stronger; stable where
terminology. Five-star stocks sell for the biggest risk-adjusted                                          we don’t anticipate changes to competitive advantages over
discount to their fair values, whereas 1-star stocks trade at                                             the next several years; or negative when we see signs of
premiums to their intrinsic worth.                                                                        deterioration.

Morningstar Equity Research Star Rating Methodology

                                                                                                                    Price
 Economic Moat                   Stewardship                                                                      Fair Value                               Morningstar
                                                                       Morningstar
                                                                                                                                                           RatingTM For Stocks
 Financial Health                Moat Trend                            Fair Value                                 Uncertainty                              QQQQQ

 Fundamental Analysis                                          Valuation                                  Margin of Safety

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    12
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

Estimated Fair Value                                                                                      value and that any new investment provides a return in line
Combining our analysts’ financial forecasts with the firm’s                                               with estimated WACC.
economic moat helps us assess how long returns on invested
capital are likely to exceed the firm’s cost of capital. Returns                                          Because a dollar earned today is worth more than a dollar
of firms with a wide economic moat rating are assumed to                                                  earned tomorrow, we discount our projections of cash flows
fade to the perpetuity period over a longer period of time                                                in stages I, II, and III to arrive at a total present value of
than the returns of narrow-moat firms, and both will fade                                                 expected future cash flows. Because we are modeling free
slower than no-moat firms, increasing our estimate of their                                               cash flow to the firm—representing cash available to provide
intrinsic value.                                                                                          a return to all capital providers—we discount future cash
                                                                                                          flows using the WACC, which is a weighted average of the
Our model is divided into three distinct stages:                                                          costs of equity, debt, and preferred stock (and any other
                                                                                                          funding sources), using expected future proportionate long-
Stage I: Explicit Forecast                                                                                term, market-value weights.
In this stage, which can last five to 10 years, analysts make
full financial statement forecasts, including items such as                                               Uncertainty around that fair value estimate
revenue, profit margins, tax rates, changes in working-capital                                            Morningstar’s Uncertainty Rating captures a range of likely
accounts, and capital spending. Based on these projections,                                               potential intrinsic values for a company and uses it to assign
we calculate earnings before interest, after taxes (EBI) and                                              the margin of safety required before investing, which in turn
the net new investment (NNI) to derive our annual free cash                                               explicitly drives our stock star rating system. The Uncertainty
flow forecast.                                                                                            Rating represents the analysts’ ability to bound the
                                                                                                          estimated value of the shares in a company around the Fair
Stage II: Fade                                                                                            Value Estimate, based on the characteristics of the business
The second stage of our model is the period it will take the                                              underlying the stock, including operating and financial
company’s return on new invested capital—the return on                                                    leverage, sales sensitivity to the overall economy, product
capital of the next dollar invested (“RONIC”)—to decline                                                  concentration, pricing power, and other company-specific
(or rise) to its cost of capital. During the Stage II period, we                                          factors.
use a formula to approximate cash flows in lieu of explicitly
modeling the income statement, balance sheet, and cash                                                    Analysts consider at least two scenarios in addition to
flow statement as we do in Stage I. The length of the second                                              their base case: a bull case and a bear case. Assumptions
stage depends on the strength of the company’s economic                                                   are chosen such that the analyst believes there is a 25%
moat. We forecast this period to last anywhere from one                                                   probability that the company will perform better than the bull
year (for companies with no economic moat) to 10–15 years                                                 case, and a 25% probability that the company will perform
or more (for wide-moat companies). During this period,                                                    worse than the bear case. The distance between the bull
cash flows are forecast using four assumptions: an average                                                and bear cases is an important indicator of the uncertainty
growth rate for EBI over the period, a normalized investment                                              underlying the fair value estimate.
rate, average return on new invested capital (RONIC), and
the number of years until perpetuity, when excess returns                                                 Our recommended margin of safety widens as our
cease. The investment rate and return on new invested                                                     uncertainty of the estimated value of the equity increases.
capital decline until a perpetuity value is calculated. In                                                The more uncertain we are about the estimated value of
the case of firms that do not earn their cost of capital, we                                              the equity, the greater the discount we require relative
assume marginal ROICs rise to the firm’s cost of capital                                                  to our estimate of the value of the firm before we would
(usually attributable to less reinvestment), and we may                                                   recommend the purchase of the shares. In addition, the
truncate the second stage.                                                                                uncertainty rating provides guidance in portfolio construction
                                                                                                          based on risk tolerance.
Stage III: Perpetuity
Once a company’s marginal ROIC hits its cost of capital,
we calculate a continuing value, using a standard perpetuity
formula. At perpetuity, we assume that any growth or decline
or investment in the business neither creates nor destroys

