2025-03-31 issue recommended excellent stock list

We believe Albemarle shares are undervalued, as we anticipate lithium prices are currently at cyclically low levels. Demand from electric vehicle (EV) sales and utility-scale batteries is on the rise. However, the rapid influx of new, higher-cost, lower-quality supply from China and Africa has shifted the lithium market from undersupply to oversupply. Presently, lithium prices are below the marginal cost of production, prompting supply reductions. We expect average prices in 2025 to exceed current lows as demand increases and the market stabilizes. Furthermore, unit production costs are likely to decrease as Albemarle expands its capacity and implements overhead cost efficiencies. Consequently, Albemarle's unit profits are projected to be higher in 2025 compared to the fourth quarter of 2024, even if prices remain at current levels. Albemarle’s competitive advantage stems from its cost-effective lithium production, which is supported by its unique geological resources. Lithium is the company’s primary business, contributing the majority of its profits. The main driver of lithium demand is electric vehicle batteries, which accounted for nearly 50% of demand in 2024. We project that EVs will represent one in three vehicles sold globally by 2030, up from nearly 14% in 2024. Additionally, we anticipate that utility-scale batteries for energy storage systems will grow at a compound annual growth rate of 30% through 2030. Given the robust growth in end-market demand, we forecast lithium demand to reach 3.2 million metric tons by 2030, up from 1.2 million in 2024. Supply is expected to struggle to keep pace with this demand, resulting in lithium prices rising to the marginal cost of production, which we estimate to be $20,000 per metric ton. As one of the lowest-cost lithium producers globally, Albemarle is well-positioned to benefit from increased EV adoption, leading to higher lithium prices and enhanced profits.

We are adding Nutrien to our Best Ideas list. Since reaching an all-time high in 2022, the stock has experienced a sell-off and is now trading at a significant discount to our fair value estimate. For income investors, Nutrien currently offers a 4% dividend yield. We believe the market is reacting to lower profits, which in 2024 were influenced by declining potash and nitrogen prices, as well as weaker retail results. However, we anticipate that rising potash prices and reduced overhead expenses in the retail sector will serve as catalysts for share growth, contributing to profit increases in 2025. Nutrien's competitive advantage stems from its cost-effective potash and nitrogen production. As the largest potash producer globally by capacity, potash represents Nutrien's most significant business segment in terms of profit percentage. Its mines, located in Canada, benefit from favorable geological conditions that result in lower mining and processing costs compared to competitors. We project that potash prices will increase in 2025. The onset of the Russia-Ukraine conflict in 2022 caused potash prices to spike to all-time highs due to restricted exports from Russia and Belarus, which together account for 40% of global potash exports. In response to these elevated prices, potash demand fell by double digits. However, the supply shock was temporary, as Russia and Belarus quickly restored exports through a global trade shift. Consequently, supply rebounded faster than demand, leading to a decline in prices to cyclically low levels. By 2024, demand had fully recovered, and we expect continued growth in 2025. Furthermore, both Belarus and Russia are planning to reduce potash production this year to support higher prices. Even if the US, EU, and Russia reach an agreement allowing Russia to sell potash to these regions, we anticipate minimal impact on potash supply and demand dynamics. Higher prices are likely to benefit Nutrien. Lastly, we foresee a recovery in retail profits. Nutrien is the largest farm retailer in the US. As more farmers transition to online farm management tools, Nutrien intends to decrease its US store count, which will help lower overhead expenses. This strategy should enhance profits in 2025.

Comcast’s shares have faced significant pressure due to challenges in retaining broadband customers. We anticipate that losses in broadband customers may worsen before they improve, as fixed-wireless competitors and expanding fiber network competition continue to impact the market. Nevertheless, we believe Comcast has the potential to grow its customer base in the long term as these challenges subside. Although we have some reservations about the company’s aggressive push into the wireless market, we expect that price competition will remain rational, enabling Comcast to maintain stable cash flow despite the pressures on its customer base. Our outlook for NBCUniversal is less optimistic, though it remains a valuable media asset. Comcast’s intention to spin off its traditional television networks appears to be an initial step in a broader industry restructuring. The company’s strategy likely includes migrating premier content to Peacock to enhance the streaming service's competitiveness against larger rivals. Despite the high costs associated with content and the upcoming NBA agreement impacting profitability, we expect NBCU to adapt successfully to evolving consumer consumption patterns. Additionally, the theme parks continue to be a strong revenue contributor. With a robust balance sheet, Comcast is well-positioned to allocate most of its free cash flow towards shareholder returns, including a solid dividend and substantial share repurchases.

