Four wide-moat stocks trading at deep discounts

It's a good time to scour the vast universe of Morningstar's stock coverage for companies that have a sustainable competitive advantage and whose stocks are trading at prices considerably below their fair value estimates.

Here are a few that fit the bill. Better still, their fair value uncertainty rating is medium, which is an indication that Morningstar analysts can estimate these stocks' future cash flows with a greater degree of confidence.

Let's take a closer look at them:

 Gilead Sciences (GILD) develops and markets therapies to treat life-threatening diseases such as HIV and hepatitis B and C. Recent acquisitions have broadened its market to pulmonary and cardiovascular diseases and cancer.

"Gilead's focus on infectious disease has paid off in spades," Morningstar strategist Karen Andersen said in a Morningstar report. "With a small sales force, inexpensive manufacturing and selective research and development, it generates stellar profit margins.

The firm's pipeline is extending its reach from HIV into other high-margin markets like hepatitis C and haematological oncology, the report noted.

Andersen says Gilead's newest combo pills that reduce bone and kidney safety issues from chronic use, help push patent protection into the late 2020s.

"Patent protection on newer HIV therapies and the firm's sustained innovation in the hepatitis C market will ensure strong returns for the next couple of decades," she said.

Gilead's expertise in infectious diseases and single-pill formulations is a part of its research and development strategy and forms a big part of its sustainable competitive advantage, added Andersen, who pegged the stock's value at US$124.

Gilead's HIV franchise, which serves almost 80% of treated HIV patients in the U.S., is forecasted to rake in US$12 billion in 2018. Further, Gilead is a clear leader among "all-oral treatments in the hepatitis C market, and has a multi-billion-dollar product, with longevity extending as far as 2029," said Anderson.

One of the four largest U.S. banks,  Wells Fargo (WFC) is close to reaching US$2 trillion in balance sheet assets. The company's business segments include community banking, wholesale banking, wealth, brokerage and retirement. It also services more than US$2 trillion in residential and commercial loans.

"More than one third of the bank's deposits come from markets in which Wells Fargo is the pre-eminent player, and more than two thirds are gathered in markets in which the company ranks among the top three," said a Morningstar report.

The bank's wide moat, or sustainable competitive advantage, flows from cross-selling, strong balance sheet and funding advantage that minimizes costs while maximizes revenue associated with every dollar held on its balance sheet.

"With almost half of revenue coming from a diverse range of fee-generating businesses, Wells Fargo is relatively insulated from interest rate drama," said Morningstar equity analyst Jim Sinegal, who appraised the stock's value at US$61 and forecasted 30% pre-tax returns on equity over the next five years, which should provide plenty of protection against macroeconomic conditions.

The bank's net loans, projected Morningstar, are poised to grow by 2% annually over the next five years, while net interest margin should expand from 2.9% in 2015 to 3.3% in 2020.

 Allergan (AGN) makes specialty pharmaceutical products in aesthetics, ophthalmology, women's health, gastrointestinal and central nervous system segments. The company also has a small drug distribution business.

"Allergan's diverse portfolio of defensible products, broad pipeline and future potential acquisitions will sustain healthy earnings growth," Morningstar equity analyst Michael Waterhouse said in a report.

The firm's recent acquisitions bolstered its product portfolio with defensible therapies in niche markets -- women's health, gastrointestinal, urology, ophthalmology and aesthetics -- providing a long runway for growth, Waterhouse said. He assessed the stock's fair value to be US$370 and projected a 12% return on capital over the next five years.

With more than US$30 billion in cash, the company can make strategic acquisitions to improve growth opportunities and increase product diversification, and to ease patent cliff concerns.

Allergan's most popular product, Botox, used for the cosmetic removal of facial wrinkles, injects more than US$2 billion annually into its revenue. Having garnered 76% global market share, Botox has become a "critical ingredient" of Allergan's competitive advantage, said Waterhouse.

Allergan is projected to clock more than US$15 billion in branded sales this year, and sustain 9% organic growth over the next five years fuelled by high-growth legacy products and new product launches.

 Compass Minerals (CMP) produces highway de-icing salt and sulfate of potash, a specialty fertilizer used for high-value crops. The company's main assets include rock salt mines in Ontario, Louisiana and the United Kingdom.

CMP owns an array of cost-advantaged assets and "controls one of only three naturally occurring brine sources that produce sulfate of potash, or SOP, a specialty fertilizer priced at a premium to standard potash," said a Morningstar report.

Highway de-icing customers constitute 60% of sales of salt, the most economical method to clear snow and ice during winter. "And with mines close to waterways like the Great Lakes and Mississippi River, Compass can competitively deliver de-icing salt to local governments and municipalities," said Morningstar equity analyst Jeffrey Stafford.

Compass possesses strong competitive and cost advantages by virtue of its unique assets that are difficult, if not impossible, to replicate by other producers. Owing in no small measure to this cost advantage, its returns on invested capital have averaged 20% over the past decade.

"Compass will continue to produce returns on invested capital that outpace the costs of capital for the next 20 years," said Stafford, who put the stock's value at US$89, implying an enterprise multiple of about 16 times.

He cautioned that weather has a big impact on Compass' year-to-year results, and salt volume fluctuates considerably. On a more positive note, though, "salt prices for both the highway de-icing and consumer/industrial end markets will expand at about 2.5% to 3% each year through 2020," he added.

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