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    13
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

  Our uncertainty ratings for our qualitative analysis are low,                                             basis, and the star rating is automatically re-calculated at the
  medium, high, very high, and extreme.                                                                     market close on every day the market on which the stock is
                                                                                                            listed is open. Our analysts keep close tabs on the companies
  × Low–margin of safety for 5-star rating is a                                                             they follow, and, based on thorough and ongoing analysis,
                   20% discount and for 1-star rating is 25% premium.                                       raise or lower their fair value estimates as warranted.
  ×                Medium–margin of safety for 5-star rating is a
                   30% discount and for 1-star rating is 35% premium.                                       Please note, there is no predefined distribution of stars. That
  ×                High–margin of safety for 5-star rating is a                                             is, the percentage of stocks that earn 5 stars can fluctuate
                   40% discount and for 1-star rating is 55% premium.                                       daily, so the star ratings, in the aggregate, can serve as a
  ×                Very High–margin of safety for 5-star rating is a                                        gauge of the broader market’s valuation. When there are
                   50% discount and for 1-star rating is 75% premium.                                       many 5-star stocks, the stock market as a whole is more
  ×                Extreme–margin of safety for 5-star rating is a                                          undervalued, in our opinion, than when very few companies
                   75% discount and for 1-star rating is 300% premium.                                      garner our highest rating.

  Morningstar Equity Research Star Rating Methodology

                        4.5
                       4.5                                                                                                                                              Q
                                                                                                                                                                        QQ
                                                                                                                                                                        QQQ
                       4.0                                                                                                                    400%                      QQQQ
                       4.0                                                                                                                                              QQQQQ

                       3.5
                       3.5

                       3.0
                       3.0

                       2.5
                       2.5

                       2.0
                       2.0                                                                                                                                200%
                                                                                                                 175%
                        1.5                                                         155%
                       1.5
                                                       135%
                               125%                                                                                          125%
                                                                   110%                         115%
                        1.0            105%
                       1.0     95%                     90%
                                       80%                                          85%                          80%
Price/Fair Value

                                                                    70%
                                                                                                 60%
                        0.5
                       0.5                                                                                                    50%             50%
                                                                                                                                                           25%
                       0.0
                        0.0      Low                       Medium                      High                         Very High                    Extreme
                                 Uncertainty               Uncertainty                 Uncertainty                  Uncertainty                  Uncertainty

  Market Price                                                                                              We expect that if our base-case assumptions are true the
  The market prices used in this analysis and noted in the                                                  market price will converge on our fair value estimate
  report come from exchange on which the stock is listed                                                    over time, generally within three years (although it is
  which we believe is a reliable source.                                                                    impossible to predict the exact time frame in which market
                                                                                                            prices may adjust).
  For more details about our methodology, please go to
  www.global.morningstar.com/equitydisclousures.                                                            Our star ratings are guideposts to a broad audience
                                                                                                            and individuals must consider their own specific investment
  Morningstar Star Rating for Stocks                                                                        goals, risk tolerance, tax situation, time horizon,
  Once we determine the fair value estimate of a stock, we                                                  income needs, and complete investment portfolio, among
  compare it with the stock’s current market price on a daily                                               other factors.