We believe narrow-moat Hanesbrands is an attractive investment, trading at approximately a 65% discount to our fair value estimate of $16.30. Our moat rating is based on the company's strong intangible brand assets. Hanesbrands owns several well-known brands in the basic innerwear market in the United States and Australia, many of which command higher prices and achieve greater sales volumes than competing brands. In 2024, Hanesbrands sold its Champion brand to Authentic Brands Group for a favorable price of $1.2 billion, with the potential for an additional $300 million in earn-outs. This sale will enable Hanesbrands' management to concentrate on enhancing its core brands and products. Additionally, the divestiture is expected to positively impact margins, as innerwear has historically demonstrated more consistent profitability compared to Champion. While Hanesbrands generates over 70% of its sales in the U.S., it also has significant international growth opportunities, particularly in Australia, where its Bonds brand and others hold dominant market shares. The company is actively working to reduce its debt, which we believe is highly advantageous for shareholders. Hanesbrands has eliminated its quarterly dividend and is utilizing nearly all of its available free cash flow for debt reduction. The proceeds from the Champion sale have also been directed towards retiring debt. By the end of 2024, Hanesbrands had approximately $2.3 billion in debt, having paid down about $1 billion during the year. This effort has reduced its debt/adjusted EBITDA ratio from 5.2 times to 3.4 times.

Shares of VF, the owner of The North Face, Timberland, Vans, and eight other brands, are currently trading at approximately a 60% discount to our valuation following a sharp decline in March. We assess the firm as having no economic moat, as Vans and several of its other key brands have faced challenges since the pandemic. Nevertheless, VF remains one of the largest apparel companies in the US and operates in appealing market segments. In response to these challenges, CEO Bracken Darrell is executing a strategy to revamp Vans, launch a new platform in the Americas, cut costs, and manage debt more effectively. Over the past year, VF has reduced its debt by $1.9 billion to $4.7 billion, partly due to the sale of Supreme for $1.475 billion in cash in 2024. We believe VF’s reduced valuation offers an investment opportunity at a discount in a company that is positioned for improved profitability. Its adjusted operating margin was a disappointing 4.5% in fiscal 2024, but it is on an upward trajectory. We anticipate that it will eventually return to annual double-digit levels within approximately three years, driven by more stable sales from Vans and other brands, cost reductions, and additional initiatives. During its October 2024 investor event, VF established reasonable fiscal 2028 targets, including an adjusted operating margin of at least 10%, an adjusted gross margin of at least 55%, an adjusted selling, general, and administrative margin of 45% or less, and net leverage of 2.5 times or below. VF has attracted the attention of activist investors advocating for significant changes, such as cost reductions and the divestiture of noncore brands. Darrell is implementing many of these changes, although it seems the company plans to retain its remaining brands for the time being. Ultimately, we believe that Dickies and some other brands may be sold in the future.

We find Bath & Body Works shares to be attractive, currently trading at approximately a 50% discount to our fair value estimate of $63. The company possesses a strong competitive advantage in the large addressable markets it serves. Its robust brand intangible asset is reinforced by its leading position in the bath and shower, as well as the candle and air freshener sectors, which has been enhanced by its swift adaptation to consumer trends. The company's narrow moat is reflected in the 37% average return on invested capital, excluding goodwill, that we anticipate it will generate over the next decade, significantly surpassing our 8% weighted average cost of capital estimate. While we project limited growth in its North American footprint, with nearly 1,900 owned stores already in operation, we expect that product innovation and improvements in store formats will drive both top- and bottom-line growth over time. Additionally, advancements in omnichannel strategies, such as buy online/pick up in store, are expected to remain a key component of growth, alongside loyalty program enhancements that will boost conversion rates and profitability. The company's emphasis on international expansion is likely to benefit both its physical and digital channels, projecting an average international sales growth of 7% over the next decade, which will help Bath & Body Works enhance its brand intangible asset on a global scale. We anticipate that these opportunities will contribute to an average sales growth of 3% in the long term, aligning with global growth forecasts (according to Euromonitor) for the bath and shower and soap industries. This growth trajectory will enable Bath & Body Works to gain additional market share, further solidifying its already dominant position.

Sealed Air manufactures a diverse range of flexible resin packaging, protective shipping materials, and integrated packaging systems. The demand for packaging surged in 2021 due to pent-up consumer demand and supply chain challenges, leading to strong end-market demand. Consequently, the company achieved record financial performance during 2021-2022. However, as supply chain disruptions eased, inventory levels began to rise. Many retailers found themselves with excess inventory and had to implement inventory-destocking measures, which negatively impacted the packaging industry. As a result, Sealed Air’s stock has significantly declined from its peak in January 2022 due to end-market weaknesses. Nevertheless, the company's unique business model remains a key strength. Sealed Air provides packaging equipment and automation solutions that clients utilize for years, which differentiates it from other packaging producers that operate on a price-taker basis. Given Sealed Air's competitive advantages and positive long-term outlook, we are confident that the currently undervalued share price will ultimately benefit long-term investors.

