Moats April 2012

StockInvestor
Buying core holdings at a discount
April 2012
SM
Volume Number
11 10
Portfolio Management Strategy

When it comes to selecting securities for the Tortoise and Hare portfolios, my strategy is to first focus on wide-moat firmsthose with some sort of competitive advantage that should allow them to generate excess economic profits for at least two decades. Second, I only purchase these firms when there is a margin of safety in the current stock price. I define margin of safety as buying securities at a discount to our fair value estimates, which are driven by longterm fundamental analysis and expected cash flows. But there is indeed a leap between selecting securities to buy and actually managing a real portfolio made up of a number of stocks that are constantly changing in market value. One thing I try to do is maximize the expected return by minimizing the dollar-weighted price/fair value ratio of each portfolio. Every month in the portfolio recapson Pages 5 and 7 of this issue I state the estimated intrinsic value of the portfolios based on our fair value estimates. I simply take the shares of each security owned and multiply by the fair value estimate, then sum the value of all the positions. I am trying to move the intrinsic value of each portfolio ever higher through the trades I make, trimming positions as the stocks approach fair value, and recycling the capital into stocks that trade at greater discounts to fair value. Focusing strictly on the price/fair value does have one significant downsideit does not take into consideration either risk or uncertainty. All stocks that trade at,
say, a 25% discount to fair value are not created equal. Id much rather buy low-risk, low-uncertainty CocaCola KO at a 25% discount than I would a company with much greater uncertainty, such as Moodys MCO or Weight Watchers WTW. Focusing strictly on price/fair value would have us constantly swinging for the fences when there might be lower-risk singles and doubles opportunities that have a very high probability of success. To account for risk and uncertainty, I also try to maximize the dollar-weighted Morningstar star rating of each portfolio. Our fair value uncertainty ratings are one of just three inputs into the star rating, the others being the fair value estimate itself and the market price. A company with a high uncertainty rating requires a 40% discount to fair value to attain a 5 -star rating, while a low uncertainty stock needs just a 20% discount to become 5 stars. Looking beyond the value considerations, there are a couple of other things I try to do when managing the portfolios. One is to keep the number of stocks in each portfolio reasonable. I currently have 23 stocks in the Tortoise and 26 in the Hare. In an ideal world, Id like to get these numbers down to 1520 names in each portfolio. I think more value can be added by assigning a greater weight to our very best ideas than the exceptionally marginal diversification benefit that can be had by owning our 40 th to 49 th best ideas. Moreover, I will make a lateral trade in terms of expected value if it means an upgrade in the economic moat rating. Selling a narrow-moat firm trading at a 25% discount to fair value in order to buy a widemoat firm trading at the same discount is a perfectly logical move.
Continued on Page 2
Paul Larson Equities Strategist and Editor Tortoise Portfolio 4 Our favorite wide-moat firms with lower risk, including Abbott Laboratories and Lowes Hare Portfolio 6 Our favorite aggressive picks with moats, including Oracle and MasterCard Pauls Favorites for New Money Todays Best Ideas 8
Wide-Moat Watchlist 9 Ratings and comments on more than 140 wide-moat companies Stocks in Focus 16 Merck, Medtronic, and Bank of New York Mellon Spotlight 22 Compass Minerals: Competitive Strengths Remain Intact Spotlight 26 Express Scripts: Merger Creates A Wide Moat Spotlight 28 More Profitable Growth to Come for Discover Financial Stock to Sell Walgreen 30
Economic Snapshot 31 Taking the Pulse of the Economy
Follow Paul on Twitter @StockInvestPaul
Portfolio Management Strategy

Continued From Front Cover
Paychex PAYX
Star Rating QQQQ Uncertainty Med. Fair Value ($) 38.00 Current Price ($) 31.05 Market Cap ($bil) 11.3 Dividend Yield (%) 4.1 Size of Moat Wide Consider Buying ($) 26.60 Consider Selling ($) 51.30 1-Yr Hi/Low ($) 33.71/25.12 Stewardship Z P/E 20.8
Berkshire Hathaway BRK.B

Star Rating QQQQ Uncertainty Med. Fair Value ($) 100.00 Current Price ($) 79.76 Market Cap ($bil) 187.3 Dividend Yield (%) Size of Moat Wide Consider Buying ($) 70.00 Consider Selling ($) 135.00 1-Yr Hi/Low ($) 83.72/65.35 Stewardship P/E 18.4
Finally, I try to keep reasonable diversification within the portfolios so that Im not sticking my neck out too far on any given unpredictable macroeconomic factor. Our analysts certainly have views regarding things like electricity prices, housing prices, fertilizer volumes, interest rates, and so on (all likely to rise from here). But the future is inherently uncertain, and a number of our projections simply will not come to fruition. I believe our analysts are more likely to be correct than not, which is why I own Exelon EXC (electricity), St. Joe JOE (housing), Compass Minerals CMP (fertilizer), and Paychex PAYX (interest rates), but I would never put more than one third of my portfolio into securities that share the same primary macroeconomic influences. So, to recap, I try to maintain a very large proportion of wide-moat firms in the portfolios, while minimizing the price/fair value ratio, and maximizing the star rating of the portfolios as a whole. This strategy has done quite well for us over the last decade-plus, and I havent exactly lost sleep owning high-quality companies like Berkshire Hathaway BRK.B or Wal-Mart WMT for long stretches of time.
How to Start Following the Tortoise and Hare One of the most common questions I receive from subscribers is how to adopt the strategy of the Tortoise and Hare. I do not think new subscribers should run out and buy all of the securities in the Tortoise and Hare at any given time, since the portfolios contain a mix of todays best ideas as well as a number of yesterdays ideas that are likely to soon be harvested.
newsletter. And to answer the most common question I received: Yes, Morningstar has partnered with other companies that do (or soon will) use the index in some tradable products. As they say, stay tuned! To recap how the index is created, we start with all of the U.S.-based corporations in our coverage universe rated with an economic moat rating of wide. We then rank this group by price/fair value ratios and take the 20 cheapest to create the index. We reconstitute the index once every quarter, and the positions are rebalanced to be equal-weighted (all 5% weights) at the point of reconstitution. The index was reconstituted in mid-March, and the table here shows the included companies until we reconstitute and rebalance again in mid-June. There were six new companies added this time, and the six companies that fell out of the index were eBay EBAY, Franklin Resources BEN, National Oilwell Varco NOV, St. Jude STJ, Stryker SYK, and Zimmer ZMH. The turnover within the index remains quite high, on pace to easily exceed 100% again this year, far above the high-teens annual turnover rate that the Tortoise and Hare historically have experienced. One company that is not part of the index is my newest purchase in the Hare, Express Scripts ESRX. I bought the stock on the day we upgraded the economic moat rating to wide, which immediately followed the closing of the companys purchase of competitor Medco. In a nutshell, the pharmacy benefit management industry is one where scale is a competitive advantage, and Express Scripts is now the largest by far. It also has a business model that requires very little invested capital and is benefiting from several secular tailwinds, including an aging population and a desire/need to control overall health-care spending. Getting back to the index, the cutoff this time around for wide-moat firms to make the index in terms of the price/fair value ratio was 0.82. Express Scripts currently trades at a ratio of 0.77. If we were reconstituting the index in early April instead of mid-March, =Express Scripts would be part of the index. See Page 26 for more on Express Scripts.
Express Scripts ESRX

I think a better strategy is to focus on companies trading at the largest discounts to fair value, and then add more securities as opportunities arise. In other words, dont dive in all at once, but rather merge into traffic over time. My goal with the relatively new feature on Page 8 (Pauls Favorites for New Money) is to better highlight those stocks that are looking the most attractive today.
About the Wide-Moat Focus Index Following last months cover story, I received a record number of email inquiries about the wide-moat focus index. I plan on making the index a regular part of the
Morningstar StockInvestor
April 2012
Wide-Moat Focus Index Components (Q2, 2012)

Company Mkt Cap ($ Bil) Price ($) Fair Value ($) Price/Fair Value
C Amazon.com AMZN
Applied Materials AMAT Bank of New York Mellon BK Cisco Systems CSCO CME Group CME
87.3 15.3 28.0 107.5 18.9 2.3 25.4 9.7 203.2 205.1 3.8 39.3 117.9 11.1 144.3 166.2 90.2 1.6 5.4 11.0
191.87 11.86 23.34 19.96 284.66 70.65 38.23 45.85 19.20 630.84 83.83 37.74 38.73 46.22 29.51 22.05 67.59 17.33 42.02 17.65
225.00 19.00 35.00 26.00 364.00 93.00 54.00 61.00 25.00 780.00 118.00 46.00 46.00 58.00 38.00 27.00 94.00 26.00 63.00 29.00
0.85 0.62 0.67 0.77 0.78 0.76 0.71 0.75 0.77 0.81 0.71 0.82 0.84 0.80 0.78 0.82 0.72 0.67 0.67 0.61
is considered return of capital, which is not taxed until one sells. As long as one doesnt sell, one can defer this potential tax liability. (And if you happen to continue to own these when you pass away, the tax on this return of capital can be deferred forever, since your heirs will have their cost basis stepped up.) More importantly, while MLPs tend to not generate much (if any) taxable income (especially in the first few years after purchase), the income they do generate is considered taxable, no matter what type of account holds the investment. This is because the income is considered unrelated business taxable income (UBTI). If you generate more than $1,000 of UBTI in your qualified account, you (or your accountant) will be stuck filling out form 990-T with the IRS and likely having to withdraw from the account to pay for taxes. Its just a sticky, tax-inefficient mess that I recommend avoiding if at all possible. Just keep these investments in your taxable accounts.
Upcoming Events Again this year, I plan on attending Woodstock for Capitalists, otherwise known as the Berkshire Hathaway annual meeting. Among other things happening that weekend in Omaha, I am slated to make a presentation at the 9th Annual Value Investor Conference (www.valueinvestorconference.com) hosted by the University of Nebraska Omaha, which is scheduled for May 3 and 4. If you use economic moats in your investment process and love value investing, I cant recommend these events highly enough. I guarantee you will leave with a wealth of useful insights and enjoy spending time with those that share a philosophy.
C Compass Minerals CMP

Exelon EXC Expeditors Intl of Washington EXPD General Electric GE
C Google GOOG
Martin Marietta Materials MLM
C Medtronic MDT C Merck & Co. MRK

Northern Trust NTRS Oracle ORCL Pfizer PFE
C Schlumberger SLB
St. Joe JOE Vulcan Materials VMC Western Union WU
C New addition for Q2.
Energy Transfer Equity ETE

Star Rating QQQQ Uncertainty Med. Fair Value ($) 54.00 Current Price ($) 40.05 Market Cap ($bil) 8.9 Dividend Yield (%) 6.2 Size of Moat Narrow Consider Buying ($) 37.80 Consider Selling ($) 72.90 1-Yr Hi/Low ($) 47.34/30.78 Stewardship P/E 29.0
Master Limited Partnerships (MLPs) and Qualified (IRA/401k) Accounts Another very common question I receive is about the tax treatment of MLPs. There are a number of MLPs on the wide-moat watchlist; pipeline firms tend to have wide moats. While returns on capital tend to be modest (low teens), the excess returns they do generate should last a very long time, often measured in decades. Ive owned a number of MLPs in the Hare over the years, including current holdings Energy Transfer Equity ETE, Enterprise Products Partners EPD, and Magellan Midstream MMP. This investment class also has increased in popularity in recent years given its generally high yields from distributions in a market parched for yield.
Regarding the tax consideration surrounding MLPs, these investments are best held in a taxable account. There are two main reasons for this. First, these investments are inherently tax advantaged. If you own these (or, say, muni bonds) in a qualified account, you forgo those advantages. Here is the source of the advantage for MLPs: These companies in most cases pay out in distributions far more than the income they generate that is considered taxable. The difference
I am also slated to make a couple of presentations at the MoneyShow in Las Vegas on May 1517. To receive your complimentary passes to the MoneyShow courtesy of Morningstar, please call 1-800-970-4355 and mention code 026640.
New Market Outlook Available Your subscription includes access to our quarterly market outlook. It has our economist Bob Johnsons view as well as insights and ideas from each of our sector teams. Please go to the StockInvestor website msi.morningstar.com to download the report.
Tortoise Portfolio
Performance and Transaction Summary
Morningstar Ratings & Fundamentals
Stock Name Star Rating Fair Val Uncert. Fair Current Consider Consider Value Price Buying Selling Size of Div Yield Stew. Moat (%) Grade
Portfolio Data
First # of Shares Purchase Change Total Cost Basis/ Share Total Cost CurrentGain/ Value Loss % % of Port
Abbott Laboratories ABT Lowes Companies LOW ExxonMobil XOM Exelon EXC Berkshire Hathaway BRK.B Pfizer PFE Novartis NVS
QQQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ
Low Med. Low Med.
70.00 34.00 91.00 54.00
60.97 31.09 83.88 38.23 79.76 22.05 54.72 54.57 60.13 64.92 70.82 74.10 38.34 57.16 29.11 43.89 42.93 66.81 16.55 65.35 15.60 86.33 41.17 32.56
56.00 23.80
87.50 45.90
Wide Wide Wide Wide Wide Wide Wide Wide Wide Wide Wide Wide Narrow Wide Wide Narrow Narrow Wide Narrow Wide Narrow Wide Narrow Narrow
3.4 1.8 2.2 4.0 0.0 4.0 4.5 2.9 2.6 3.5 2.9 0.0 1.4 1.4 3.7 2.7 4.1 3.1 1.9 3.2 0.0 2.7 3.1 2.8
C Z C X X X C Z C X X Z Z X Z X X V X
02-04-11 11-15-07 07-11-08 10-06-09 06-18-01 09-24-01 02-09-07 06-14-02 07-19-02 12-06-05 03-12-03 03-08-06 05-16-07 07-18-01 04-28-08 07-23-02 01-23-04 05-12-09 06-02-10 07-19-02 03-17-04 01-23-08 02-25-10
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
289 500 178 370 175 470 185 175 150 130 110 104 200 125 235 150 150 75 300 75 300 50 70 0
47.68 13778.65 17620.33 25.07 12534.40 15545.00 76.68 13648.17 14930.64 46.55 17224.65 14145.10 51.23 8965.58 13958.00
27.9 24.0 9.4 -17.9 55.7 -2.4 -3.7 96.0 26.8 9.1 113.8 128.1 1.9 94.0 0.3 43.9 102.4 31.4 35.6 81.9 -5.4 15.2 0.9 -14.0
8.5 7.5 7.2 6.8 6.7 5.0 4.9 4.6 4.3 4.1 3.7 3.7 3.7 3.4 3.3 3.2 3.1 2.4 2.4 2.4 2.3 2.1 1.4 0.0 3.6
72.80 113.75 37.80 72.90
Med. 100.00 Med. Low Med. Low Low Med. Med. Med. High Med. High Low Low High Low Med. Low Med. High 27.00 69.00 57.00 61.00 77.00 75.00 86.00 37.00 54.00 36.00 51.00 44.00 72.00 25.00 72.00 21.00 100.00 55.00 35.00
70.00 135.00 18.90 55.20 39.90 48.80 61.60 36.50 86.25 77.00 76.25 96.30
22.60 10622.05 10363.50 56.80 10508.61 10123.20 27.84 47.43 59.51 33.12 32.48 37.61 29.46 29.01 30.49 21.21 50.86 12.21 35.92 16.49 74.93 40.80 39.37 4872.72 7114.28 7736.38 3643.34 3377.93 7522.00 3682.50 6817.73 4574.16 3181.88 3814.74 3662.97 2694.25 4948.02 3746.49 2856.15 4330.61 9549.75 9019.50 8439.60 7790.20 7706.40 7668.00 7145.00 6840.85 6583.50 6439.50 5010.75 4965.00 4901.25 4680.00 4316.50 2881.90 0.00 7581.52
Automatic Data Prcssing ADP QQQ Wal-Mart Stores WMT Johnson & Johnson JNJ General Dynamics GD
QQQ QQQQ QQQ
52.50 101.30 60.20 116.10 25.90 32.40 25.20 30.60 35.20 57.60 15.00 57.60 14.70 49.95 83.70 48.60 79.10 55.00 90.00 38.80 90.00 28.40
Kinder Morgan Mngmnt KMR QQQQ Cintas CTAS American Express AXP Sysco SYY JPMorgan Chase JPM TransCanada TRP Procter & Gamble PG First American Financial FAF PepsiCo PEP CoreLogic CLGX 3M MMM
QQQ QQQ QQQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ
80.00 125.00 38.50 21.00 74.25 54.25
Molson Coors Brewing Co TAP QQQQ
Walgreen WAG
Cash Holdings
QQQ
10-11-07 -110
Tortoise Portfolio Total
2.9
Goal of the Tortoise The Tortoise Portfolio has two goals: to outperform the S&P 500 Index and to generate positive returns regardless of the broad market environment. Companies in this portfolio tend to be large, with moderate to low risk, and slow-growing. We aim for all the companies here to have an economic moat, preferably wide. Invest in the Tortoise ApproachThe Hassle-Free Way. Did you know that Morningstar Investment Services now offers a customizable portfolio patterned after StockInvestor s Tortoise portfolio? To learn more, call 1-866-765-0663.** Footnotes: Morningstar ratings and fundamentals as of 04-09-12. Portfolio inception date: 06-18-01. *March 7 to April 9. **Morningstar Investment Services, Inc. is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc.
208204.99
Cost basis includes commissions. Returns since inception are annualized and include dividends.
Legend: Shares added Shares sold C New holding UR Under Review NR Not Rated
April 2012
Tortoise Performance Breakdown

