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Weekly Wrap: Monsanto Worries Leave Bayer Looking Cheap

Concerns that Bayer will overpay for the ag giant have created an opportunity. Plus, why we like defense contractor moats.

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Jeremy Glaser: Should Bayer shareholders be worried? Is there value in defense? And how one tech giant is planning on becoming more focused. This time on the Morningstar Weekly Wrap.

After a few weeks of speculation, we got Bayer's formal offer for Monsanto this week. Monsanto rejected it, but said they were open to further negotiations. Does this mean Bayer's going to have overpay to take over the agriculture giant and what does this mean for Bayer shareholders? Damien Conover shares his thoughts.

Damien Conover: We see Bayer as one of our most undervalued pharmaceutical stocks in our entire coverage right now. The stock's been under pressure lately because of concerns that it might overpay for Monsanto. When we look at Bayer we see a company that has a very strong lineup of currently marketed products without a lot of patent exposure. And an acquisition of Monsanto would give them a very strong competitive profile in the agriculture space that we think will bode very well for its strategic position and would really enhance its economic competitive advantage or it's economic moat.

Glaser: We relaunched our coverage of the defense sector. And our analyst Chris Higgins thinks that there are some strong competitive advantages there and also some growth opportunities, but he's less excited about valuations.

Christopher Higgins: So this week we reinitiated coverage on General Dynamics, Lockheed Martin, Raytheon, and Northrop Grumman. We think the defense names are interesting; we like their moats. Northrop Grumman and Lockheed Martin--we'd highlight those two. For Lockheed Martin we raised the moat trend from stable to positive and we also did the same for Northrop Grumman, we raised their moat trend from stable to positive. For Lockheed it's really driven by the F-35 Fighter program that they are ramping up. And for Northrop Grumman it's the long-range strike bomber. It's a major program worth $80 billion that they won in February.

We also think the international market offers some interesting opportunities for these contractors. This week Vietnam opened up for U.S. arms sales for the first time in five decades. It's the eighth-largest defense market outside the U.S. We think it offers some potential long-term upside for these names as well.

Glaser: Not long after splitting with the HP Inc. retail business. Hewlett Packard Enterprises will become even smaller as it spins off it's services businesses and then merges it with CSC. We think it makes a lot of sense for HPE to become smaller and to exclusively focus on the infrastructure market. However, we still don't think that the company has a sustainable competitive advantage. We don't see the shares as particularly attractive today.

Also on Morningstar this week we launched our annual 529 Plan Report. This gives a look at what makes a good college savings plan.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.