Polaris' shares are currently trading at approximately a 45% discount to our fair value estimate of $75 per share. The company's strong brands, innovative products, and Lean manufacturing practices contribute to its wide economic moat. We believe Polaris will continue to leverage its research and development, high-quality standards, and operational excellence to drive demand. Historically, the company has generated exceptional returns on invested capital, including goodwill, and we anticipate it will achieve an 18% return on invested capital (ROIC) by 2034, significantly exceeding our 10% weighted average cost of capital assumption. Recently, the stock has faced pressure due to challenges related to slowing consumer conversion and cautious dealer behavior, which we view as temporary issues. Consequently, the company has provided a conservative initial outlook for 2025, projecting a sales decline of 4% to 1% and adjusted earnings per share of $1.10, down from $3.25 in 2024. We also forecast a 4% decline in sales and earnings per share of $1.10. With dealer inventory largely optimized, we expect wholesale shipments to align more closely with consumer demand. We believe that long-term demand driven by new product launches will support growth in shipments and profit improvements beyond 2025. From 2026 to 2034, we project the company will achieve an average sales growth rate of 3.6% and double-digit growth in earnings per share.

Nike is currently trading at approximately a 40% discount to our fair value estimate of $112 per share. The company is facing one of its most challenging periods in decades, with shares declining nearly 30% over the past year. However, we believe that new CEO Elliott Hill is implementing effective strategies to enhance the brand's value, which underpins our wide moat rating. Hill's overarching strategy, termed "Win Now," focuses on leveraging the company's connections to global sports—its greatest advantage—while also cutting costs in other areas. In the long term, we anticipate that Nike can achieve mid-teens EBIT margins by increasing full-price sales, launching new merchandise, and boosting sales in high-margin markets. Under the previous leadership of John Donahoe, Nike emphasized direct selling at the expense of product development, inadvertently allowing more innovative competitors to gain ground in key categories. Additionally, demand for sportswear in critical markets such as North America (43% of revenue) and Greater China (15%) has softened due to economic challenges. Elliott Hill, who has extensive insider knowledge from his 32 years at Nike, including his last role as president of consumer and marketing before retiring in 2020, has significant work ahead. He needs to strengthen relationships with wholesale partners and enhance full-price selling through the company's digital channels. Hill plans to increase discounting to clear out inventory in anticipation of new product launches, particularly in footwear, as Nike reduces reliance on overexposed lines to make way for more competitive offerings. As a result, we expect near-term results to be weak. Nevertheless, we project that Nike will return to growth in sales and operating margins by fiscal year 2027.

Hasbro's shares have outperformed the broader market year to date, rising 8% compared to a 1% decline in the Morningstar Global Markets Index as of March 28. We continue to view the shares as undervalued relative to our fair value estimate of $83. We believe investors have not fully recognized Hasbro's successful business transition, which included the sale of its entertainment division, enabling the company to achieve structurally higher operating margins. We anticipate a significant improvement in revenue mix, with the high-margin Wizards of the Coast and digital segments projected to account for approximately 38% of sales by 2025, up from 29% in 2023. Additionally, with a renewed focus on core competencies, Hasbro is poised to benefit from more concentrated innovation and a streamlined operating model, supported by the outlicensing of lower-productivity brands to partners, which should enhance working capital efficiency. Moreover, due to a rigorous focus on expenses, Hasbro aims to reduce gross costs by $1 billion from 2021 levels by the end of 2027, which will support profit growth. The company exceeded its 20% operating margin target in 2024, and we believe it has the potential to reach 23% by fiscal 2028. Therefore, we see a strong opportunity for Hasbro to exceed expectations, driven by its renewed emphasis on product innovation, cost management, and a lean operating profile.

Shares of wide-moat Estée Lauder have declined by 53% over the past 12 months, primarily due to ongoing weak demand in China and investor skepticism regarding the firm's profit recovery strategy. Recent changes in top management, including the CEO and CFO, have added to the uncertainties. We believe the shares, currently trading at a 45% discount to our $120 fair value estimate, present a compelling investment opportunity, and we recommend that investors seeking exposure to the attractive beauty care market consider buying in. Although the weak consumer environment in China has created short-term challenges for Estée and its beauty industry peers in regaining market growth, we maintain that the trends toward premiumization and Estée Lauder's competitive position remain strong. We believe the current difficulties in China are manageable as the company leverages its strong brands, solid channel relationships, and various research and manufacturing initiatives in Asia to enhance its positioning and long-term growth prospects. While we now project a high-single-digit sales decline in fiscal 2025 due to ongoing issues in China, we anticipate revenue growth will accelerate to an average of 5% for the remainder of the 10-year forecast period, driven by Estée's focus on the structurally appealing premium skincare market. We expect the operating margin to recover to 16% by fiscal 2034, supported by an improved channel mix (moving away from heavy promotions in department stores), manufacturing efficiency gains, and cost-cutting measures.