Cumulative Total Return Comparison (%) 150 120 90 60 30 0 -30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total Return (%) Tortoise Portfolio S&P 500 Index Top Five Sectors (%)
Index Level This Month * 12 Month Since Inception
p Tortoise Portfolio p S&P 500 Index
1382.2
2.5% 3.5%
7.7% 6.3%
7.6% 3.2%
Style Breakdown (%)
d Healthcare y Financial Srvcs o Energy s Cons Defensive p Industrials
23.2 16.3 14.5 14.3 13.1
Value Blend Grth
51 5 5
27 4 0
8 0 0
Lrg Med Sm
p51100 p2650 p1125 p010
Portfolio Roundup
by Paul Larson
From inception on June 18, 2001, through April 9, 2012, the Tortoise has produced a total return of 119.5% compared to 40.3% for the S&P 500 Index and 40.7% for the average large-cap blend mutual fund. Total returns include dividends for both the Tortoise and the benchmarks. During the last 12 months, the Tortoise has outperformed 89.4% of large-cap blend funds and is still beating 99.4% of them since inception. The Tortoise did not have the best month in March, with the S&P 500 jumping ahead 3.5% since last issue. Im not worried; the Tortoise still posted a positive absolute return, and I continue to expect our periods of outperformance will come in bear markets, not what weve experienced in recent months. I made just one trade in the Tortoise this month, closing out Walgreen WAG on April 3 at $33.99, realizing a 14% capital loss on a position initiated in 2007. The reason I sold Walgreen dovetails with the reason I bought Express Scripts ESRX in the Hare. Namely, the recent spat between the two companies shows that the balance of power lies with the pharmacy benefit managers and their clients (that care more about lowering overall health-care costs) than it does with the pharmacies (that offer convenience). There were four fair value estimate changes since last issueone reduction and three increases. We trimmed Exelon EXC by $4 per share following its merger with Constellation Energy, and we also cut ExxonMobil XOM by $8 per share. On the other side
of the coin, we raised Kinder Morgan by $13 per share and Berkshire Hathaway BRK.B by $11. Taking all of these changes into consideration, the estimated intrinsic value (shares held times fair value) of the Tortoise is now $240,583, a 0.5% increase from $239,345 last month. This increase is because of the net increase in the fair value estimates as well as dividends that have accrued. The Tortoise now trades at a 13.5% discount to its estimated fair value, a slight decrease from the 15.1% seen last month, largely because of stock prices that increased more than the net increase in the fair value estimates. The dollar-weighted average star rating is also now 3.65, a moderate decrease from 3.79 last month, thanks again to recent price appreciation. While there are a large number of mildly undervalued stocks available today, the pickings are still pretty slim regarding table-pounding opportunities.
Contact Paul Larson at paul_larson@morningstar.com. Paul Larson personally owns shares of the following Tortoise stocks: ABT, AXP, BRK.B, CLGX, CTAS, EXC, FAF, GD, JNJ, JPM, KMR, LOW, MMM, NVS, PFE, PG, SYY, TAP, TRP, WAG, WMT, XOM. Paul has increased his position in the stock in the past month. Paul has reduced his position in the stock in the past month. 2012 Morningstar, Inc. All rights reserved. Any opinions, recommendations, or information contained herein: (i) is for educational purposes only; (ii) is not guaranteed to be accurate, complete, or timely; (iii) has not been tailored to suit any particular persons portfolio or holdings; and (iv) should not be construed as investment advice of any kind. Neither Morningstar nor any of its agents shall have any liability with respect to such opinions, recommendations, or information. Morningstar has not given its consent to be deemed an expert under the federal Securities Act of 1933. Past performance is no guarantee of future results. Before making any investment, consult with your financial advisor. Morningstar employees may have holdings in the stocks recommended.
Hare Portfolio
Performance and Transaction Summary
Morningstar Ratings & Fundamentals
Stock Name Star Rating Fair Val Uncert. Fair Current Consider Consider Value Price Buying Selling Size of Div Yield Stew. Moat (%) Grade
Portfolio Data
First # of Shares Purchase Change Total Cost Basis/ Share Total Cost CurrentGain/ Value Loss % % of Port
St. Joe JOE Compass Minerals CMP MasterCard MA Energy Transfer Equity ETE
QQQQ QQQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQQ QQQQ QQQ
High Med. High Med. Med. Med. Med. High Med. High High High Med.
26.00 93.00
17.33 70.65
15.60
40.30
Wide Wide Wide Narrow Wide Wide Wide Wide Wide Narrow Narrow Wide Wide Wide Wide Wide Narrow Wide Narrow Wide Wide Wide Wide Narrow Narrow Narrow
0.0 2.8 0.3 6.2 0.0 0.0 4.1 0.0 0.0 1.2 4.5 3.1 1.1 0.7 0.6 0.8 0.0 2.3 0.0 4.6 0.1 1.6 2.6 4.9 1.5 0.0 2.4
C Z Z C C Z X Z C C X X X Z X X
06-08-10 08-18-05 05-30-06 10-13-10
0 1050 0 0 0 200 30 325 220 330 350 17 250 300 110 30 125 280 100 250 200 365 400 75 120 250 150 75 200 443
22.56 23683.38 18196.50 25.40 44.00 5080.74 14130.00 1319.99 13178.70
-23.2 178.1 898.4 5.6 -1.1 9.7 8.4 18.9 108.7 52.7 -0.5 21.1 27.4 -29.7 22.2 7.5 122.8 -0.5 -23.4 99.5 -52.0 -4.2 18.2 116.0 -42.1 -69.1
8.1 6.3 5.9 5.8 5.5 5.3 4.8 4.8 4.5 4.4 4.3 3.8 3.6 3.5 3.5 3.2 2.9 2.9 2.7 2.4 2.2 2.2 2.1 1.7 1.5 1.4 0.8
65.10 125.60
394.00 439.29 236.40 610.70 54.00 73.00 42.00 38.00 40.05 56.32 36.30 31.05 37.80 51.10 29.40 26.60 72.90 98.55 56.70 51.30
37.94 12331.44 13016.25 56.95 12527.99 12390.40 33.08 10917.98 11979.00 28.65 10026.38 10867.50 530.59 19.43 21.39 88.72 235.13 50.34 9019.99 10724.28 4857.50 10135.00 6416.67 9759.29 7053.91 6292.36 9795.00 9711.90 8539.80 8018.75 7910.00 7821.00 7252.50 6556.00 6442.25 6120.00 5361.75 5042.40 4990.00 4665.00 3768.00 3280.00 3211.75 1691.27 224795.00
C Express Scripts ESRX

eBay EBAY Paychex PAYX Google GOOG Autodesk ADSK
04-03-12 +220 04-20-06 06-24-02 07-14-11 11-18-08 0 0 0 0
780.00 630.84 468.00 1209.00 39.00 34.00 130.00 40.54 32.65 88.29 27.30 20.40 52.70 52.70
Discover Financial DFS

Strayer Education STRA CME Group CME Zimmer Holdings ZMH
08-08-07 -200 10-19-11 01-13-12 11-17-10 01-06-06 10-18-11 01-13-12 0 0 0 0 0 0
78.00 201.50
364.00 284.66 218.40 564.20 71.00 64.15 28.25 78.21 29.01 32.78 17.65 15.30 71.49 42.02 19.96 31.10 50.24 16.40 7.25 49.70 13.00 95.90 45.50
International Speedway ISCA QQQ National Oilwell Varco NOV Oracle Corp ORCL
V.High 26.00 Med. Med. High 97.00 38.00 33.00 29.00 29.00 68.00 63.00 26.00 35.00 55.00 19.00
40.18 11251.49 64.03 26.99 14.71 17.74 19.97 35.83 6402.94 6747.25 2942.08 6474.63 7989.96 2687.24
QQQQ QQQQ QQQ
67.90 131.00 26.60 19.80 20.30 17.40 54.40 44.10 18.20 24.50 38.50 11.40 5.50 51.30 51.20 39.20 44.95 85.00 85.10 35.10 47.25 74.25 29.45 19.30
CarMax KMX
Western Union WU Cloud Peak Energy CLD Magellan Midstream MMP Vulcan Materials VMC Cisco Systems CSCO Microsoft MSFT Enterprise Products EPD International Game Tech IGT
01-20-04 -150 10-02-06 03-15-11 04-28-08 10-03-07 01-21-11 08-22-05 05-29-07 06-27-05 12-11-06 0 0 0 0 0 0 0 0 +17
QQQQQ Med. QQQQQ High QQ Low
QQQQQ Med. QQQQ QQQQ QQQ QQQ QQQQ Med. Med. Med. High
87.53 10503.68 20.84 26.30 23.26 28.35 5209.98 3945.63 1744.64 5669.00
Cemex CX
Cash Holdings
V.High 11.00
23.48 10402.92
Hare Portfolio Total
Legend: Shares added Shares sold C New holding UR Under Review NR Not Rated
Goal of the Hare The Hare Portfolio has two goals: to outperform the S&P 500 Index, and to generate positive returns regardless of the broad market environment. Companies in this portfolio tend to either be small or fast-growing, or have a high risk/return proposition. We aim for all companies here to have an economic moat, preferably wide. Invest in the Hare ApproachThe Hassle-Free Way. Did you know that Morningstar Investment Services now offers a customizable portfolio patterned after StockInvestor s Hare portfolio? To learn more, call 1-866-765-0663.**
Footnotes: Morningstar ratings and fundamentals as of 04-09-12. Portfolio inception date: 06-18-01. *March 7 to April 9. ** Morningstar Investment Services, Inc. is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc.
Cost basis includes commissions. Returns since inception are annualized and include dividends. Master limited partnership units have different tax characteristics than common stocks and may not be suitable for tax-deferred accounts such as IRAs. Please consult your tax advisor before buying.
April 2012
Hare Performance Breakdown

Cumulative Total Return Comparison (%) 150 120 90 60 30 0 -30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total Return (%) Hare Portfolio S&P 500 Index Top Five Sectors (%)
Index Level This Month * 12 Month Since Inception
p Hare Portfolio p S&P 500 Index
1382.2
1.9% 3.5%
2.1% 6.3%
6.9% 3.2%
Style Breakdown (%)
a Technology y Financial Srvcs o Energy r Basic Mtrls. t Cons Cyclical
18.4 17.0 13.4 12.8 11.9
Value Blend Grth
4 2 3
10 20 22
30 Lrg 9 0
Med Sm
p51100 p2650 p1125 p010
Portfolio Roundup
by Paul Larson
From inception on June 18, 2001, through April 9, 2012, the Hare has produced a total return of 105.3% compared to 40.3% for the S&P 500 Index and 40.5% for the average large-cap growth mutual fund. Total returns include dividends for both the Hare and the benchmarks. During the last 12 months, the Hare has outperformed just 22.1% of large-cap growth funds but is still beating 98.3% of them since inception. A couple of stocks in the Hare had a relatively tough time since last issue, namely Strayer STRA (off 8.5%) and Cloud Peak CLD (off 9.1%), the same stocks that were drags on performance in February. On the other hand, IGT IGT, International Speedway ISCA, and Autodesk ADSK all appreciated more than 10%. There were a number of fair value estimate changes. On one hand, we trimmed Oracle ORCL by $3. We also published a new $54 fair value estimate for Energy Transfer Equity ETE, down $4 from before we put the stock under review. On the other hand, we added $36 to the Google GOOG fair value estimate, and also added $4 to Discover DFS. I made three trades in the Hare since last issue, all on April 3. I trimmed Discover (200 shares at $33.37) and CarMax KMX (150 shares at $34.70) to make the position sizes more accurately reflect the remaining opportunity in these names. I then purchased a new position, buying 220 shares of Express Scripts ESRX at $56.90. Read further into this issue for much more on Express Scripts.
Following all of these changes, the estimated intrinsic value of the Hare is now up to $279,959, a significant 3.6% jump from last issue. The net fair value estimate increases as well as the trades were both responsible for the increase in overall estimated value. The Hare now trades at a 19.7% discount to this estimated fair value, slightly better than the 18.4% discount seen last issue, thanks largely to the fair value estimate increases that were of greater magnitude than the market price increases. The dollar-weighted average star rating is now 3.73, up slightly from 3.70 last issue.
Contact Paul Larson at paul_larson@morningstar.com. Paul Larson personally owns shares of the following Hare stocks: ADSK, CLD, CME, CMP, CSCO, CX, DFS, EBAY, EPD, ESRX, ETE, GOOG, IGT, ISCA, JOE, KMX, MA, MMP, MSFT, NOV, ORCL, PAYX, STRA, VMC, WU, ZMH. Paul has increased his position in the stock in the past month. Paul has reduced his position in the stock in the past month. 2012 Morningstar, Inc. All rights reserved. Any opinions, recommendations, or information contained herein: (i) is for educational purposes only; (ii) is not guaranteed to be accurate, complete, or timely; (iii) has not been tailored to suit any particular persons portfolio or holdings; and (iv) should not be construed as investment advice of any kind. Neither Morningstar nor any of its agents shall have any liability with respect to such opinions, recommendations, or information. Morningstar has not given its consent to be deemed an expert under the federal Securities Act of 1933. Past performance is no guarantee of future results. Before making any investment, consult with your financial advisor. Morningstar employees may have holdings in the stocks recommended.
Pauls Favorites for New Money
Todays Best Ideas Here is a new monthly feature in which Paul highlights some of the stocks from the Tortoise and Hare that look the absolute most attractive to him today. The companies are ranked here by their attractiveness. Data as of April 9, 2012.
e Western Union WU | QQQQQ

