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Stock Strategist

Up Close and Personal with Four Undervalued Firms

How you can learn more about these companies in person.

Individual investors have very little opportunity to directly access a company's senior management. At the same time, with all the pressure for short-term results from Wall Street, it is hard for management teams to find audiences to discuss what makes their company unique and what exactly the long-term plan is. We intend to fill both of these gaps with Morningstar's first company management conference, "The Management Behind the Moat," on April 26.

We have invited senior management representatives from 12 of our favorite companies--all of which have established economic moats--to give presentations to and take questions from conference attendees. The presentations will focus on the companies' long-term strategic plans and the competitive advantages that have historically allowed these firms to generate excess returns for their shareholders. We believe that individual investors, fund managers, and financial advisors, particularly those focused on long-term value investing, will benefit from this unique opportunity.

All of the presenting companies are narrow- and wide-moat companies that we believe run high-quality businesses and would be attractive long-term investments. The lineup includes  General Electric (GE),  Walgreen (WAG),  Harley-Davidson (HOG),  Kinder Morgan / ,  CDW ,  Wipro (WIT),  Bemis ,  Fuel Tech (FTEK),  Realty Income (O),  Republic Services (RSG),  McCormick (MKC), and  Actuant (ATU). Many of these companies are household names, but we've also invited some smaller and more distinctive firms that are worth bringing to the center stage. One thing that these companies all have in common is that they've built strong competitive advantages for the long haul. We even hold some of these companies in our newsletter portfolios.

Four of our presenting companies in the upcoming conference are significantly undervalued as of March 8. One has a 5-star Morningstar Rating for stocks (it's trading below our "Consider Buying" price), and the others are deep in 4-star territory. By way of background, we award a stock a 5-star rating when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimates. Thus, when a stock hits 5 stars, we consider it an especially compelling value.

 Republic Services (RSG)
Morningstar Rating: 5 stars
Economic Moat: Narrow
Fair Value Estimate: $54
Business Risk: Below Average

Waste-haulers have solid business models and provide an essential service--a combination that creates strong and predictable cash flow, even during tough economic times, according to Morningstar analyst Brian Nelson. Republic plans to raise core prices by 3.5% in 2007, following a 3.4% hike in 2006. The industry's shift in focus from share gains to profitability bodes well for further price increases.

 Fuel Tech (FTEK)
Morningstar Rating: 4 stars
Economic Moat: Narrow
Fair Value Estimate: $32
Business Risk: Average

Morningstar analyst John Kearney believes that Fuel Tech has quietly established itself as a leading provider of clean energy engineering solutions. With more than 1,500 coal-fired plants in the United States, there is a huge market potential for Fuel Tech's proprietary slag-reduction technology, even if it captures only a fraction of what could be a $1 billion-plus market. China--which generates 70% of its electricity from coal--offers an immense, long-term revenue opportunity for Fuel Tech's pollution-control solutions and its slag-reduction product. Kearney thinks that the company's suite of products and management's deep-rooted ties to the utilities industry will translate into substantial growth for this narrow-moat firm.

 Walgreen (WAG)
Morningstar Rating: 4 stars
Economic Moat: Wide
Fair Value Estimate: $56
Business Risk: Average

Amid all its competitors' new threats in the past year, Walgreen should be able to maintain steady growth as it benefits from the rapid increases in prescription drug spending and continues to aggressively build new stores. Morningstar analyst Mitchell Corwin thinks that Walgreen is years ahead of its peers in scouting locations for stores, and it aggressively pursues the sites it wants, paying premium dollars for prime locations. We estimate that a Walgreen store is 30% more productive than its nearest competitor's. More-productive stores equate to better earnings per store, robust free cash flow, and the highest returns on invested capital of any drugstore chain.

Morningstar Rating: 4 stars
Economic Moat: Narrow
Fair Value Estimate: $76
Business Risk: Average

CDW's focus on small and medium-sizes businesses has allowed the firm to capture market share and realize impressive financial returns. According to Morningstar stock analyst Andrew Golomb, IT spending slumps don't affect CDW as much as competitors, largely because of the firm's customer and product mix. Revenue has continued to grow even as major IT manufacturers report declines. By lowering customers' total cost of technology ownership, CDW builds loyalty, which will engender customers to spend a greater portion of their IT budgets with CDW. This strategy appears to be working.

To learn firsthand about the long-term value-creation strategies that separate these firms from the rest of the pack and to register for this conference, click here.

The Management Behind the Moat conference is being held in conjunction with our Annual Morningstar Stocks Forum, which will take place on April 27. At the forum, our three equity strategists--who head up our StockInvestor, DividendInvestor, and GrowthInvestor newsletters--and stock analysts will share their best stock picks, offer insights into how we value stocks, and provide in-depth answers to questions from the audience, particularly sharing their knowledge of specific stocks.

Ramesh Poola has a position in the following securities mentioned above: FTEK. Find out about Morningstar’s editorial policies.