Kraft Heinz is currently trading at approximately a 45% discount to our fair value estimate of $53 and offers a 5% annual dividend yield, making it a compelling option for investors. We believe that market skepticism regarding the company's ability to avoid significant and lasting volume declines is misplaced, especially in light of ongoing cost pressures, reduced consumer spending, and increased competition following recent price increases. The company has shifted away from previous management's focus on short-term profitability and cash flow. Since mid-2019, Kraft Heinz has strategically pursued sustainable efficiencies, increased brand investment (with spending on product innovation and marketing at a mid-single-digit percentage of sales, aligning more closely with industry peers), improved its category management and e-commerce capabilities, and utilized its scale to adapt more effectively to changing market dynamics. We are confident in the company's commitment to this strategy. As a result of these initiatives, we anticipate that Kraft Heinz will achieve low-single-digit annual sales growth while maintaining operating margins in the low 20s.

From early April to late July 2024, Lamb Weston shares experienced a significant decline, falling by 50% following two disappointing quarters. In its fiscal third quarter (ending February), the company faced challenges due to a problematic rollout of a new enterprise resource planning (ERP) system, which resulted in inaccurate inventory estimates at distribution centers. This led to decreased customer fulfillment rates, loss of market share, and inventory write-offs. The company has struggled to regain lost market share, compounded by sluggish restaurant traffic. In its fiscal second quarter of 2025 (ending November), Lamb Weston continued to report lower sales and declining profit margins. The situation is further complicated by an industry-wide investment cycle aimed at expanding capacity, which poses risks to Lamb Weston's utilization rates and margins in the longer term. The near to medium-term outlook appears challenging, as these headwinds are expected to persist. Despite these difficulties, long-term valuation catalysts remain intact, with shares trading over 30% below our fair value estimate. While traffic has decreased, attachment rates for fries—one of the most profitable items for restaurants—remain high. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit growth in fry sales. Although the company is currently facing excess capacity, we believe that long-term demand growth and the recovery of lost market share will help restore utilization rates to the high-90% range. Additionally, Lamb Weston's underperformance has attracted acquisition interest from Post Holdings and involvement from activist investors Jana Partners and Continental Grain, who collectively own more than 5% of shares and are advocating for significant changes. The departure of CEO Tom Werner is unlikely to meet their demands, particularly since COO and soon-to-be CEO Michael Smith does not appear to be a catalyst for change, given his long tenure with the company. Nonetheless, an acquisition at an appropriate price or changes driven by activist investors could provide near-term catalysts, suggesting potential for meaningful upside. Furthermore, the challenges related to traffic and the ERP system do not diminish Lamb Weston's cost advantage or the strength of its intangible assets. The company's supply chain is heavily concentrated in the low-cost Columbia Basin and Idaho, where high yields result in costs that are 10%-20% lower per pound. Despite losing some market share due to ERP issues, we expect Lamb Weston to maintain strong customer relationships and regain share as its operations stabilize.

From the beginning of 2022 to late October 2023, Tyson Foods’ shares declined nearly 50%, underperforming the Morningstar US Market Index (down 5%), as well as protein-centric peers Pilgrim’s Pride (down 7%) and Hormel (down 33%). Although Tyson's stock has rebounded approximately 30% since then, it remains significantly below our fair value estimate, presenting attractive risk-adjusted upside potential along with a healthy dividend yield exceeding 3%. Tyson's adjusted EBITDA fell 62% from fiscal 2022 to fiscal 2023. As a no-moat food producer primarily reliant on raw meats for revenue, Tyson is vulnerable to fluctuations in input costs and product prices. This has been particularly challenging recently due to rampant cost inflation and supply/demand imbalances in the beef and pork markets. Additionally, the recovery of the US cattle supply will take time. However, we believe the current stock price suggests that these difficult conditions will persist. Meat markets are cyclical, and a return to a more normalized operating environment is all that is necessary to support our valuation. The chicken market has already shown signs of recovery, with 12-month trailing adjusted EBITDA increasing by 59% at the end of fiscal first-quarter 2025 (ended December). Furthermore, we do not anticipate any structural changes in meat markets that would necessitate a permanent alteration in profitability. Consequently, we project nearly 2% top-line growth over the next five years, with adjusted operating margins recovering to our 2029 estimate of 6.9%, aligning with historical levels and improving from the fiscal 2024 estimate of approximately 3.4%.

In recent years, the market sentiment surrounding PayPal has fluctuated between optimism and pessimism. The stock experienced a significant increase, roughly tripling during the early stages of the pandemic, but subsequently plummeted nearly 80% from its peak, falling to a level significantly below its pre-pandemic price. With market confidence in the stock currently low, we perceive a potentially attractive long-term investment opportunity. Our fair value estimate for this narrow-moat company is $104. We believe the market is overly focused on short-term absolute growth, while it should be concentrating more on relative performance, which we consider a better indicator of the company's competitive position and long-term value. We acknowledge the challenges the company has encountered recently. However, in the long run, PayPal's prospects are closely linked to the high-growth e-commerce sector, with Venmo offering additional upside potential. We maintain that the company holds a strong competitive position within this space. While the e-commerce landscape is characterized by intense competition, we believe PayPal is well-equipped to compete effectively, and we see no evidence in its recent performance indicating a significant weakening of its long-term competitive position. Nonetheless, we recognize the possibility of results fluctuating in either direction. Consequently, we view the stock as more appropriate for risk-tolerant investors.