Fair Value Est.
$29.00
Current Price
$17.65
The risks the company faces from technological disruption are overblown as the technical hurdles to connect one countrys telecom and payment infrastructure to another countrys are immense. Plus,
Western Union is in a very good position to utilize whatever the next payment standard is. Meanwhile the stock trades at just 9 times earnings and with a free cash flow yield near 10%.
r St. Joe JOE | QQQQ

Fair Value Est.
$26.00
Current Price
$17.33
St. Joe moves down the list from the top spot after appreciating since last month. Progress has been made developing the area around the new Panama City airport and Port of St. Joe. Meanwhile, the stock continues to be priced at dirt-cheap levels. The implied valuation on the companys land is near a mere $2,500 per
acre, dramatically undervaluing the significant number of acres around the airport and along the beach. Meanwhile, limiting the downside, the company has just $54 million in debt balanced against $186 million in cash and Treasuries.
t Exelon EXC | QQQQ

Fair Value Est.
$54.00
Current Price
$38.23
Owning the largest nuclear power plant fleet in the country, Exelon is a low-cost generator of electricity. While exceptionally low natural gas prices have been a headwind thus far, a major tailwind is emerging in the form of tightened EPA emissions standards for
its competitors that stand to raise the price of electricity. While we wait for this positive catalyst to unfold, we can collect a juicy 5.5% yield on the shares (adjusted for the Constellation merger).
u Vulcan Materials VMC | QQQQQ

Fair Value Est.
$63.00
Current Price
$42.02
This firm has suffered through terrible cyclical headwinds during the last four years, and those headwinds should become tailwinds sooner than later. Home construction activity should normalize to roughly match new household formation. Not
only will recovering volumes help revive revenue, but there is also significant operating leverage built in as currently underutilized assets become more efficiently used. The Martin Marietta MLM merger proposal looks inferior.
i Energy Transfer Equity ETE | QQQQ

Fair Value Est.
$54.00
Current Price
$40.05
We recently published a new $54 fair value estimate. ETE is like an asset manager in that it can grow its earnings by increasing the profits from its underlying businesses or by managing more assets.
Both are likely to occur. The merger with Southern Union is likely to keep distribution growth from happening for a couple of quarters, but the current yield of 6.1% is relatively rich.
o Express Scripts ESRX | QQQQ

Fair Value Est.
$73.00
Current Price
$56.32
The newest addition to the Wide-Moat Watchlist is also now in the Hare portfolio. The merger with Medco created a wide-moat firm. Meanwhile, the company trades at just 13 times forward consensus
EPS estimates despite having the secular tailwinds of an aging population (more overall prescription drug use), more generic drugs available, and societys need to lower overall health-care spending.
p Compass Minerals CMP | QQQQ

Fair Value Est.
$93.00
Current Price
$70.65
An exceptionally warm winter has opened up an opportunity to buy one of the relatively few wide-moat firms with a positive moat trend. While near-term results from its highway salt business should be very weak, the long-term competitive advantages are
only growing stronger as the company increases capacity and reduces unit costs at its two flagship facilitiesGoderich and Great Salt Lake. See Page 22 for more.
a CME Group CME | QQQQ

Fair Value
$364.00
Current Price
$284.66
The company has a wide moat thanks to the network effect, which is one of the most potent sources of competitive advantage. Reflecting the moat, this company is exceptionally profitable, as operating margins routinely top 80% and aftertax margins
approach 40%. We can buy the shares at just 14 times 2012 estimated earnings. Meanwhile, CME just bumped its dividend (new yield: 3.1%) and initiated a special annual dividend ($3 per share for this year).
April 2012
Wide-Moat Watchlist
More Wide-Moat Watchlist Information! If you wish to read more about any of the companies on the Wide-Moat Watchlist, please visit msi.morningstar.com. We have made available the analyst reports for each of the companies on the watchlist.
Company Name
Star Rating
Fair ValueUncert.
FairValue*
Current ConsiderPrice Buying
Moat Stew. Trend Grade
Yield (%)
P/E
Portfolio
Comments
3M MMM
Abbott Laboratories ABT Adobe Systems ADBE Advisory Board ABCO Allergan AGN AllianceBernstein AB Altria MO Amazon.com AMZN Ambev ABV American Express AXP Amgen AMGN Anheuser-Busch InBev BUD Applied Materials AMAT AstraZeneca AZN Autodesk ADSK Automatic Data Prcssng ADP Bank of New York Mellon BK Berkshire Hathaway BRK.A Berkshire Hathaway BRK.B Biogen BIIB BlackRock BLK
QQQQ QQQQ QQQ Q QQQ QQQ QQ QQQ QQQ QQQ QQQ QQQ
Low Low Med. Med. Med. High Med. High High High Med. High
100.00 70.00 33.00 58.00
86.33 60.97 33.22 86.82
80.00 56.00 23.10 40.60 64.40 9.00 16.80 135.00 21.60 32.40 47.60 42.00 13.30 37.10 27.30 39.90 21.00 105000 70.00 74.90 151.20
k k l k l l k k k k l l k l k k k k k k j
X C C C
2.7 14.5 3.4 20.2 0.0 21.2 0.0 66.7 0.2 31.3 3.3
a a d d d d d d b a d b d d c a b b a d d
Innovation basis of moat. Two thirds of sales outside U.S. CEO Buckley stepping down, replaced by Inge Thulin. Diversified firm with patent-protected drugs and a leading diagnostics operation. Splitting into two. Acrobat and Photoshop are industry standards. HTML5 gradually displacing Flash. Similar to Corp. Executive Board but focused on health-care and education sectors. Sensitive to economic conditions. Specialty pharmaceutical company that derives more than one third of its revenue from Botox. Top-tier asset manager. Conditions in capital markets can both help and hurt results. Focused on U.S. tobacco market. Marketing ban raises barriers to entry. High taxes actually yield pricing power. Head and shoulders above competition in online retailing. Increasing competition with Apple and Google. Dominates Brazil beer market; strong in other markets, soft drinks. Currency volatility with Brazilian real has moderated. Large payment network combined with lending operation. Loan losses have continued to fall. Top-shelf biotech. Anemia drugs contending with reimbursement pressures and biosimilars. Controls 25% of global beer market. Cut overhead expenses and marketing to help pay for merger. Semiconductor equipment standard-bearer. Technological lead and broad product portfolio. Very cyclical. Number one in gastrointestinal (ulcer) drugs. Hefty late-stage pipeline. Expanding biologic presence. AutoCAD software is close to a standard and has very high switching costs. Recovery in demand continues. Payroll processing leader. Minimal client turnover. Low interest rates hurt earnings, as does anemic labor market. Mammoth in asset custody and management. Benefits from large scale. Featured this issue. Buffett still going strong. Bought big stake in IBM. Started buying back shares. Woodstock for Capitalists around corner. B-share value is now worth 1/1500th of A-share. Investments during crisis paid off handsomely. History could be repeating. Multiple-sclerosis leader with two leading treatments, Avonex and Rituxan. Tysabri has good efficacy and potential. After several mergers, now the largest asset manager in the world, with more than $3 trillion under management.
92.00 ] 93.94 15.00 24.00 225.00 36.00 54.00 68.00 70.00 19.00 53.00 39.00 57.00 35.00 14.74 31.16 191.87 40.83 57.16 67.02 70.67 11.86 44.05 40.54 54.57 23.34
V C X
5.3 19.0 0.0
3.8 28.4 1.4 14.0 2.2 16.6 1.9 23.7 3.0 10.2 8.9 6.0
X V
QQQQQ Med. QQQQ QQQ QQQ QQQQ QQQQ QQQQ QQ QQQ

Med. Med. Med. High Med. Med. Med. Med.
C C C X C

0.0 33.2 2.9 20.2 2.2 11.5 0.0 19.3 0.0 18.3 0.0 25.1 3.0 16.4
150000 ] 119700 100.00 ] 79.76 107.00 216.00 126.61 202.74
C C
Stew. Grade Morningstar Stewardship Grade C New Addition a Tortoise Holding b Potential Tortoise Holding c Hare Holding d Potential Hare Holding
10
Wide-Moat Watchlist (continued)

Company Name Star Rating Fair Value Uncert. Fair Value* Current Price Consider Buying Moat Stew. Trend Grade Yield (%) P/E Portfolio Comments
Boardwalk Pipeline Prtnrs BWP Bristol-Myers Squibb BMY British Amer Tbco BTI Buckeye Partners LP BPL Campbell Soup CPB Capella Education CPLA Caterpillar CAT CH Robinson Worldwide CHRW Cisco Systems CSCO CME Group CME Coca-Cola KO Colgate-Palmolive CL Comcast CMCSA Compass Minerals CMP Corporate Executive Board EXBD CoStar Group CSGP Dassault Systemes DASTY Diageo DEO Dun & Bradstreet DNB Eaton Vance EV eBay EBAY Eli Lilly LLY Equifax EFX Exelon EXC Expeditors International EXPD
QQQQ QQ QQ QQQQ QQQQ

UR
Low Med. Med. Low Low High High Med. Med. High Low Low Med. Med. Med. High Med. Med. Med. High Med. Med. Med. Med. High
29.00 30.00 82.00 67.00 36.00 UR 111.00 73.00 26.00 364.00 69.00 92.00 30.00 93.00 38.00 64.00 72.00 79.00 85.00 28.00 42.00 40.00 41.00 54.00 61.00
26.85 33.04 101.07 59.88 33.24 34.68 103.57 64.00 19.96 284.66 72.87 97.04 29.33 70.65 40.39 68.49 89.59 96.27 81.55 27.45 36.30 39.72 43.21 38.23 45.85
23.20 21.00 57.40 53.60 28.80 UR 66.60 51.10 18.20 218.40 55.20 73.60 21.00 65.10 26.60 38.40 50.40 55.30 59.50 16.80 29.40 28.00 28.70 37.80 36.60
l l k k k k l k l k k k l j l j k k k k k l k l k
C C X X C X X X X X X X C
7.9 24.6 4.1 15.3 5.5 20.4 6.9 50.0 3.5 14.1 0.0 10.2 1.8 14.0 2.1 24.4 1.6 15.6 3.1 10.5 2.8 19.8 2.6 19.6 2.2 19.6 2.8 15.9 1.7 24.2 0.0
d d d d b d b d c c b b d c d d d b d d c d d a d
Natural gas pipeline company that is well-positioned for growth. Large cost overruns on projects in recent years. Major patent losses in 2011 offset by strong pipeline. Focusing on core pharmaceutical business. Cash-cow firm. Successfully taking cigarettes into emerging markets. High taxes yield pricing power. Pipelines tend to have moats because of their geographic advantage. Bought general partner. Buying storage assets. Strong brands and market share in excess of 70%. Very defensive business. Volumes weak recently. High amount of scrutiny around for-profit education lately. We are highly likely to downgrade moat rating. Sensitive to economic cycles, so results may be bumpy. Company benefiting from commodity boom. Leading truck brokerage with an interesting business model. Benefits from network effect and scale advantages. Still 800-pound gorilla of networking. Cash flow and hoard provide buffer. Restructuring effort starting to bear fruit. Largest futures exchange in the world benefits from network effect. MF Global scandal has hit shares. Bought in Hare. Extremely long-lived moat. Bought bottlers in North America in an attempt to give flexibility with new products. Has 44% worldwide market share in toothpaste. Large overseas exposure. About 75% of sales outside U.S. Unmatched ability to offer multiple services via one connection. Bought NBC Universal from GE. Low-cost producer of salt and sulfate of potash fertilizer. Weather is leading to near-term earnings weakness. Collects and sells best-practices intelligence. Growth stopped in recession, has now stabilized. Controls info critical to commercial real estate industry. Databases very costly for competitors to replicate. French product-life management and design software firm, focused on higher-end products. Significant switching costs. Largest spirits producer in the world. Strong brands and exclusive distribution that competitors cant match. Database model characterized by high barriers to entry and low incremental costs. Money-management firm with below-average customer turnover. Industry problems have stung less here. Classic network effect. PayPal going very strong, marketplace growing again. GSI purchase working well thus far. Leading maker of mental-health drugs. Steep patent losses in coming years offset by decent pipeline. Credit bureaus operate in an oligopoly. Like other database firms, enjoys low costs and high barriers to entry. Large fleet of nuclear plants gives cost advantage. Low nat. gas prices sting. Constellation deal has been completed. Freight consolidation business model benefits from network effect, scale. Outstanding management.
QQQ QQQQ QQQQ QQQQ QQ QQ QQQ QQQQ QQQ QQQ QQ QQ QQQ QQQ QQQQ QQQ QQQ QQQQ QQQQ
C X C X X C Z C C
0.7 30.0 2.2 22.9 1.9 15.5 2.8 14.4 0.0 14.7 4.9 10.2 1.7 23.1 4.0 10.2 1.1 25.6
*Fair value based on Morningstar analyst estimates. Data through April 9, 2012. UR Under Review ] Fair Value Increased [ Fair Value Decreased j Positive k Stable l Negative
April 2012
11

C Express Scripts ESRX

ExxonMobil XOM Fastenal FAST Federated Investors FII Fiserv FISV Forward Air FWRD Franklin Resources BEN General Dynamics GD General Electric GE GlaxoSmithKline GSK Google GOOG Graco GGG Grupo Aero del Norte OMAB Grupo Aero Pacifico PAC Grupo Aero del Sureste ASR Grupo Televisa TV Harley-Davidson HOG Hershey Company HSY Home Depot HD IBM IBM Imperial Tobacco Group ITYBY Intel INTC IntercontinentalExchange ICE International Speedway ISCA Intuit INTU
QQQQ QQQQ Q QQ QQQ QQ QQQQ QQQ QQQQ QQQ QQQQ QQ QQQ QQQ QQ QQQQ QQ QQ QQQ QQ QQ QQQ QQQ QQQ QQ
Med. Low Med. High Med. Med. Med. Med. Med. Med. High Med. High High High Med. High Med. Med. Low High Med. High V.High Med.
73.00 ] 56.32 91.00 34.00 19.00 69.00 32.00 145.00 75.00 25.00 49.00 780.00 48.00 16.00 43.00 62.00 26.00 39.00 48.00 49.00 182.00 69.00 26.00 145.00 26.00 46.00 83.88 51.58 22.42 68.77 35.41 124.81 70.82 19.20 45.02 630.84 53.54 15.87 37.35 71.97 20.99 46.92 59.81 50.58 204.94 78.90 27.76 135.84 28.25 59.11
51.10 72.80 23.80 11.40 48.30 22.40 101.50 52.50 17.50 34.30 468.00 33.60 9.60 25.80 37.20 18.20 23.40 33.60 34.30 145.60 41.40 18.20 87.00 13.00 32.20
k l k k k l k k l l k k k k l k l l k k k k k k k
0.0 22.3 2.2 10.0 1.3 42.6 4.3 15.5 0.0 20.2 0.8 22.1 0.9 14.5 2.9 10.2 3.5 15.6 5.9 13.8 0.0 21.2 1.7 23.1 3.3 18.6 1.8 17.6 3.6 17.6 0.7 24.9 1.3 20.1 2.5 21.8 2.3 20.5 1.5 15.7 5.4 14.1 3.0 11.6 0.0 19.7 0.7 20.5 1.0 26.7
c a d d d d d a b b c d d d d d b b b d d d d c d
New addition to the watchlist following merger with Medco. Roughly 40% share. Bought in Hare. Highlighted this issue. Largest, most efficient oil company. Recent rise in oil prices and refining margins should lead to near-term profit spike. Distributor focused on fasteners. Past Morningstar CEO of the Year winner at helm. Great execution, but a pricey stock. Major player in the money-management industry. Potential reforms to money market funds a major uncertainty. The largest bank-processing firm. Enjoys significant customer-switching costs as evidenced by 99% renewal rate. Has no rival with the same scale and service quality because of its wide transport network. Owns some of the best-established brand names in the mutual fund industry. Defense firm focused on cash generation. Allocates capital with discipline. Federal budget constraints a headwind. Leader in large number of industries. Firm survived capital markets freeze and recession. Reducing GECS exposure. Strong drug portfolio despite recent negative safety data on Avandia. Well-positioned in vaccines. Majority share of search, expanding into other areas. Bought Motorola for its patents. Rivalry with Apple increasing. Dominant in several niche markets, such as paint sprayers. Benefits from efficient scale phenomenon. Airport monopoly in central and northern Mexico. Benefits from efficient scale. Airport monopoly in west-central Mexico, including Guadalajara. Yet another efficient-scale situation. Third major owner of Mexican airport concessions. Completed third terminal at Cancun airport. Dominates Mexican broadcast media industry, especially programming. Among the strongest and most profitable brands. Demographics represent significant headwind. Largest candymaker in the U.S. with a 30% share. Trust still controls in excess of 80% of voting power. Maintained profitability in cyclical trough. Same-store sales quite strong recently thanks to warm winter weather. Bread and butter is servicing complicated IT infrastructure at core of most firms. Berkshire Hathaway bought 5% stake. Fourth-largest tobacco firm in world. Cash cow. Nearly 50% share in U.K. market. Semiconductor behemoth. Scale advantages. Antitrust issues have resurfaced overseas. Electronic exchange focused on energy futures. Benefits from network effect. Regulation change still a risk. Strong ties to NASCAR sanctioning body and also benefits from efficient scale. Casino opened in Kansas. Dominates small-business accounting, tax-prep, and personal finance software. Large switching costs.
Z C C