  ©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
  investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    14
  notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
  proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
  Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Research | Large Cap Global Core Pick List | May 2019

The Morningstar Star Ratings for stocks are defined below:                                                This report is for informational purposes only and has
                                                                                                          no regard to the specific investment objectives, financial
QQQQQ We believe appreciation beyond a fair risk-                                                         situation or particular needs of any specific recipient. This
adjusted return is highly likely over a multiyear time frame.                                             publication is intended to provide information to assist
Scenario analysis developed by our analysts indicates                                                     institutional investors in making their own investment
that the current market price represents an excessively                                                   decisions, not to provide investment advice to any
pessimistic outlook, limiting downside risk and maximizing                                                specific investor. Therefore, investments discussed and
upside potential.                                                                                         recommendations made herein may not be suitable for all
                                                                                                          investors: recipients must exercise their own independent
QQQQ We believe appreciation beyond a fair risk-                                                          judgment as to the suitability of such investments and
adjusted return is likely.                                                                                recommendations in the light of their own investment
                                                                                                          objectives, experience, taxation status and financial position.
QQQ Indicates our belief that investors are likely to
receive a fair risk-adjusted return (approximately cost of                                                The information, data, analyses and opinions presented
equity).                                                                                                  herein are not warranted to be accurate, correct, complete
                                                                                                          or timely. Unless otherwise provided in a separate
QQ We believe investors are likely to receive a less than                                                 agreement, neither Morningstar, Inc. or the Equity Research
fair risk-adjusted return.                                                                                Group represents that the report contents meet all of the
                                                                                                          presentation and/or disclosure standards applicable in the
Q Indicates a high probability of undesirable risk-adjusted                                               jurisdiction the recipient is located.
returns from the current market price over a multiyear time
frame, based on our analysis. Scenario analysis by our                                                    Except as otherwise required by law or provided for in a
analysts indicates that the market is pricing in an excessively                                           separate agreement, the analyst, Morningstar, Inc. and
optimistic outlook, limiting upside potential and leaving the                                             the Equity Research Group and their officers, directors and
investor exposed to Capital loss.                                                                         employees shall not be responsible or liable for any trading
                                                                                                          decisions, damages or other losses resulting from, or related
Risk Warning                                                                                              to, the information, data, analyses or opinions within the
Please note that investments in securities are subject                                                    report. The Equity Research Group encourages recipients
to market and other risks and there is no assurance or                                                    of this report to read all relevant issue documents (e.g.,
guarantee that the intended investment objectives will                                                    prospectus) pertaining to the security concerned, including
be achieved. Past performance of a security may or may                                                    without limitation, information relevant to its investment
not be sustained in future and is no indication of future                                                 objectives, risks, and costs before making an investment
performance. A security investment return and an investor’s                                               decision and when deemed necessary, to seek the advice of
principal value will fluctuate so that, when redeemed, an                                                 a legal, tax, and/or accounting professional.
investor’s shares may be worth more or less than their
original cost. A security’s current investment performance                                                The Report and its contents are not directed to, or intended
may be lower or higher than the investment performance                                                    for distribution to or use by, any person or entity who is a
noted within the report. Morningstar’s Uncertainty Rating                                                 citizen or resident of or located in any locality, state, country
serves as a useful data point with respect to sensitivity                                                 or other jurisdiction where such distribution, publication,
analysis of the assumptions used in our determining a fair                                                availability or use would be contrary to law or regulation or
value price.                                                                                              which would subject Morningstar, Inc. or its affiliates to any
                                                                                                          registration or licensing requirements in such jurisdiction.
General Disclosure
Unless otherwise provided in a separate agreement,                                                        Where this report is made available in a language other
recipients accessing this report may only use it in the country                                           than English and in the case of inconsistencies between
in which the Morningstar distributor is based. Unless                                                     the English and translated versions of the report, the
stated otherwise, the original distributor of the report is                                               English version will control and supersede any ambiguities
Morningstar Research Services LLC, a U.S.A. domiciled                                                     associated with any part or section of a report that has
financial institution.                                                                                    been issued in a foreign language. Neither the analyst,

©2019 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute
investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without    15
notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the
proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to,
Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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