Moderna's shares have experienced significant volatility, with investors initially overly optimistic in 2021 regarding the company's technological potential, followed by a more pessimistic outlook on its growth post-coronavirus. While we maintain modest expectations for sales of the firm's COVID vaccine due to the substantial demand driven by the pandemic in 2021 and 2022, we believe that Moderna's pipeline of mRNA-based vaccines and treatments is progressing swiftly across various therapeutic areas. Despite a decline in sales during 2023-2024 in anticipation of new product launches, we remain confident in the long-term sales trajectory of the company's diversified pipeline. We see strong validation of Moderna's technology in respiratory virus vaccines (with an RSV vaccine set to launch in 2024 and a COVID/flu combination approval anticipated in 2025), oncology (with a potential melanoma launch by 2027), and rare diseases (where accelerated approvals could occur by 2026).

Baxter shares are currently trading at a significant discount compared to our valuation. Recently, demand for many of the company's products has been on the rise due to increased medical utilization. Additionally, new product launches, such as the Novum IQ pump platform, are contributing to this demand. Baxter is also positioned for margin improvement, as inflationary pressures in its supply chain are subsiding, and important new group purchasing organization contracts will come into effect in 2025, which should enhance its product pricing. We anticipate that profits will grow at a relatively rapid pace in the near term before stabilizing at a more normalized growth rate in the high single to low double digits over the long term. Although we acknowledge the short-term market concerns related to Baxter's recent management transition and potential tariffs, we believe there is a significant margin of safety in the current share price.

Humana continues to be featured on our Best Ideas list, highlighting the significant discount at which its shares are currently trading compared to our fair value estimate. The company maintains a strong competitive position in the Medicare Advantage sector and has substantial potential for long-term profit growth. However, the results for 2024 and the outlook for 2025 indicate severely reduced profits due to mispriced Medicare Advantage plans, which may take several years to recover. Additionally, initial star ratings for 2025 marketing and 2026 bonus payments have declined significantly, presenting another near-term challenge. Although the company is contesting these star ratings in court, this situation introduces uncertainty regarding Humana's intermediate-term profit trajectory, leading many investors to sell their shares. While these investors may be acting out of fear, we believe that those with a long-term investment perspective should take advantage of Humana's discounted shares, which offer a rare combination of a high-quality firm at an attractive valuation within the managed care industry.

Wide-moat HII, a former subsidiary of Northrop Grumman, is the largest military shipbuilder in the US. While the company benefits from extraordinarily long planning horizons and budget visibility, small shifts in the timing of major programs can lead to lumpy quarterly results, which we believe have impacted the stock. Nevertheless, HII's strong ties to the US Department of Defense, its status as the sole provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and its position as one of only two producers of nuclear submarines for the US Navy position the company for recurring profits well into the future. The long-cycle shipbuilding business does not yield the highest margins in the defense contracting industry. However, it exemplifies the conditions that provide a durable competitive advantage and significant visibility into revenue and profitability for decades. The large shipbuilding sector offers extensive planning horizons and budget visibility, although minor timing shifts in major programs, such as aircraft carriers, can result in uneven quarterly results. We anticipate some potential fluctuations later this decade, contingent on upcoming revisions to US Navy budgets. The timing of work on two America-class amphibious assault ships expected to commence around 2027 may or may not offset the decline in work on the third Ford-class aircraft carrier, the Enterprise. This concern is more operational than financial and should not impact the company, provided it maintains sufficient visibility into similar work at each of its two shipyards as each ship nears completion. HII's products take years to build and are typically produced in small quantities. The potential for margin gains as the company progresses down the learning curve is limited, even as the government negotiates the price (and consequently, the available profit) of each ship upon agreement to purchase. This close relationship between the buyer and the company distinguishes HII from other defense contractors, as it is highly insulated from macroeconomic or market risks. In 2022, HII generated only $50 million in revenue from commercial customers out of nearly $11 billion in total revenue. Additionally, the Defense Department has a vested interest in maintaining multiple shipyards in operation and ensuring their financial viability. This policy results in a balanced distribution of work between HII and General Dynamics, mitigating risk and spreading rewards among them. While the firm may experience uneven revenue and profits in certain quarters and years due to the multiyear production cycles of its large products, we believe long-term investors will be rewarded, particularly with the anticipated growth in submarine and destroyer revenue.