Z X X C X V C V C X C X X X X X C X
12

Intuitive Surgical ISRG Jack Henry & Associates JKHY John Wiley & Sons JW.A Johnson & Johnson JNJ Kinder Morgan KMI Kinder Morgan Energy Ptnr KMP
Q QQ QQQ QQQQ QQQ QQQ
Med. Med. Med. Low Med. Med. Med. Med. Med. High Med. Med. High Med. Low Med. High Med. Low Low High Med. Med. Med. Med.
343.00
539.07
240.10 21.00 32.20 61.60 26.60 60.20 60.20 35.70 37.10 18.00 25.20 49.70 72.00 23.80 54.40 82.60 236.40 18.90 UR 80.00 24.00 32.20 32.20 24.50 58.10
j k l k k k k k k l k k k k k k l l k k l k l l k
0.0 43.7 1.4 20.0 1.7 14.9 3.5 18.6 3.2 57.8 5.6 0.0
d d d a b b a d d d d b d a c d c d b b d b b c d
Currently has monopoly position in robotic surgery. One of the widest moats in all of health care, if not entire market. Bank processing firm similar to Fiserv, but focused on smaller banks. Enjoys exceptionally high customer switching costs. Publisher enjoys high returns on capital. Science and technical franchises especially lucrative. Diversified health-care giant. Reform legislation mild net positive. Recalls hurt results. Exiting stent business. Structured as regular corporation. Owns general partner of KMP. Announced blockbuster merger with El Paso. Large master limited partnership focused on energy transport and storage. KMI purchase should lead to many dropdowns. Different share class of KMP without MLP tax complexity. Pays in shares instead of cash. Long-time holding in Tortoise. Still dominates certain niches of highly cyclical semiconductor supply industry. Logistics firm very similar to C.H. Robinson, benefiting from network effect. Now among the largest asset managers on the planet. Still smarting from damage done during financial crisis. Among semiconductor companies, lower-risk. Has a concentrated amount of industrys design talent. Defense market now highly consolidated. Sole provider of many key defense items, particularly in aerospace. Dominates menthol tobacco category. FDA scrutinized menthol products, but we think outright ban is unlikely. Same-store sales bounced thanks to warm weather. Overall housing market is showing signs of life. Pipelines and energy-storage assets. Annuitylike with inflation hedge. Great business, but units are not cheap. High transport costs gives geographic advantage. Volumes off significantly, pricing holding up. Bid for Vulcan. Benefits from cash-to-plastic shift. Federal Reserve diluted Dodd-Frank debit card rules. Positive operating leverage. Leading analog chipmaker with concentration of industrys engineering talent. More than 2 times larger than its next competitor in spices and seasonings. Very stable business, but not exactly cheap. Brand and scale make Golden Arches unique. Same-store sales holding up very well in anemic economy. Splitting publishing and S&P ratings businesses. Dodd-Frank implementation a wild card. Few friends in D.C. today. Largest medical equipment maker with wide product portfolio and technological lead. Featured this issue. Patents on pharmaceutical products basis for moat. Bought Schering-Plough in bid to gain scale, diversity. Windows is flat, but Office still selling well and growing. Raised cash for unknown reason. Bought Skype. Large technological lead in seeds. Roundup facing pricing pressure from generics. Antitrust issues surfacing.
30.00 ] 33.23 46.00 77.00 38.00 86.00 86.00 51.00 53.00 46.86 64.92 39.38 82.22 74.10 53.28 57.38
X C

Kinder Morgan Management KMR QQQQ KLA-Tencor KLAC Landstar System LSTR Legg Mason LM Linear Technology LLTC Lockheed Martin LMT Lorillard LO Lowes LOW Magellan Midstream MMP Martin Marietta MLM MasterCard MA
QQQ QQQ QQQ QQQ QQ QQQ QQQ QQ QQQQ QQQ
2.6 12.0 0.4 24.1 1.2 18.2 3.1 15.1 4.5 11.3 4.6 17.1 1.8 21.7 4.6 19.5 1.9 49.5 0.3 29.6 3.2 17.4 2.3 20.7 2.8 18.8 2.1 17.7 2.6 12.1 4.3 19.2 2.6 11.3 1.6 21.7
30.00 ] 26.27 36.00 71.00 120.00 34.00 68.00 118.00 394.00 27.00 UR 100.00 40.00 46.00 46.00 35.00 32.05 88.74 136.40 31.09 71.49 83.83 439.29 27.78 53.87 98.88 48.69 37.75 38.73 31.10
X Z X
C X

Maxim Integrated Products MXIM QQQ McCormick MKC McDonalds MCD McGraw-Hill Companies MHP Medtronic MDT Merck MRK Microsoft MSFT Monsanto Company MON
UR
QQQ QQ QQQQ QQQQ QQQQ QQQ
C Z
83.00 ] 76.59
April 2012
13

Moodys MCO MSCI MSCI National Oilwell Varco NOV Nike NKE Northern Trust NTRS Novartis NVS Novo Nordisk NVO ONEOK Partners OKS Oracle ORCL Paychex PAYX PepsiCo PEP Pfizer PFE Philip Morris PM Potash Corp of Saskatchew POT Procter & Gamble PG Qualcomm QCOM Ritchie Bros. Auctioneers RBA Roche Holding RHHBY SABMiller SBMRY Sanofi-Aventis SNY Schlumberger SLB SEI Investments SEIC Spectra Energy SE Spectra Energy Partners SEP St. Joe JOE
QQ QQQ QQQQ QQQ QQQQ QQQQ QQ QQ QQQQ QQQQ QQQQ QQQQ

UR
High Med. Med. Med. High Low Med. Med. Med. Med. Low Med. Med. High Low Med. Med. Med. Med. Med. Med. Med. Low Low High
35.00 41.00 97.00
41.60 36.76 78.21
21.00 28.70 67.90 70.00 34.80 55.20 84.00 32.20 26.60 26.60 57.60 18.90 UR 33.60 57.60 43.40 16.80 36.40 23.10 32.20 65.80 13.30 25.60 24.80 15.60
l k k k k k k k k k k l k k k l j k k k k l k k k
C C C
1.5 16.7 0.0 26.0 0.6 16.6 1.3 23.0
b d c d b a d d c c a a d d a d d b b b d d b b c
Pressured by mortgage and structured-finance mess. Could be disrupted by implementation of Dodd-Frank legislation. Owns numerous equity indexes, some of which are industry standards. Licenses provide high-margin earnings stream. A 2011 addition to watchlist after we upgraded moat rating. Dominant share in drilling rig equipment. Bought in Hare. Strong brands and global scale translate to high returns on capital. Margins are a current concern. Relatively conservative company. Focused on large institutions and the wealthy. Unique in that patented pharmaceutical business married to large generics business. Swiss currency playing havoc. Leader in diabetes treatments. Rivals also attracted to growing diabetes market. Like most pipeline firms, has very long advantage duration and is relatively low-risk. Low nat. gas prices do not hurt. Maintains enviable position in the database market. Sun Micro integration proceeding. Focused on small businesses. High customer switching costs. HR services still growing faster than core payroll business. Dominant salty-snacks company. Boasts 16 brands with more than $1 billion in sales. Bought some of its bottlers. Lipitor patent has expired, but firm should still earn more than $2 per share in 2012. Stock is no longer a table-pounder. Tobacco industry enjoys huge barriers to entry, and high taxes actually lead to pricing power. Largest fertilizer producer in world and part of cartel. Cash bid by BHP Billiton killed by Canadian regulators. Has 24 brands that generate more than $1 billion in sales annually. Reached new deal to sell Pringles. Intellectual property powerhouse in wireless industry. Patents provide very high-margin revenue stream. Industrial equipment auctioneer based in Canada benefits from network effect. We recently lowered our fair value est. Largest biotech company in the world, with relatively large number of biologics. Has 15% of worldwide beer market. Near monopoly in certain countries. Joint venture in N. America doing well. Wide lineup of branded drugs and vaccines. Recently closed on purchase of Genzyme. We recently upgraded moat rating. Intellectual property lead in specialized oil services. Strong technology platform to offer investment-processing services. Very high switching costs. Owns giant midstream natural gas business, as well as general partner of Spectra Energy Partners. Majority owned by Spectra Energy. Structured as MLP. Has less attractive stock valuation than peers at moment. Huge amounts of undeveloped land in Florida. Development around new airport and seaport has started.
100.00 ] 110.69 58.00 69.00 120.00 46.00 46.22 54.72 145.00 54.06
X X X C
2.6 18.7 4.5 14.5 1.3 29.0 4.5 16.1 0.8 15.3 4.1 20.7 3.2 16.2 4.0 19.9 3.5 18.2 1.3 12.6 3.1 19.6 1.5 24.0 2.0 31.1 0.0 16.2 1.0 24.0 4.7 13.2 1.6 19.3 1.5 18.2 3.6 17.6 6.1 19.2 0.0 NA
38.00 [ 29.01 38.00 72.00 27.00 UR 56.00 72.00 62.00 31.05 65.35 22.05 88.37 44.10 66.81 66.50
Z Z C

QQQQ QQQQ QQQ QQQ QQQQ QQ QQQQ QQQQ QQQ QQQ QQQ QQQQ
X Z X C C
24.00 [ 22.33 52.00 33.00 46.00 94.00 19.00 32.00 31.00 26.00 42.99 40.29 37.02 67.59 20.25 31.17 31.34 17.33
X C X V
14

St Jude Medical STJ Starbucks SBUX State Street STT Stericycle SRCL Stryker SYK Sysco SYY T. Rowe Price TROW Time Warner Cable TWC Total System Services TSS United Parcel Service UPS United Technologies UTX Verisk Analytics VRSK Visa V Vulcan Materials VMC Wal-Mart Stores WMT Walt Disney DIS Waters WAT Weight Watchers Intl WTW Western Union WU Zimmer Holdings ZMH
QQQQ QQ QQQ QQ QQQQ QQQQ QQQ QQ QQ QQQ QQQQ Q QQQ
Med. Med. High Med. Med. Med. Med. Med. Med. High Med. Med. High
49.00 48.00 50.00 77.00 63.00 36.00 61.00 70.00 19.00 80.00 100.00 32.00 105.00 63.00 61.00 45.00 96.00 77.00 29.00 71.00
38.91 57.42 43.82 84.77 54.15 29.11 63.61 79.93 22.54 79.19 80.23 46.83 119.50 42.02 60.13 42.11 90.08 74.48 17.65 64.15
34.30 33.60 30.00 53.90 44.10 25.20 42.70 49.00 13.30 48.00 70.00 22.40 63.00 44.10 48.80 31.50 67.20 46.20 20.30 49.70
k l k j k k k l l j k k l k l l k k k k
2.4 15.4 1.2 34.5 2.2 11.6 0.0 31.5 1.6 15.7 3.7 14.9 2.1 21.8 2.8 16.1 1.8 19.6 2.9 20.6 2.4 14.6 0.0 28.7 0.7 31.5 0.1
d b d d d a d b d b b d d c a b d d c c
Part of implantable cardioverter defibrilator oligopoloy. No longer just a fast-follower. Brand creates large barrier to success for competitors. Diversification of distribution channels working thus far. Enviable position in custody and asset management. Balance sheet was problem during credit crisis. Medical waste is a noncyclical business, and Stericycle has a dominant share. Mark Miller won CEO of Year for 2009. Orthopedic devices benefit from demographic trends. Government crackdown on industry relatively benign. Wide-moat distributors are rare, but this one dominates thanks to its scale. Food inflation a headwind to profitability. Asset manager with excellent fund lineup and ethical reputation. Communications capabilities competitors cant match. Spin-off from Time Warner complete. Handles applications, billing, collections, and customer service for credit card issuers. Scale and network density give cost advantage. Strong balance sheet. Expanding network in Europe by buying TNT. Diversified company operating efficiently in several industrial markets. Service contracts quite lucrative. Became publicly traded in late 2009. Collects data essential to insurance industry operations. Enjoys advantages from network effect and scale. Federal Reserve diluted Dodd-Frank debit card rules. Volumes down by roughly half from peak. We recommend standing pat on MLM bid for now. Retailing goliath enjoys cost advantages. Anticyclical: Did relatively well during recession, lagging during recovery. Owns theme parks, movie studios, and TV properties. Very strong brands, extensive media library. Large share in analytical instruments important in drug discovery, research, and manufacturing. Highly recognizable and respected brand. Insurance reimbursement could ignite growth. Strong brand and large network of more than 400,000 agents. Average transaction size now flat, volumes still growing. Leading provider of orthopedic devices. Cyclical and demographic trends on firms side.
C X X X X C C X Z C

QQQQQ Med. QQQ QQQ QQQ QQQ

Low Med. Med. High
X X Z C
2.6 13.2 1.4 15.9 0.0 19.2 0.9 18.1 2.3 9.6
QQQQQ Med. QQQ

Med.
1.1 15.9
Watchlist Recommendations
These are all the Wide-Moat Watchlist firms trading below their Consider Buying price as well as those trading above their Consider Selling price.
Stocks to Consider Buying
Stocks to Consider Selling
Applied Materials AMAT Vulcan Materials VMC Western Union WU
Advisory Board ABCO Fastenal FAST Intuitive Surgical ISRG
Verisk Analytics VRSK
April 2012
15
Wide-Moat Statistics
Wide-Moat Firms With the Highest Yield (%)
Wide-Moat Firms With the Lowest Forward P/E Ratios
AstraZeneca AZN Boardwalk Pipeline Partners BWP Buckeye Partners BPL Spectra Energy Partners SEP GlaxoSmithKline GSK Kinder Morgan Energy Partners KMP British American Tobacco BTI Imperial Tobacco Group ITYBY Altria MO Eli Lily LLY
8.9 7.9 6.9 6.1 5.9 5.6 5.5 5.4 5.3 4.9
Western Union WU Sanofi SNY Caterpillar CAT General Dynamics GD Bank of New York Mellon BK Pfizer PFE ExxonMobil XOM Novartis NVS State Street STT Cisco Systems CSCO
9.1 9.1 9.1 9.1 9.2 9.4 9.4 9.7 9.7 10.0
Wide-Moat Firms Trading at Best Price/Fair Value Estimate Ratios
Median Price/Fair Value Estimates
Western Union WU Applied Materials AMAT St. Joe JOE Bank of New York Mellon BK Vulcan Materials VMC Exelon EXC Martin Marietta Materials MLM Schlumberger SLB Expeditors International of Washington EXPD
0.61 0.62 0.67 0.67 0.67 0.71 0.71 0.72 0.75
Coverage Universe
By Moat Rating
0.95
Wide Narrow None