Following the pullback that began in late January, we believe Fluor is currently at an attractive entry point for patient investors willing to endure near-term volatility. Investors appear to be growing impatient with the extended timeline for Fluor’s monetization of its equity interest in NuScale; however, we think the market is underestimating the potential upside. Fluor is trading at what we consider a fair price for the company, excluding its NuScale stake, which means investors are essentially getting a free call option on NuScale’s success at the current stock price. Additionally, despite a decline in its backlog in 2024 and ongoing cash burn from legacy projects extending into 2025, we believe the market is not fully recognizing the company’s operational improvements. Fluor has significantly reduced the risk profile of its backlog, and we think the enhancement in cash flows has set the stage for accelerated share repurchases and the potential reinstatement of the dividend.

A.O. Smith is a leading water technology company and the largest manufacturer of water heaters in North America. Beyond the established North American water heater market, the company has opportunities for growth through expansion into international markets and the development of water treatment products. The stock price has been declining since the guidance for 2024 was lowered on October 11, primarily due to weaker-than-expected sales in China, which represented 20% of total sales last year. Despite this, the fourth-quarter financial results fell short of FactSet consensus estimates. Nonetheless, we consider A.O. Smith to be a high-quality company with a significant economic moat. The North American water heater and boiler segments, which account for approximately 70% of sales, benefit from strong brand recognition that supports robust profit margins, as well as a transportation-related cost advantage that deters potential foreign competitors in the tank-style water heater market. The difficult operating environment in China may weigh on the stock, even though this market contributes less than 10% to profits. Additionally, weak North American water heater shipments in 2024 and management's projections for continued challenges in 2025 have likely dampened investor enthusiasm. However, we anticipate that sales will grow at a mid-single-digit percentage rate, with earnings per share increasing by a high-single-digit to low-double-digit percentage from 2026 to 2029, driven by a recovery in demand for water heaters in North America, an improvement in the Chinese market, and the expansion of the water treatment business.

Following the successful development of a COVID-19 vaccine in November 2020, the hotel industry, along with the broader REIT sector, experienced a rally as investor confidence grew, with expectations of a return to pre-pandemic business levels. However, the emergence of the delta and omicron variants led to a decline in hotel stock prices, even as the rest of the sector continued to perform well. Many hotel companies have struggled to generate positive corporate cash flows since the onset of the pandemic; the rise in virus cases has hindered the industry's recovery and prolonged the period of negative cash flows. We believe the current environment presents an opportunity for investors to acquire Park Hotels & Resorts at a price below our fair value estimate. We assess that the company's balance sheet is robust enough to withstand ongoing disruptions in the hotel industry for the foreseeable future. Although numerous businesses have delayed their plans to fully return employees to the office, which subsequently postpones the recovery of hotel demand driven by business travel, we do not expect this disruption to significantly impact the long-term demand for Park's portfolio of high-quality hotels. Additionally, Park's management has demonstrated effective management of hotel net operating income during the pandemic, exceeding our expectations, which gives us confidence in their ability to navigate the current challenges facing the hotel sector. We anticipate that Park will recover from the pandemic, experiencing several years of strong growth, and will return to its 2019 peak levels by the end of 2024.

Kilroy Realty, which lacks a moat, presents a compelling investment opportunity due to its high-quality office portfolio, especially following the recent selloff of office REITs. While we acknowledge the uncertainty surrounding the future of office spaces and anticipate a challenging environment for office owners in the near to medium term, we believe the recent selloff has been excessive. The current implied valuation of Kilroy’s shares appears disconnected from the prevailing private market valuations of its office portfolio. Long-term investors may find this stock attractive, as it is trading significantly below our fair value estimate of $59 per share. Kilroy’s office portfolio is among the best in the publicly traded REIT sector, with an average age of just 11 years, compared to 30 years for its peers. Additionally, it performs well on various metrics, including rent spread and sustainability. The company is well-positioned to capitalize on the flight-to-quality trend, which is gaining momentum as employers seek to encourage employees to return to the office. However, there are risks to consider in our investment thesis. The recovery in physical office occupancy levels has been slow. According to Kastle Systems' weekly work barometer, average occupancy in office buildings is still around 50% of pre-pandemic levels, based on the latest data. Another risk factor is Kilroy’s geographic concentration in California and its significant exposure to the technology and life sciences sectors.

No-moat Realty Income is currently trading at a significant discount to our $75 fair value estimate. We believe the decline in share price since August 2022 is primarily due to rising interest rates. Our analysis indicates that Realty Income is the most interest-rate sensitive REIT we cover, exhibiting the highest negative correlation with interest rates. The company has branded itself as "The Monthly Dividend Company," attracting many investors during periods of low interest rates. However, these investors may shift their focus to risk-free Treasuries as interest rates increase. Moreover, Realty Income sets its annual rent escalators relatively low, which means it depends on executing billions of dollars in acquisitions each year to drive overall growth. The rise in interest rates has narrowed the spread between the company's acquisition cap rates and the weighted average cost of capital used to finance those acquisitions, potentially hindering growth. Despite this, Realty Income has increased its acquisition volume in recent years and continues to acquire properties at a positive spread over its cost of capital. In 2023, the company completed $9.5 billion in acquisitions at an average cap rate of 7.1%, significantly higher than the average interest rate of about 5% on the debt issued for these transactions. Additionally, the $9.3 billion acquisition of Spirit Realty, finalized in January 2024, is expected to enhance shareholder value. We are optimistic that management will continue to identify opportunities that boost funds from operations, supporting ongoing dividend growth for shareholders. We view the selloff driven by rising interest rates as an attractive entry point for investors, especially if the Federal Reserve signals any rate cuts in 2024.

Sabre has effectively managed the factors within its control despite a challenging macroeconomic and geopolitical landscape. Its investments in technology have contributed to gains in air booking market share. Additionally, Sabre has enhanced its debt profile; as it entered 2022, it had $3.8 billion in debt maturing in 2024-25, but now has no significant debt maturing until 2027, thanks to successful tender offers and refinancing efforts. We believe that Sabre's cash reserves, free cash flow generation, and a gradual recovery in platform demand position the company well to service this upcoming debt. Replicating Sabre's distribution platform would encounter significant aggregation and processing challenges. In 2024, American Airlines reported declining sales due to its choice to reduce emphasis on global distribution system platforms. American is now returning to GDS networks to recover lost corporate business. Investments in cloud technology, new distribution capabilities, and sales opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, reinforcing its competitive advantages. Ongoing uncertainty surrounding US trade policies, particularly related to tariffs, is negatively impacting consumer sentiment and raising concerns about inflation, which poses a risk for Sabre's stock. Nevertheless, investors who can navigate the short-term uncertainty and volatility in US policy may find an opportunity to invest in a company with significant network advantages, efficient scale, and high switching costs.

We are highlighting wide-moat Microsoft as one of our top technology stocks, as shares appear attractive relative to our fair value estimate of $490 per share. We believe the stock is well-positioned for 2025, following relatively stagnant performance over the past 12 months. Our long-term thesis focuses on the expansion of hybrid cloud environments, the growth of artificial intelligence, and Azure. The company continues to leverage its on-premises dominance, allowing clients to transition to the cloud at their own pace. Our growth assumptions are centered around Azure, the migration to Microsoft 365 E5, and traction with the Power Platform for long-term value creation. With its leadership in the public cloud through Azure, partnership with OpenAI, and unmatched distribution capabilities, we view Microsoft as a current leader in AI and expect it to maintain this position in the coming years. We anticipate a catalyst in accelerating Azure revenue in the second half of fiscal 2025, which we believe investors will welcome after capacity constraints limited growth, impressive as it was, over the last several quarters. Given early demand signals, strong AI revenue traction, and the significant success of similar Azure investments over a decade ago, we believe the current wave of capital expenditure investments will yield positive results for both the company and its investors. Microsoft’s ability to maintain margins despite increasing Azure investments, challenges from the Activision acquisition, and accounting changes for server depreciation is commendable. We believe this positions the company well for margin improvement as Azure capacity comes online, which should alleviate these pressures and drive multiyear margin expansion.

We believe Eversource is undervalued and should not be overlooked by investors. While the company may miss out on much of the data center growth potential due to its Northeast service territory, it has numerous investment opportunities that can sustain earnings growth of 6% annually at least through 2028. We feel the market is overlooking this growth potential. Eversource has largely reduced its offshore wind exposure and will generate all its earnings from its rate-regulated utilities by 2025. We believe the company can mitigate regulatory challenges in Connecticut by pursuing projects in Massachusetts, where the regulatory environment is more favorable. A positive shift in Connecticut's regulatory landscape could provide further earnings and valuation upside.

Electricity demand in Evergy's Kansas and Missouri service territories is expected to accelerate, creating additional growth investment opportunities. The influx of industrial demand from companies like Google, Meta, Panasonic, and other data centers is projected to sustain total demand growth of over 2% for at least the next three years. Enhancements in Kansas rate regulation, along with anticipated rate increases in Missouri, are likely to improve earned returns. We project a 6% annual earnings growth through at least 2028. As of late March, Evergy's dividend yield stands at 4%, which is above the median yield for US utilities. Additionally, Evergy's price-to-earnings (P/E) ratio is lower than the sector median.

Tencent's business is characterized by enduring competitive advantages, a proven track record of success, and a strong financial position. WeChat, with its extensive user base of 1.3 billion in China, still presents significant opportunities for enhanced advertising monetization, especially through its additional services like video accounts and WeChat search. With anticipated growth and margin improvements in its gaming, financial technology, and cloud segments, Tencent is well-positioned to achieve a comfortable mid-teens compound annual growth rate in earnings over the next five years. Importantly, the company's valuation remains highly attractive. Furthermore, Tencent shows a strong commitment to returning value to shareholders, distributing approximately 80% of its earnings through a mix of around 30% in dividends and 50% in share buybacks, highlighting its focus on shareholder value.