By Fair Value Uncertainty
0.99 0.94 0.95
Low Medium High

Data as of April 9, 2012
0.99 0.98 0.92
Performance: Morningstar StockInvestor Portfolios vs. S&P 500

Invest Like the Tortoise and Hare Morningstar Investment Services** offers customizable separate account stock portfolios patterned after these popular StockInvestor strategies.
Call 1-866-765-0663 to learn more, or e-mail mp@morningstar.com Period Tortoise (%) Hare (%) Tortoise & Hare Combined (%) S&P 500 (%)
2001* 2002 2003 2004 2005 2006
9.1 -1.6 26.2 13.1 8.0 13.7 1.6 -22.2 19.4 9.7 7.3 5.9 119.5 7.6
0.7 -23.9 26.3 26.9 3.2 22.0 5.2 -32.4 45.6 14.3 1.4 3.9 105.3 6.9
4.9 -12.3 26.2 18.8 5.8 17.3 3.3 -26.8 30.5 11.9 4.5 4.9 112.4 7.3
-4.8 -22.1 28.7 10.9 4.9 15.8 5.5 -37.0 26.5 15.1 2.1 6.3 40.3 3.2
2007 2008 2009 2010 2011 Trailing 12 Months Since Inception Cumulative Since Inception Annualized
Data as of April 9, 2012. Returns include interest and dividends. *Since Inception June 18, 2001. Time-weighted, assuming equal investments at inception. **Morningstar Investment Services, Inc. is a registered investment advisor and wholly-owned subsidiary of Morningstar, Inc.
16
Merck MRK
Stock Focus | Damien Conover, CFA
Pauls Position Merck recently has become one of the more attractive opportunities in health care. Morningstars Take Facing increased competition, patent losses, and a pipeline of late-stage drugs with poor chances of approval, Merck greatly improved its long-term outlook by acquiring Schering-Plough. Without Schering, Mercks prospects were muddled, despite its recent success launching several new blockbusters. Now, with the addition of Schering, we believe Merck is favorably positioned for long-term growth. Mercks new products during the last few years have helped offset recent patent losses. Januvia for diabetes, Isentress for HIV, and the Gardasil vaccine against human papillomavirus represent new blockbusters. All the drugs enjoyed monopoly positions at the time of launch. However, current and expected competition from other big drug firms likely will create a drag on these drugs growth during the next few years.
Rating QQQQ Econ. Moat
Fair Value
Current Price
Price/Fair Value
Consider Buy
Consider Sell
$46.00
Moat Trend
$38.73
Uncertainty
0.84
Credit Rating
$32.20
Stewardship
$62.10
Stock Style 4 P/CF
Wide
Market Cap
Negative
PE
Med.
Proj. Yield
AA
P/B
P/S
$117.9 bil
Total Return
80 60 40 20 0 -20 -40
2002 2003
19.2
4.3%
2.2
2.5
9.7
p Merck (%) p S&P 500 Index (%)
2004
2005
2006
2007
2008
2009
2010
2011
Fundamental Table
Fiscal Year Ended Dec-09 Dec-10 Dec-11 *Dec-12 *Dec-13 *Dec-14 *Dec-15
Sales ($ mil) Operating Income ($ mil) Net Income ($ mil) Free Cash Flow ($ mil) EPS ROIC (with goodwill)
27,428 15,392 12,899 1,931 $3.26 33.6%
45,987 2,957 861 9,144 $3.42 5.7%
48,047 8,280 6,272 10,660 $3.76 9.2%
47,160 12,416 8,978 12,812 $3.76 15.1%
45,481 10,868 7,788 10,395 $3.50 13.6%
46,273 11,761 8,466 9,536 $3.59 14.1%
47,577 12,620 9,116 10,326 $3.70 14.7%
Still reeling from the patent loss on hypertension drugs Cozaar/Hyzaar in early 2010, Merck faces the loss of its next top drug in terms of revenue generation: Singulair for respiratory ailments in 2012. Singulair represents more than 10% of the combined sales of Merck and Schering. While losses in international markets should not fade as fast as in U.S. markets, the patent expirations create major roadblocks to Mercks growth. Mercks efforts to develop a reliable late-stage pipeline have yielded questionable results. The Food and Drug Administration denied Merck approval for cholesterol drug Tredaptive (formerly Cordaptive) in early 2008. Subsequently, Merck reported poor clinical data on late-stage drugs Rolofylline for heart disease and Telcagepant for migraines. Further, key late-stage drug anacetrapib for atherosclerosis is chemically extremely similar to a drug (torcetrapib) that failed to receive FDA approval, raising the risk that anacetrapib might meet the same end. Deciding not to wait for new internal pipeline drugs, Merck significantly strengthened its operations by acquiring Schering-Plough for about $40 billion. Schering brings in a very strong pipeline of late-stage drugs with
*Morningstar Estimates, Base Scenario
Profile
Management & Stewardship
Merck makes pharmaceutical products to treat conditions in a number of therapeutic areas, including cardiovascular disease, asthma, infections, and osteoporosis. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Following the Schering acquisition, about 45% of the companys sales are generated in the United States.
At the beginning of 2011, Ken Frazier took over as CEO, replacing Dick Clark. With Clark nearing the age of retirement, we view the new leadership as a continuation of Mercks past strategy and not a red flag causing concern. Regarding the new CEO, Fraziers almost two decades of experience at Merck across most major divisions should position him well to lead the company. Also, Frazier deserves much of the credit for the successful handling of the Vioxx litigation as he held Mercks general counsel position during the majority of the litigation. Mercks board is packed with current and retired CEOs, which can lead to quid pro quo compensation packages for top executives, but lends valuable strategicplanning experience.
April 2012
17
blockbuster potential and faces only limited patent losses during the next few years. Combining the two entities should also yield more than $3 billion in annual cost savings. While Merck historically has chosen to grow through internal development, we believe the Schering acquisition places Merck in a stronger strategic position.
Mercks Economic Moat and Trend While Mercks competitive advantage has been eroding during the last several years, the company still supports a wide economic moat. Patents, economies of scale, and a powerful intellectual base buoy Mercks business and keep it well shielded from the competition. As the bedrock of Mercks wide moat, patent protection should continue to keep competitors at bay while Merck strives to introduce the next generation of drugs. Further, the companys enormous cash flows support a powerful salesforce that not only sells currently marketed drugs, but also serves as a deterrent for developing drug companies seeking to launch competing products. As a result, Merck offers a powerful partnership opportunity for externally developed drugs. The cash flows also put the company in the rare position of supporting the approximately $800 million in research and development needed on average to bring each new drug to the market. Lastly, while not as powerful as in the 1990s, Mercks research laboratories still hold a vast database of knowledge that should help the company maintain its leadership positions in drug discovery and development.
also is evaluating comparative effectiveness programs and more aggressive price negotiations, potentially raising the bar for future innovation. Partially offsetting these issues, international markets remain a bright spot for the company, and Merck is forging ahead with more innovative development with a particular focus on biologics. The acquisition of Schering-Plough brings in a stable consumer healthcare business and a host of biologic drugs with much stronger barriers to entry.
Valuation Our fair value estimate is $46 per share. We believe Mercks acquisition of Schering-Plough will yield enough earnings growth to offset the steep purchase price. In particular, we expect several billion dollars in annual cost savings. Scherings strong late-stage pipeline should boost Mercks long-term growth rate. On the patent side, Merck will face major generic competition to its blockbuster drug Singulair in 2012. Therefore, we anticipate a high degree of volatility in sales growth as the patent expires. However, we expect sales of marketed products and products still under development eventually to offset sales lost to the Singulair patent expiration, and the addition of Scherings pipeline further remedies Mercks patent cliff.
Merck faces a deteriorating moat trend. While patent protection still shields the majority of Mercks drugs from competition, the company is not developing enough new drugs to offset eventual patent losses. In the post-Vioxx era, the FDA has grown increasingly risk-sensitive, tending to approve only very safe drugs or drugs in highly needed areas such as cancer. While diverse, Mercks pipeline still has sizable exposure to primary-care indications, which carry high hurdle rates required for approval. Exacerbating the issue, insurance companies are steadily reducing coverage for follow-on drugs, forcing drug firms to push for true innovation and reducing the power of their distribution networks. The U.S. government
One of the key uncertainties facing Merck is the success of its recently launched drugs. Given the low trajectories of recently launched drugs, we have projected relatively conservative estimates for several new products including Saphris, Dulera, and Bridion. However, under a more bullish scenario, we could see our estimates double. In this bullish case, our fair value estimate would increase to $50. Conversely, side effects or payor pushback could cause all of these drugs to fail. Under this bearish scenario, our fair value estimate would fall to $40. Merck remains in strong financial health, even with the additional $8.5 billion in debt needed for the Schering acquisition. We expect the combined company will generate a free cash flow of approximately $12 billion in 2011. Mercks strong and stable cash flows should whittle away the debt relatively quickly.
18
Medtronic MDT
Stock Focus | Debbie S. Wang
Pauls Position Here is another relatively attractive health-care firm. When the Wide-Moat Focus index was reconstituted a few weeks ago, Medtronic became a member. Morningstars Take With its diversified portfolio and strategy to develop products for a wide range of chronic diseases, Medtronic is well positioned to take advantage of new trends in disease management.
Fair Value
Current Price
Price/Fair Value
Consider Buy
Consider Sell
$46.00
Moat Trend
$37.75
Uncertainty
0.82
Credit Rating
$32.20
Stewardship
$62.10
Stock Style 1 P/CF
Wide
Market Cap
Stable
PE
Med.
Proj. Yield
AAP/B
P/S
$39.3 bil
Total Return
60 45 30 15 0 -15 -30
2002 2003
12.1
2.6%
2.3
2.4
9.6
p Medtronic (%) p S&P 500 Index (%)
2004
2005
2006
2007
2008
2009
2010
2011
This wide-moat companys vision is to establish a significant presence in chronic diseases, in addition to its historical stronghold in heart disease. Investments in neuromodulation, diabetes, and spinal products from the middle to late 1990s have paid off in spades, offering new revenue streams and taking some pressure off heart products. Revenue from those three product areas increased from 25% of total sales in fiscal 2000 to 40% in fiscal 2011. Medtronics diversified medical technology portfolio allows it to better weather glitches in the development or approval process for any particular new device. While several of the firms key markets have experienced slowing growth (including implantable cardioverter defibrillators and spinal procedures), the firm has focused on its fundamental strategy of innovation. The firm is often first to market with new products. For instance, Medtronics new Revo MRI-compatible pacemaker received Food and Drug Administration approval last spring and is the first such pacer in the U.S. market. Because an estimated one third to one half of pacemaker patients will eventually need an MRI, Medtronics technology addresses a key limitation of early generations of pacemakers. We expect Medtronic will apply the same engineering knowledge to introduce MRI-compatible ICDs in the coming years. Additionally, Medtronic enjoys a dominant position in the emerging neuromodulation market. While Medtronics electrical devices have been primarily used for subsegments of incontinence and chronic pain patients, the general therapeutic approach is being applied to a number of additional conditions including epilepsy, Parkinsons, treatmentresistant depression, and essential tremor.
Fundamental Table
Fiscal Year Ended Apr-09 Apr-10 Apr-11 *Apr-12 *Apr-13 *Apr-14 *Apr-15
Sales ($ mil) Operating Income ($ mil) Net Income ($ mil) Free Cash Flow ($ mil) EPS ROIC (with goodwill)
14,599 2,801 2,074 3,380 $3.13 18.9%
15,817 4,215 3,099 3,558 $3.44 21.6%
15,933 4,001 3,096 3,240 $3.61 20.2%
16,201 4,213 3,195 4,102 $3.44 17.9%
16,345 4,111 3,019 3,448 $3.56 16.0%
17,210 4,376 3,172 3,361 $3.52 16.4%
18,199 4,473 3,257 3,387 $3.60 16.4%
Profile
One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the companys total sales.
Medtronic gets good marks for its stewardship. In 2011, Omar Ishrak left GE Healthcare to lead Medtronic as CEO and chairman. While Ishrak has had little direct experience with the cardiac market or the device industry, he was considered a rising star at GE. We note Ishrak was the pioneer behind GE Healthcares successful entrance into the China markethe led efforts to expand the product portfolio in order to compete head-to-head with local imaging companies, which gave GE a substantial leg up in the Chinese midmarkets. Considering Medtronic has been making a number of investments in China and has identified emerging markets as a strategic source of growth, we think Ishrak can bring valuable perspective.
April 2012
19
Medtronic has pinned its hopes for growth on atrial fibrillation, transcatheter heart valves, and drugresistant hypertension. The firm recently bulked up its technology in these three areas with a series of acquisitions. There is a growing body of clinical evidence to support the efficacy of these therapeutic approaches, especially for calcified aortic stenosis and uncontrolled hypertension. We note that these remain health conditions for which there are few good treatment options. As favorable data comes out of the clinical trials, Medtronic is appropriately armed to expand these therapies into sizable new markets. We expect to see Medtronic delve more deeply into emerging markets, especially as new CEO Omar Ishrak brings extensive experience with the Chinese market. Medtronic was one of the earliest medical device companies to establish a beachhead in China, and that investment is beginning to pay off. Although emerging markets continue to account for a small portion of the firms current revenue base, we expect that to expand steadily over the next 10 years. Importantly, the firm has concentrated on fundamental building blocks that plant the seeds for a moat later on. In China, for example, Medtronic has focused on establishing itself as a resource for doctors, both in terms of providing medical training on its products, but also to help in creating a stream of patients. Even the most innovative companies may stumble on occasion, though. Medtronics late start in developing a drug-coated stent has been a disappointment. The firm received domestic regulatory approval for its own stent in 2008, long after rivals Boston Scientific BSX and Johnson & Johnson JNJ established footprints in that market. Further exacerbating the situation, Medtronics first-generation stent technology wasnt as impressive as that of rivals. There is the possibility for a more favorable foray into this market with Medtronics next-generation Resolute stent, especially as J&J exits the market. But it is a market that is not as moaty as some of the others that Medtronic operates in.
Economic Moat and Trend Medtronics wide moat is rooted in its dominant presence in highly engineered medical devices to
treat chronic diseases, including those beyond its historical stronghold in heart disease. Medtronics moat is mainly related to several intangibles, including intellectual property and carefully nurtured relationships with physicians. Thanks to its persistent ability to innovate, Medtronic is often first to market with new products in various therapeutic areas. We expect Medtronic to continue its record of innovation, based on its extensive patent portfolio. According to independent intellectual property evaluation publications Device Link and The Patent Board, Medtronic holds the strongest intellectual property position based on the number and technological strength of its patents. Further, Medtronics diversified medical technology portfolio allows it to better weather occasional glitches in the development or approval process for any particular new device. For example, even though Medtronic trailed competitors by four years in launching its drug-coated coronary stent, it hardly skipped a beat as the cardiac rhythm management, spinal, and neuromodulation businesses more than compensated for its tardiness in stents. Another element of Medtronics wide moat is its highly trained salesforce and relationships with medical practitioners. Doctors often rely on medical device sales reps for their deep device knowledge as well as their experience with device usage in a wide range of patients. As a result, Medtronics reps play the role of highly specialized experts who advise practitioners on implantation, programming, and maintenance of Medtronic devices and create sticky relationships with medical practitioners.
Valuation Our fair value estimate is $46 per share. We stand behind our tempered projections for key product lines, including cardiac rhythm management and spinal, as these markets have seen a substantial slowdown in growth. We expect Medtronics launch of its next-generation pacemaker and ICDs and the recent FDA approval of its Resolute stent should stem pricing erosion for the firm in the near term. This adds up to estimated 1.7% revenue growth in fiscal 2012, followed by average annual gains of 4.8% through fiscal 2016.
20
Bank of New York Mellon BK

Stock Focus | Michael Kon, CFA
Fair Value
Current Price
Price/Fair Value
Consider Buy
Consider Sell
Pauls Position While banking in general is a narrow-moat line of business, this firm stands out because of its asset management service business. Bank of New York Mellon continues to be a part of the Wide-Moat Focus index. Trading at just below 10 times earnings and stated book value, the stock looks cheap. Morningstars Take Bank of New York Mellon provides a wide array of services to investors, governments, and corporations that tap capital markets. However, the bulk of the banks profits come from two business segments: asset servicing (global custody) and issuer services. We like the banks competitive position and its longterm growth prospects in both segments. BNY Mellon benefits from an unmatched market share in the global custody business. The bank provides asset administration and trust services to investment managers in multiple countries and markets. The global custody business is concentrated within the hands of six firms, which administer more than 75% of all financial assets. The custody and asset-servicing business is a commodified business in which scale, operating efficiency, and ability to provide sophisticated services in multiple countries and markets are essential for success. Relationships in this business can span decades because switching costs prevent asset managers from changing their custodians frequently. As a result, the top three providers in this business, with BNY Mellon being the largest, benefit from wide economic moats.
$35.00
Moat Trend
$23.34
Uncertainty
0.67
Credit Rating
$21.00
Stewardship
$54.30
Stock Style 1 P/CF
Wide
Market Cap
Stable
PE
High
Proj. Yield
A
P/B
P/S
$28.0 bil
Total Return
80 60 40 20 0 -20 -40
2002 2003
11.5
2.2%
0.8
1.9
12.9
p Bank of New York Mellon (%) p S&P 500 Index (%)
2004
2005
2006
2007
2008
2009
2010
2011
Fundamental Table
Fiscal Year Ended Dec-09 Dec-10 Dec-11 *Dec-12 *Dec-13 *Dec-14 *Dec-15
Sales ($ mil) Operating Income ($ mil) Net Income ($ mil) Free Cash Flow ($ mil) EPS ($ mil) ROIC (with goodwill)
12,939 3,376 (598) (1,551) $(0.95) 0.6%
13,837 3,667 2,647 (1,507) $2.07 8.7%
14,681 3,569 2,569 2,309 $2.07 8.1%
15,413 4,269 2,860 (2,206) $2.38 8.2%
16,718 4,964 3,326 4,225 $2.77 9.6%
18,315 5,701 3,819 2,801 $3.18 10.5%
19,155 5,988 4,012 2,951 $3.34 10.8%
Profile
Bank of New York Mellon was created by the July 2007 merger between Mellon Financial and Bank of New York. The resulting entity is one of the worlds largest financial services companies. Through its custody operations, BNY Mellon is a leader in providing back-office services to other financial firms. The banks asset-management and private banking operations serve institutional and high-net-worth individuals globally.
Gerald Hassell replaced Robert Kelly as chief executive officer in August 2011 as the latter unexpectedly stepped down due to differences in approach with the board of directors. We think the previous CEO didnt properly prepare the bank for the financial crisis and took too much risk just before liquidity in capital markets dried up. As a result, the balance sheet came under significant stress because of losses on securities held on and off the books. More crucial, we think management came into the crisis with too little capital, which only dwindles relative to assets, as the bank had to consolidate offbalance sheet items. Fortunately, management recognized the dangers in time and reacted quickly to restore confidence in the banks books.
Although revenue in global custody depends on market returns, BNY Mellon benefits from several strong tailwinds in this business. More and more asset managers look for providers that can operate on a global basis, providing administration services in multiple currencies, languages, and jurisdictions. In addition, the financial crisis prompted asset managers to reconsider their relationships with commercial lenders and broker-dealers, which bodes well for BNY Mellon and its rival, State Street STT. Moreover, government regulation and the development of new financial products make it more difficult for asset managers to administer financial assets in-house.
April 2012
21
These trends bode well for BNY Mellons future growth prospects in the global custody business. The banks competitive position in the issuer services segment is even more compelling. BNY Mellon is the largest provider of trust-related services to fixedincome and equity issuers around the world, with no contenders in sight. Most of the banks competitors are small regional players that are usually limited to certain geography or market and cannot compete with BNY Mellons global reach, product diversity, and sophistication. We are concerned about managements appetite for acquisitions in the asset-management space. BNY Mellon is already one of the largest asset managers in the world, but the firm stated that its interested in growing this business by buying asset managers, mainly in foreign markets. Buying an asset-management business from a distressed seller could be a decent endeavor for the bank, but such deals are hard to find. Even the most distressed sellers now attract multiple offers, which makes the pricing of these deals competitive. As a result, we are concerned that BNY Mellon would overpay for a large acquisition overseas.
Economic Moat and Trend Global scale in servicing institutional investors all over the world garners Bank of New York Mellon a wide moat. The firm is one of the largest global custodians and providers of back-office services to asset managers, as well as a large asset manager itself. BNY Mellons clients face high switching costs if they decide to replace the firm with another service provider. With its scale and global reach, the bank offers a broad range of products, reducing the impetus for clients to reach out to its competitors. In addition, custody clients want to avoid potential disruption to their back-office processes and are therefore loath to change providers. Bank of New York also benefits from scale and a wide product offering in its asset management business. The firm has a diversified platform of products that prevents major asset outflows when a particular investment strategy goes out of favor or when the market turns south.
Bank of New Yorks businesses are protected by a wide, stable economic moat. As the firm services more and more assets, its scale and operating efficiency, especially in foreign markets, increases, while the scale of smaller foreign rivals decreases. That said, Bank of New York intends to participate in the consolidation of its industry by acquiring foreign competitors. We are concerned that the bank will make acquisitions that would be detrimental for the return it earns in the custody business.
Valuation We think Bank of New York Mellon is worth $35 per share. We forecast assets under custody (AUC) and assets under management (AUM) to grow by 7% per year in the long run. Because of the banks ability to attract deposits, we expect net interest margin to remain around 2% in the long run. However, in 2012 we model a net interest margin of 1.55% as the bank continues to suffer from the low-interest-rate environment. Our assumptions lead to total revenue growth of around 8% in 2012 and a similar rate thereafter. We expect the bank to keep reining in costs, and we model the efficiency ratio to stay around 65%. BNY Mellons fair value is driven by growth in AUC and AUM and the banks ability to keep costs in check. AUC and AUM grow during a bull market and contract when markets turn south, but new business wins, which continue to flow during bad times, help to offset the pain from falling markets. In our base case, we model AUC and AUM to grow by 7% a year over the long haul and compensation expense to hover around 36% of total revenue. If the pace of consolidation accelerates from current levels, AUM and AUC could grow by as much as 8% and compensation expense could decline to 34% of total revenue. In this case, our fair value estimate would be $40 per share. On the downside, if AUC and AUM remain flat and compensation expense reaches 42% of total revenue, our fair value estimate would drop to $25 per share.
22
Compass Minerals: Competitive Strengths Remain Intact

Spotlight | Elizabeth Collins, CFA
Director, Basic Materials
Unfavorable weather events are hurting Compass Minerals CMP near-term earnings. However, this company has strong and sustainable competitive advantages for the production of highway deicing salt and sulfate of potash specialty fertilizer. The companys rock salt mine in Goderich, Ontario, is the worlds largest and it has access to a deepwater port, which allows Compass to deliver salt cost-effectively to customers throughout the Great Lakes region. Further, Compass Great Salt Lake solar evaporation facility allows the company to produce sulfate of potash specialty fertilizer at a much lower cost than most other producers that use ore mining or a chemical process. The Great Salt Lake facility is one of only three in the world. We think Compass stock is currently depressed because the companys near-term profitability will be weighed down by a trio of weather events: tornado damage costs and production interruptions at Goderich, rainfall-related production shortfalls at Great Salt Lake, and mild winter weather in the Midwest that is hurting demand for deicing salt. Compass earnings should grow as these issues are resolved and as the company expands its sulfate of potash fertilizer production and grows into its expanded rock salt capacity. The main valuation uncertainty for Compass is the price of sulfate of potash. We look for prices to trend down long term as global potash producers ramp up brownfield expansions, but we actually think Compass sulfate of potash earnings will grow as its production increases. The stock is trading at a 24% discount to our fair value estimate. We think this is attractive. The stock could certainly get cheaper as the extent of the mild winter weathers impact on profits plays out, but wed view that as an opportunity to add to a position in one of the highest-quality companies in our Basic Materials coverage universe.
Compass Minerals CMP

Star Rating QQQQ Uncertainty Med. Fair Value ($) 93.00 Current Price ($) 70.65 Market Cap ($bil) 2.3 Dividend Yield (%) 2.8 Size of Moat Wide Consider Buying ($) 65.10 Consider Selling ($) 125.60 1-Yr Hi/Low ($) 98.10/62.85 Stewardship P/E 15.9
Advantaged Assets Lead Way for Compass The company has strong and sustainable competitive advantages as a result of its world-class, low-cost rock salt and sulfate of potash specialty fertilizer resources. The Goderich rock salt mine is the largest in the world. The deposits are 100 feet thick, compared with most competitors mines that access 2030 feet thick deposits. This allows Compass to use more efficient mining techniques and to get more salt for each foot of advance. Goderich is located on a deepwater port that can accept the largest ships on the Great Lakes, which gives Compass a shipping cost advantage. In 2010, Compass completed a $70 million project to expand the annual capacity of Goderich to 9.0 million tons from 7.5 million tons. This will give Compass the opportunity to capture more than its share of organic market growth as well as opportunistic spot sales when winters are especially harsh.
The Winsford rock salt mine in Cheshire is the largest in the United Kingdom. Its size enables efficient mining. Further, the mines stability and closeness to the surface allows for alternative uses of unused caverns. Compass uses these caverns for its document storage and hazardous waste management businesses. This effectively lowers the cost of rock salt mining at Winsford. Compass energy-efficient Great Salt Lake solar evaporation facility gives the firm an edge in sulfate of potash (SOP) production. As a result, SOP margins have been quite handsome. Its plant is one of only three all-natural solar SOP plants in the worldthe others are located in Chile and China. We believe Compass has the lowest-cost source of SOP for the markets it serves in the western and southeastern U.S., based on the firms efficient production facility and its close proximity to markets.
Not Subject to Commodity Price Swings The vast majority of Compass revenues and profits come from the salt segment (see graphic). While volumes can swing wildly from year to year based on the severity of winter weather, salt prices remain relatively stable. Highway deicing salt sells for about $50 per ton, so shipping costs make up a significant portion of total delivered costs. Therefore, markets
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tend to be very regional. Historically, highway deicing salt prices have grown at a 3%4% annual pace on average. Most cities, counties, and states secure their winter salt supply through a contract bid system. Each government entity issues a Request for Quotation, and salt companies submit those in blind, sealed bids. There is no negotiation. All bids are made public on the bid-open date, and the contract is awarded to the lowest bidder. Most U.S. customers guarantee a minimum purchase volume and require a maximum volume delivery (typically 80% to 120%). As a result of this system, prices will not change during the winter. Weve seen a weak winter result in flat pricing in the subsequent summer as customers reduced their bid volumes because they had leftover inventory; likewise, pricing gains have been as high as 8% in a bidding season after an especially harsh winter. Finally, while winter weather will create wide swings in demand for highway deicing salt, volumes are essentially recession resistant. Cities and states prioritize keeping streets and highways free of ice after snowfalls.
Highway Deicing Key to Salt Segment Compass Minerals salt segment sells highway deicing salt to customers in North America and the U.K. and consumer and industrial salt to folks in North America. Beyond deicing, applications include culinary salt, water conditioning, pool care, chlorine and caustic soda production, animal nutrition, and fishery management. Compass salt competitors include Cargill, K+S (Morton), American Rock Salt, Detroit Salt, Texas Brine Company, U.S. Salt, and United Salt in North
America, and Irish Salt and Cleveland Potash in the U.K. We think Compass has strong competitive advantages in the production of highway deicing salt thanks to its Goderich and Winsford mines, and Goderich likely will receive the majority of Compass capital investments within the salt segment. In August 2011, a tornado hit Goderichs salt mine and mechanical evaporation facility. Tornado damage will hurt Compass production and costs into 2012, but much of the loss ultimately should be recovered through insurance. Snow day variability creates large swings in deicing volumes, but for valuation purposes, we should assume a long-term return to normal winter weather. The company provides investors with enough information about weather patterns and volumes so that normalizing deicing assumptions is a fairly straightforward task. During the last several years, the market has become more accustomed to looking through Compass weather-driven volume variability. Although Compass consumer and industrial salt business is not advantaged, these products do not detract from the companys wide economic moat. While Compass consumer and industrial salt assets are not as clearly advantaged as the Goderich and Winsford rock salt mines, this business still has some attractive characteristics. Volumes and prices tend to be relatively steady compared with other commodities. Further, Compass consumer and industrial business benefits somewhat from its vertical integration with the Goderich mine and the Great Salt Lake solar evaporation ponds, which produce evaporated salt in addition to sulfate of potash. Clearly, consumer and industrial sales do not crimp Compass salt segment performance. Compass salt segment EBIT margins are nearly double that of K+S, which produces a variety of salt products in Europe and the Americas.
SOP Prices Should Track MOP Prices Sulfate of potash (SOP, potassium sulfate, K2SO4) is closely related to muriate of potash (MOP, KCl, potassium chloride). SOP is a substitute for MOP, and MOP is a feedstock for the worlds highest-cost SOP producers. Therefore, MOP prices are the key determinant of SOP prices. SOP typically trades at a premium
Segment EBITDA Contributions p SOP EBITDA p Salt EBITDA p OTHER 500 400 300 200 100 0
04 05 06 07 08 09 10 11 12E 13E 14E 15E 16E
24
SOP vs. MOP Prices: Average Annual Realized Prices $800 $600 $400 $200 p SOP Price Per Metric Ton p MOP Price Per Metric Ton
typical plant gate in Saskatchewan. See the graphic for average annual historical and forecast prices. Despite our SOP price forecast, we still think Compass SOP profits will grow thanks to capacity expansion. The company recently has implemented the first phase of an expansion at the Great Salt Lake solar evaporation facility. This project did not affect the evaporation ponds, but enhanced the plant that processes the mineral mix recovered through solar evaporation. Phase II development is now underway. The company will add 220,000 tons of annual capacity without expanding its current solar-pond footprint by adding barrier walls to reduce subsurface brine loss. Simply put, Compass is increasing the production capacity per pond acre. Also, Compass magnesium chloride capacity should increase materially with the Phase II Great Salt Lake expansion. Magnesium chloride is sold by both segments, as a highway deicer and specialty fertilizer. In 2011, magnesium chloride revenues contributed about 6% of the companywide total. Given that Compass Great Salt Lake facility is one of only three of its kind in the world, we acknowledge that there is project development execution risk. However, Compass has one more alternative to producing sulfate of potash. The company can purchase muriate of potash from the global potash producers, combine it with its solar harvest, and process it in its plant to create more sulfate of potash. Compass management likes to downplay this alternative because it is higher cost than the companys own production methods and there is more input cost uncertainty. However, we estimate that given the premium for sulfate of potash, this alternative production method can make economic sense if Compass needs the extra volumes to meet customer demand. In May and June 2011, rainfall was 50% above typical levels, which will curtail supply from the solar evaporation ponds and result in fixed-cost deleveraging through 2012 because of the length of Compass production cycle. Management reports that about one out of every seven years will see rainfall of 33% above normal. Just as with Compass deicing business, we argue that the company should be valued based
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to MOP, as SOP is used primarily on higher-value crops that cannot withstand the chloride content of MOP. For some crops, such as potatoes, SOP improves the yield and quality enough relative to MOP that farmers favor the application of higher-priced SOP. Key SOP crops include potatoes, tree nuts, citrus fruits, grapes, turf, tobacco, and sugar cane. Our long-term MOP price forecast is $375 per metric ton, compared with $535 today. Producers of potash benefit from an industry oligopoly, which we think will allow potash prices to remain well above marginal costs of production over the long term. The prospects for new entrants to materially penetrate the market are fairly low, with BHP Billiton BHP as the most notable possibility. If this mining giant is able to bring meaningful production to market (or acquire a large incumbent), the company could put downward pressure on potash prices by operating at full capacity without regard to market conditions. That said, major greenfield development projects still have hurdles to cross, with large projects currently scheduled for the back half of the decade. In addition to the oligopolistic nature of the industry, the marginal utility of potash for farmers should provide support to potash prices above production costs. However, we dont think potash prices will run north forever, and were actually predicting a contraction from current levels, as potash supply growth (bolstered by both brownfield and greenfield projects) outpaces demand growth. Further, we think crop prices will come down, with farmers less willing to accept elevated potash prices (despite potash utility). Our long-term price forecast is $375 per metric ton at the
BHP Billiton BHP

Star Rating QQQQ Uncertainty Med. Fair Value ($) 84.00 Current Price ($) 69.90 Market Cap ($bil) 186.9 Dividend Yield (%) 3.2 Size of Moat Narrow Consider Buying ($) 58.80 Consider Selling ($) 113.40 1-Yr Hi/Low ($) 104.59/62.54 Stewardship P/E 8.2
Potash Corp of Sktchw POT

Star Rating QQQQ Uncertainty High Fair Value ($) 56.00 Current Price ($) 44.10 Market Cap ($bil) 37.9 Dividend Yield (%) 1.3 Size of Moat Wide Consider Buying ($) 33.60 Consider Selling ($) 86.80 1-Yr Hi/Low ($) 62.60/38.42 Stewardship P/E 12.6
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SOP Industry Cost Curve (Approximate) Cost Per Ton $400 $300 $200 $100
0 KCl + H2SO4
he was running an impressive company with advantaged assets, and he had to make sure that excess cash flows were invested in opportunities that didnt erode the companys existing competitive advantages. Fortunately for shareholders, Compass investments during the last several years have only enhanced its existing strengths. Under Brisimitzakis tenure, the company has bought a document storage business that leverages unused storage capacity at its U.K. salt mine and invested in capacity expansions at the Goderich salt mine in Ontario and the Great Salt Lake solar evaporation facility for the production of specialty fertilizer. In 2011, Compass acquired Big Quill Resources, a fellow sulfate of potash producer, for an attractive valuation. The company continues to work on an expansion at its Great Salt Lake facility, a high-return investment proposition by our calculations. In summary, we think Brisimitzakis has taken a company with attractive assets and actually enhanced its competitive advantages, as indicated by our wide moat, positive moat trend ratings.
About Todays Opportunity We think the shares are attractively valued. Compass profits should grow materially during the next several years as the company grows into its recently expanded capacity at Goderich and develops Phase II of the Great Salt Lake expansion. Magnesium chloride volumes also will increase with the Great Salt Lake expansion. Profit margins should improve with operating leverage and once weather-driven issues are resolved, from 25% in 2011 to 31% in 2016. Risks to our view include much lower SOP prices or weak salt volumes. The main risks to our thesis are permanently depressed highway deicing volumes because of low snowfall and much lower SOP prices than we currently envision. In a low-SOP-price scenario, we think the company is worth $76 per share. Adding a low-deicing scenario (lower volumes, slightly weaker prices) would reduce our fair value estimate another $5 to $71 per share. But even if these negative outcomes were to occur, the stock still would be close to fairly valued today.
Solar Evaporation
Ore Mining
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on normal volumes and costs driven by average weather. Weve incorporated weaker near-term results into our DCF model, but we assume that the current problems ultimately will be resolved. Given that Compass advantaged assets will be around for the long run, we argue that shareholders shouldnt mind sticking around for operations to improve. Compass has a noteworthy cost advantage for sulfate of potash production. As the graphic here shows, Compass solar evaporation method gives it a significant cost advantage relative to the chemical process SOP producers that must purchase MOP and sulfuric acid. Solar evaporation opportunities are limited. For example, Compass is the only company able to access the highly concentrated brine at the north end of the Great Salt Lake.
Sterling Stewardship The company is led by exemplary stewards of shareholder capital. As Compass earnings improve, its managers will have more cash at their disposal, but we think investors should not be too concerned about the potential for future dilutive actions given the teams strong track record. When CEO Angelo Brisimitzakis joined Compass Minerals in 2006, he inherited a company with strong competitive advantages that was using excess cash flows to deleverage and return cash to shareholders in the form of dividends. As the product of a leveraged-buyout in 2001, these were the most prudent uses of cash. As Compass earnings grew, more cash was available, and Brisimitzakis implicit job was first, do no harm. He knew
Intrepid Potash IPI

Star Rating QQQQ Uncertainty High Fair Value ($) 29.00 Current Price ($) 23.14 Market Cap ($bil) 1.7 Dividend Yield (%) Size of Moat Narrow Consider Buying ($) 17.40 Consider Selling ($) 45.00 1-Yr Hi/Low ($) 35.65/20.75 Stewardship P/E 16.0
26
Express Scripts: Merger Creates a Wide Moat

Research Spotlight | Matthew Coffina, CFA
Senior Analyst, Healthcare
Express Scripts ESRX

CVS Caremark CVS

Star Rating QQ Uncertainty Med. Fair Value ($) 40.00 Current Price ($) 43.94 Market Cap ($bil) 57.2 Dividend Yield (%) 1.5 Size of Moat Narrow Consider Buying ($) 28.00 Consider Selling ($) 54.00 1-Yr Hi/Low ($) 45.88/31.30 Stewardship P/E 17.0
We recently upgraded the economic moat rating of Express Scripts ESRX to wide after it completed its acquisition of Medco. Both Medco and Express Scripts have done extraordinarily well for the last several years, partly attributable to the generics wave and growing concern about health-care costs. Medco took advantage of these tailwinds to boost its market share while passing most savings through to customers, while Express Scripts maintained flat market share but boosted profitability per prescription. Both companies are taking advantage of the low capital requirements inherent in the pharmacy benefits management (PBM) business modelMedco aims to repurchase 22% of its outstanding shares in three years, while Express Scripts plans to acquire volume. CVS Caremarks CVS PBM has languished during this time as the company struggled to find its identity as a unique retail-PBM combination. Express Scripts results received a major boost during this time from the acquisition of WellPoints WLP NextRx PBM subsidiary. It is difficult to isolate the earnings contribution of this acquisition, but Express Scripts claims that it contributed around $1 billion of incremental EBITDA (almost the entire increase in EBITDA since the deal closed in late 2009). That would imply that EBITDA approximately doubled within two years under Express Scripts management.
PBM Economic Moats Are Founded on Scale In our opinion, scale is the only source of a sustainable competitive advantage for pharmacy benefit managers. PBMs exist to control pharmaceutical spending, or ideally to lower overall health-care spending. This is accomplished in two primary ways: by leveraging purchasing power to extract better prices from suppliers, and by encouraging members to make costeffective pharmaceutical consumption choices.
Large PBMs have several advantages over smaller competitors. Following the Medco merger, Express Scripts has the ability to influence the pharmaceutical spending of more than 100 million individuals. By excluding some pharmacies from its retail pharmacy network, the company can direct patients to low-cost dispensing outlets. In drug categories with multiple brand-name alternatives, Express Scripts can use its influence to extract favorable rebates from manufacturers. In categories with generic options, it can negotiate with manufacturers for large supplies of generic drugs to its mail-order facilities. The company should be able to operate these facilities at maximum efficiency, while leveraging other administrative costs such as claims processing systems. Express Scripts also will have greater resources to invest in innovative programs that encourage generic substitution and ensure that the right patients are taking the right drugs, in the right dosages, and at the right time. The company already has industry-leading capabilities here, combining its own behavioral-sciences approach with Medcos Therapeutic Resource Centers and investments in pharmacogenomics. Thanks to the merger, Express Scripts is much larger than any of its competitors (or, for that matter, any PBM in history). After accounting for a few major client losses by Medco, Express Scripts run-rate market share will be around 41%. We expect Express Scripts 1.5 billion adjusted prescriptions to make it 50% larger than CVS Caremark in 2013, 3 times the size of third-place UnitedHealth UNH, and around 8 times the size of fourth-place Catalyst Health Solutions CHSI. Goodwill and other intangibles associated with the Medco merger will temporarily depress returns on invested capital. However, it is important to note that intangibles account for pretty much all of Express Scripts invested capital. The company operates with negative net working capital and less than $500 million of net property, plant, and equipment (before the merger). We expect the company to grow earnings substantially in the coming years without any incremental investment of capital.
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Walgreen WAG
Star Rating QQQ Uncertainty High Fair Value ($) 35.00 Current Price ($) 32.56 Market Cap ($bil) 28.1 Dividend Yield (%) 2.8 Size of Moat Narrow Consider Buying ($) 21.00 Consider Selling ($) 54.25 1-Yr Hi/Low ($) 45.34/30.34 Stewardship X P/E 11.1
Wal-Mart Stores WMT

Star Rating QQQ Uncertainty Low Fair Value ($) 61.00 Current Price ($) 60.13 Market Cap ($bil) 204.7 Dividend Yield (%) 2.6 Size of Moat Wide Consider Buying ($) 48.80 Consider Selling ($) 76.25 1-Yr Hi/Low ($) 62.63/48.31 Stewardship X P/E 13.3
A Case Study in Relative Competitive Advantage Express Scripts has been busy with more than just the Medco merger. A month before the merger was announced, Walgreen WAG declared that it planned to exit Express Scripts network because of inadequate reimbursement terms. We stated from the beginning that Express Scripts had the upper hand in negotiations. Half of the companys legacy business was concentrated in two contracts with terms exceeding five years. Much of the remainder of the business was on a three-year contract cycle, leaving only a midteens percentage of the book up for renewal in any given year. Most importantly, clients seem to view pharmacy services as a commodity, and prefer lower costs to broad access. Even without Walgreen, Express Scripts has more than 50,000 retail pharmacies in its network and was able to meet all contract provisions related to network adequacy.
Walgreen out of the network. With Medcos members, Express Scripts bargaining position has only gotten stronger, allowing the company to dictate terms to suppliers and extract the greatest portion of value from the pharmaceutical supply chain.
Moat Trend Now Stable; Valuation Attractive We previously rated both Express Scripts and Medco as having positive moat trends, based primarily on our expectation for ongoing industry consolidation. Now that the merger between the companies is complete, we are downgrading our moat trend rating to stable. Antitrust considerations likely will prevent the company from participating in any further consolidation, which means the moat is now about as wide as it will get, in our view.
Express Scripts is claiming 97% client retention for 2012, with 95% of clients moving forward without Walgreen in their networks. Walgreen is on the opposite side of that equation, with 85% of Express Scripts members prescription volumes immediately lost in January. Competing pharmacies such as CVS Caremark, Wal-Mart WMT, Rite Aid RAD, and supermarket chains have welcomed Express Scripts members with open arms. Now that those patients already have been transitioned to other pharmacies, there is little incremental disruption to keeping
Returns on Capital Remain High at Express Scripts

2009 2010 2011 2012 2013 2014 2015 2016
There are also long-term risks to our thesis. CVS Caremark has been pricing its services aggressively to steal market share, which could pressure margins industrywide. Medco has mostly been on the losing end of CVS Caremarks share gains. Although we think Medcos recent contract losses are explained by some unique circumstances, its possible that the company has some more fundamental shortcomings that will affect Express Scripts long-run client retention. It is also possible that we are underestimating how much clients value access to Walgreen, which could result in future market share losses as contracts come up for renewal. Finally, the generics wave has been a boon, but most large generic conversion opportunities will be used up by 2015. That could lead to intensified price competition and margin pressure. Even so, we think Express Scripts is cheap. Relative to our stand-alone projections for Medco and Express Scripts, we project $1.6 billion in pretax synergies by 2016 as a result of the merger, which would require the company to add about 1.8% to total revenue and cut about 1.4% from total costs. While this hardly seems like a heroic feat, considering Express Scripts operating margin was 5% last year, even these modest synergies could provide a huge boost to earnings. We dont think the current stock price properly accounts for these likely synergies. Our fair value estimate is $73 per share.
ROIC ROIC ex Goodwill
14.8% 58.6%
23.2% 230.2%
16.0% 33.4%
6.9% 26.3%
10.6% 46.0%
12.2% 56.8%
13.6% 64.5%
14.5% 66.8%
PBM Market Shares Post-Medco Merger
j Express Scripts j CVS Caremark j UnitedHealth j Prime Therapeutics j Catalyst j SKC j Others
41% 28% 14% 5% 5% 2% 5%
Data through April 9, 2012. Source: Drugchannels.net.
28
More Profitable Growth to Come for Discover Financial

Research Spotlight | Michael Kon, CFA
Senior Analyst, Financial Services
Discover Financial DFS

Star Rating QQQ Uncertainty High Fair Value ($) 34.00 Current Price ($) 32.65 Market Cap ($bil) 17.3 Dividend Yield (%) 1.2 Size of Moat Narrow Consider Buying ($) 20.40 Consider Selling ($) 52.70 1-Yr Hi/Low ($) 34.43/20.51 Stewardship P/E 7.4
On March 22, we attended Discover Financials DFS Investor Day in New York, where management outlined its growth plan for the firm. Overall, the presentations and conversations we had with senior executives confirmed our investment thesis. We continue to expect that increasing acceptance could boost volume growth on the firms networks, and recent acquisitions created a direct-banking platform that is well positioned to gain market share in the consumer banking space. We recently raised our fair value estimate to $34, but because the stock trades very close to it, we no longer think it offers compelling value. That said, Discover could be a terrific long-term holding for investors ready to compromise on price in order to own a company with an expanding moat, solid growth prospects, and potential as an acquisition target.
Discovers Businesses Poised for Strong Growth During the last eight years, Discover has made four strategic acquisitions (Diners Club, Pulse, Student Lending Corp., and Tree) to create a compelling product offering in payments and consumer banking. The firm now has a very strong lending and payments platform on which it can grow market share while generating attractive returns on capital.
Going All In on Direct Banking Discover strives to become a leading direct bank. The firm intends to expand its consumer banking business through one main distribution channelthe Internet. Through this channel, Discover intends to offer lending and deposit products to retail customers and leverage its card customer base to grow in banking. The consumer banking segment has grown quickly during the last five years (mainly through acquisitions), and management expects it to remain a major growth driver for many more years.
We agree with management that Discover has plenty of room to grow in consumer banking, using its direct-banking model, but we dont model any heroic assumptions for assets or earnings growth over the next five years. Because we think growth will be mostly internal, given Discovers conservative credit culture, we doubt whether the firm will grow more than 1%2% above the market. Discovers focus on one channel gives it a competitive advantage over peers. Management has repeatedly argued that the business model of servicing customers through multiple channels creates conflicts, especially in regard to the pricing of similar products. Management believes these problems create plenty of operational hurdles for large banks, but dont exist at Discover. We think Discovers focus on one channel improves customer satisfaction and loyalty, which bodes well by reducing attrition and growing wallet share among existing customers. However, we believe there is a high probability that savvy bank operators such as JP Morgan Chase JPM eventually will overcome the operational hurdles of operating multiple distribution channels and will be able to better compete with online-only banks like Discover. According to Discover, the direct-banking model allows the company to save money on operating expenses and transfer the savings to customers. Management views this as a competitive advantage because it boosts client satisfaction and loyalty. Management
We share managements bullish take on Discovers growth prospects. We think each of the firms business segments benefits from unique competitive advantages and is well positioned to generate aboveaverage growth for the next five years. Yet, we are reluctant to model any extreme growth rates for assets or revenue because we think in both consumer banking and payments, competition is on the rise and eventually will reach a level that weighs on growth and returns, even for firms as well managed as Discover.
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JPMorgan Chase JPM

Star Rating QQQ Uncertainty High Fair Value ($) 51.00 Current Price ($) 43.89 Market Cap ($bil) 167.5 Dividend Yield (%) 2.7 Size of Moat Narrow Consider Buying ($) 30.60 Consider Selling ($) 79.10 1-Yr Hi/Low ($) 47.37/27.85 Stewardship Z P/E 9.8
argued that launching checking accounts will further entrench Discovers lead over its peers and improve its cost structure. Keeping operating expenses below peers is an important competitive advantage, but we dont think Discover will be able to protect its deposit base if other banks offer higher rates for consumers. We agree that launching checking accounts will improve funding costs, but if competition over deposits ramps up, Discover might see its cost advantage squeezed. Discover has proved to possess a superior underwriting culture. Management has done an outstanding job of keeping credit costs below peers and staying ahead of the curve when it comes to reserving against future losses. Current delinquency rates trend well below historical levels, which also proves Discover has solid underwriting capabilities. Discover has a very sound underwriting culture that can be preserved even when the firm expands its lending activities beyond credit cards. Our confidence stems from Discovers outstanding track record in underwriting credit card loans. In addition, the firms focus on risk-adjusted returns tempers any desire to grow at any price; the firm has no intention to expand into risky loan categories such as subprime mortgages. Discovers lending plans remain within its core competencyconsumer loansand it already has put in place stringent standards for underwriting student loans.
Improving Acceptance Crucial for Growth Discover is in the final stages of implementing its plan to partner with merchant acquisitors to boost acceptance in the United States. In foreign markets, Discover is employing several tactics, including partnerships with regional networks (BC Cards, JCB, RuPay) and merchant acquisitors, and leveraging the Diners Club franchise (Ecuadorian franchisee).
more on their Discover and Diners Club cards, attracting both new cardholders to the networks and new issuers. Growth also can come from issuing the Discover card brand in foreign markets. Discover recently announced a deal with its Diners Club franchisee in Ecuador to issue Discover cards in this country. This is the first issuing deal Discover has made outside of the United States. Management believes more could follow. While we expect Discover to attract new issuers to its networks, we think Diners Club franchisees are the low-hanging fruit for the firm in foreign markets. These partners already have business relationships with Discover and can easily leverage their market knowledge and presence to introduce a mass-market product that complements Diners. However, expanding beyond Discovers existing partners will be challenging because many issuers in foreign markets either already issue Visa or MasterCard MA, or they own their own local payment brand.
Discover Still an Attractive Acquisition Target While the current share price might reflect the firms intrinsic value, we continue to assert that Discovers strategic value for a large card issuer or a foreign regional network could be significantly higher than the current stock price. We continue to believe that the takeout range for Discover based on its value to potential buyers could be well above the current price. JPMorgan Chase and Bank of America BAC could recoup up to $24 per share of purchase price by directing their volumes through Discovers network notwithstanding the value of the companys lending business. We think deals like the one reached with Payments Corporation only increase Discovers attractiveness to potential suitors. We believe a takeout price could range from $40 to $75 per share. Importantly, managements options, struck between $15 and $28 per share, provide a much larger incentive for a deal at current prices.
MasterCard MA
Star Rating QQQ Uncertainty High Fair Value ($) 394.00 Current Price ($) 439.29 Market Cap ($bil) 55.6 Dividend Yield (%) 0.3 Size of Moat Wide Consider Buying ($) 236.40 Consider Selling ($) 610.70 1-Yr Hi/Low ($) 442.88/253.66 Stewardship C P/E 29.6
Bank of America BAC

Star Rating QQQ Uncertainty V.High Fair Value ($) 10.00 Current Price ($) 8.93 Market Cap ($bil) 95.8 Dividend Yield (%) 0.5 Size of Moat Narrow Consider Buying ($) 5.00 Consider Selling ($) 17.50 1-Yr Hi/Low ($) 13.64/4.92 Stewardship V P/E
Management didnt provide any projections with respect to future growth, but we assume that merchant acceptance will reach 80% of Visas V within five years. We think growth in acceptance creates an exceptional opportunity to grow volume on Discovers networks by prompting existing cardholders to spend
30
Stock to Sell: Walgreen

Research Spotlight | Paul Larson and Matthew Coffina, CFA
Walgreen Analyst Report Walgreens store base offers unmatched convenience, and its brand name is one of the most recognized in the retail pharmacy business. However, we are highly concerned about competitive pressures. We think Walgreens business model will have to rapidly evolve for the company to remain relevant.
Walgreen WAG
Star Rating QQQ Uncertainty High Fair Value ($) 35.00 Current Price ($) 32.56 Market Cap ($bil) 28.1 Dividend Yield (%) 2.8 Size of Moat Narrow Consider Buying ($) 21.00 Consider Selling ($) 54.25 1-Yr Hi/Low ($) 45.34/30.34 Stewardship X P/E 11.1
On April 3, I waived adios to Walgreen WAG, selling the Tortoises final 110 shares at $33.99, creating a 13.7% realized loss. Its not too often I completely sell a position from either portfolio, but in the case of Walgreen, the companys competitive positioning has deteriorated to the point where I no longer feel comfortable holding the shares over the long haul. Its been a painful ride owning this stock; initially purchased in 2007 when the company was rated with a wide moat, it is only a narrow-moat firm today, and the moat continues to erode. For an investment that was clearly a mistake on my part, I am thankful the realized loss was not larger. (Chalk one up to the benefit of margin of safety.) The thing that tipped me over the edge was the recent spat with Express Scripts ESRX. As illustrated in the previous pages, when the two companies parted ways at the start of 2012, Express Scripts was able to retain 95% of its clients after taking Walgreen out of its network. Walgreen was on the other side of this, with roughly 85% of the prescriptions from Express Scripts members immediately lost. Clearly, employers (the ultimate payor of pharmacy expenses) care much more about keeping overall health-care spending in check (Express Scripts value-add) than they do about maintaining maximum convenience (Walgreens value-add). Meanwhile, pharmacies have relatively high fixed costs, so the reduction in volume will have an oversized effect on profitability. Beyond a deteriorating business position, Walgreens stock was in the neighborhood of its fair value estimate. Another reason I sold Walgreen was to simply keep the number of companies within the Tortoise and Hare at a reasonable number. Going to 50 stocks with my newest purchaseExpress Scriptswould have been a bit much. Paul Larson
Walgreen has a store within three miles of 63% of the U.S. population, giving a significant convenience advantage over most of the competition. The company benefits from secular tailwinds, such as the aging population and growth in pharmaceutical spending. Finally, Walgreen has decided to slow its new store openings after decades of rapid expansion, which will also boost margins as mature stores are considerably more profitable. Peak store profitability usually isnt reached until stores are open as long as seven years. Despite these positive drivers, we suspect that the company faces more competitive and reimbursement pressure today than it ever has in the past. Pharmacy benefit managers like Express Scripts and Medco are patients first point of contact with the pharmaceutical supply chain. These PBMs are using their massive scale to wield unprecedented bargaining power over retailers, and they are encouraging consumers to switch to their own low-cost mail-order facilities instead of retail drugstores.
Wal-Mart WMT poses another competitive threat with its $4 generics program, which has been imitated by other big-box retailers and supermarkets. These competitors are particularly dangerous for Walgreen; because pharmacy is only incidental to their core businesses, they may be willing to earn thin or even negative margins on pharmaceuticals to increase traffic to other parts of their stores. By contrast, Walgreen relies on pharmaceuticals for about two thirds of sales.
We think Walgreens convenience advantage is being eroded by cheap prescriptions offered through the mail and by many other retailers. Only time will tell if offering clinical services alongside the pharmacy is enough to keep traffic strong at Walgreens stores. Analyst: Matt Coffina, CFA
ETFInvestor Morningstar StockInvestor
April 2012
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Economic Snapshot
Historical U.S. Economic Data
Quarterly Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11
Real Annualized GDP Growth % Year-Over-Year Change %

2011 Monthly May June
3.8 -0.5
3.9 2.2
3.8 3.3
2.5 3.5
2.3 3.1
0.4 2.2
1.3 1.6
2012
1.8 1.5
3.0 1.6
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
ISM Diffusion Index Capacity Utilization
54.2 76.7
55.8 76.7
51.4 77.5
52.5 77.6
52.5 77.7
51.8 77.9
52.2 77.9
53.1 78.5
54.1 78.8
52.4 78.7
53.4
10-Year Macroeconomic Overview

10 8 6 4 2 0 -2 -4 -6 -8
Inflation
Year-Over-Year % Change 8 6 4 2 0 -2 -4 -6 02 03 04 05 06 07 08 09 10 11 i Income ($Bil) 10-Year Median ($Bil) 10-Year Mean ($Bil) i Consumer Price Index 10-Year Median 10-Year Mean
Source: U.S. Bureau of Labor
10.0
Personal Consumption Expenditures

Year-Over-Year % Change Savings Rate % 6.5 3.0 -0.5 02 03 04 05 06 07 08 09 10 11 i PCE ($Bil) 10-Year Median ($Bil) 10-Year Mean ($Bil) t Prsnl Savings Rate % 10-Year Median % 10-Year Mean %
Source: Bureau of Econ. Analysis
13,256.4 11,713.8 6.5 11,233.5 228.4 3.0 204.2 203.6

-0.5 -4.0
9,493.6** 9,045.4 8,871.4 3.7 3.7 3.8
700 525 350 175 0
Housing
Housing Starts (Thou) 1,875 1,250 625 02 03 04 05 06 07 Houses for Sale (Thou) 525 t Housing Starts (Thou) 10-Year Median (Thou) 10-Year Mean (Thou) 698.0 1,490.0 1,325.4 150.0 366.0 367.5
11 6 1 -4 -9
Unemployment
% 6 1 -4 02 03 04 05 06 07 08 09 10 11 p Unemployment % 10-Year Median % 10-Year Mean % i Total Hours 10-Year Median 10-Year Mean
Source: U.S. Bureau of Labor
8.3 5.8 6.6 96.2** 97.8 98.0
350 p Houses for Sale (Thou) 10-Year Median (Thou) 175 10-Year Mean (Thou) 08 09 10 11
Source: U.S. Census Bureau: New Residential Construction
15.0
Retail Sales
Year-Over-Year % Change 7.5 0 -7.5 02 03 04 05 06 07 08 09 10 11 i Retail Sales ($Mil)
20.00
Industrial Activity
Year-Over-Year % Change 8.75 -2.50 -13.75 02 03 04 05 06 07 08 09 10 11 i Shipments ($Mil) 462,642.0 396,624.6 616,789.0
407,805.0 345,846.4
-2.50
7.5
10-Year Median ($Mil) 349,780.08.75 10-Year Mean ($Mil)
10-Year Median ($Mil) 398,153.0 10-Year Mean ($Mil) i Inventories ($Mil)
0.0
i Consumer Credit ($Bil) 2,512.3* 10-Year Median ($Bil) 2,389.8 2,308.4
-7.5
10-Year Mean ($Bil)
-13.75
10-Year Median ($Mil) 512,990.0 10-Year Mean ($Mil) 501,119.7

Source: U.S. Census Bureau: Shipments Inventories
Source: U.S. Board of Governors
-15.0
-25.00
All non-10-year data as of February 2012 unless otherwise noted. *Data through January 2011. **Data through December 2011.
it Arrows indicate directional movement from previous months reading. p Indicates no change.
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StockInvestor

Buying core holdings at a discount

Portfolio Management Strategy

Economic Snapshot 31 Taking the Pulse of the Economy

Follow Paul on Twitter @StockInvestPaul

Portfolio Management Strategy

Berkshire Hathaway BRK.B

Express Scripts ESRX

Wide-Moat Focus Index Components (Q2, 2012)

C Compass Minerals CMP

C Medtronic MDT C Merck & Co. MRK

C New addition for Q2.

Energy Transfer Equity ETE

QQQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ

Low Med. Low Med.

70.00 34.00 91.00 54.00

72.80 113.75 37.80 72.90

QQQ QQQQ QQQ

80.00 125.00 38.50 21.00 74.25 54.25

Molson Coors Brewing Co TAP QQQQ

Tortoise Portfolio Total

Tortoise Performance Breakdown

Index Level This Month * 12 Month Since Inception

p Tortoise Portfolio p S&P 500 Index

Style Breakdown (%)

d Healthcare y Financial Srvcs o Energy s Cons Defensive p Industrials

23.2 16.3 14.5 14.3 13.1

Value Blend Grth

p51100 p2650 p1125 p010

06-08-10 08-18-05 05-30-06 10-13-10

22.56 23683.38 18196.50 25.40 44.00 5080.74 14130.00 1319.99 13178.70

C Express Scripts ESRX

04-03-12 +220 04-20-06 06-24-02 07-14-11 11-18-08 0 0 0 0

Discover Financial DFS

08-08-07 -200 10-19-11 01-13-12 11-17-10 01-06-06 10-18-11 01-13-12 0 0 0 0 0 0

QQQQ QQQQ QQQ

QQQQQ Med. QQQQQ High QQ Low

Hare Portfolio Total

Hare Performance Breakdown

Index Level This Month * 12 Month Since Inception

p Hare Portfolio p S&P 500 Index

Style Breakdown (%)

a Technology y Financial Srvcs o Energy r Basic Mtrls. t Cons Cyclical

18.4 17.0 13.4 12.8 11.9

Value Blend Grth

p51100 p2650 p1125 p010

Pauls Favorites for New Money

e Western Union WU | QQQQQ

r St. Joe JOE | QQQQ

t Exelon EXC | QQQQ

u Vulcan Materials VMC | QQQQQ

i Energy Transfer Equity ETE | QQQQ

o Express Scripts ESRX | QQQQ

p Compass Minerals CMP | QQQQ

a CME Group CME | QQQQ

Current ConsiderPrice Buying

Moat Stew. Trend Grade

100.00 70.00 33.00 58.00

86.33 60.97 33.22 86.82

5.3 19.0 0.0

QQQQQ Med. QQQQ QQQ QQQ QQQQ QQQQ QQQQ QQ QQQ

150000 ] 119700 100.00 ] 79.76 107.00 216.00 126.61 202.74

Wide-Moat Watchlist (continued)