Within China's e - commerce coverage, we favor JD.com with a wide moat. It'll be a key beneficiary of the government - subsidized home appliance and electronics trade - in program. Given China's weak economy, we think the program will last at least a year.JD.com gets 47% of revenue from electronics and appliances. Its comprehensive services like installation and old appliance disposal draw customers. We still believe JD.com will see long - term margin expansion due to lower procurement costs and a rising share of high - margin third - party platform business.

Macao has demonstrated a robust recovery from COVID-19 disruptions. As of the fourth quarter of 2024, the industry's gross gaming revenue reached 79.6% of 2019 levels, despite a decline in junket VIP income due to regulatory changes. We believe that Sands China's emphasis on the mass market, combined with its largest room inventory in Macao and a proven track record in nongaming activities, positions the company as a primary beneficiary of the ongoing demand recovery in the region. Furthermore, with the adverse effects of renovation disruptions expected to conclude in the first half of 2025, we anticipate that the company will experience reaccelerated sales growth and margin expansion starting in 2025.

Geely is one of China’s leading automakers, having sold nearly 1.7 million cars in 2023. We maintain a positive outlook on Geely, as its new-energy vehicle (NEV) initiatives continue to demonstrate progress. The NEV-focused brand Galaxy has successfully gained traction since its launch in 2023, while the premium brand Zeekr is steadily increasing its delivery rates. With strong vehicle sales year to date, management has raised its 2024 full-year vehicle volume guidance to 2 million units, reflecting a 21% year-over-year growth. The company anticipates a 70% year-over-year expansion in NEV sales. With a robust model lineup from Galaxy and Zeekr, we believe Geely is well-positioned to further enhance NEV penetration, which is favorable for its transition to electrification. The increase in sales volume and declining battery costs may help mitigate pricing pressures amid industry competition. We believe investors may be underestimating the long-term earnings potential of the company’s diverse new energy brands. Near-term catalysts include strong monthly sales momentum from Galaxy and Zeekr, as well as a recovery in profitability.

We consider Yum China to be a long-term beneficiary of demographic changes in China. There is considerable potential for increased fast-food penetration, primarily fueled by enduring trends such as longer working hours for urban consumers, a rapid rise in disposable income, and decreasing family sizes. We believe that investors are undervaluing the company's long-term growth potential and the opportunities for margin improvement as Yum China increasingly transitions towards a franchising model over time.

We are optimistic about Tongcheng Travel, which presents a 30% upside potential, as spending in China's service sector continues to outpace that in the retail goods sector. In our analysis of the China travel market, we find that Tongcheng is often overlooked in comparison to Trip.com, primarily because it lacks an ADR secondary listing and has lower brand recognition, even though both companies offer similar domestic travel options. Our fair value estimate suggests a price/earnings ratio of 27 times, while Tongcheng's shares are currently trading at a high-teens P/E. We believe Tongcheng has limited exposure to international revenue, which is on the rise and is expected to triple its contribution to total revenue, reaching 15% over the next three years; this growth is anticipated to outpace that of Trip.com. Furthermore, we expect Tongcheng to experience operating leverage, as strong revenue growth leading into 2025 should enhance its operating margins.

Budweiser APAC is the leading beer brewer by sales value in China, holding approximately 40% of the premium segment market share. The company benefits from a comprehensive nationwide distribution network and a diverse portfolio of international premium beer brands, supported by the substantial resources of its parent company, Anheuser-Busch InBev. Budweiser APAC has also shown proficiency in digitalizing its channel management, which we believe gives it a competitive advantage over its peers and is crucial for seizing premiumization opportunities as volume growth stabilizes. We anticipate that the long-term premiumization trend in China's beer market will persist, despite current sluggish consumer sentiment, due to a favorable competitive environment and the shared objectives of major brewers in pursuing price growth over the long term.

Near-term macroeconomic headwinds have weakened demand for baijiu (clear liquor) and impacted the sector’s profitability, resulting in slower year-over-year sales growth across all segments in recent quarters. We anticipate that sluggish baijiu sales will continue into 2025; however, demand for Moutai remains relatively strong. Moutai's unique cultural significance, unparalleled brand image, and exceptional product quality position it well to navigate the current challenges facing baijiu sales. These characteristics also enable Moutai to capitalize on the trend of beverage premiumization in China over the mid- to long term. Furthermore, Moutai's commitment to increasing its regular dividend payout ratio to 75% from 51.9% over the past six years, through 2024-26, sends a positive signal to the market, which is likely to enhance shareholder returns and boost investor confidence. Our estimated dividend per share for 2025 is CNY 57.44, reflecting the 75% payout ratio.

CNOOC serves as the upstream division of China National Offshore Oil, the third state-owned oil company in China. Consequently, it represents the most direct investment opportunity for those looking to engage with China's energy security policy and its long-term objectives to enhance oil supply. The absence of downstream operations has allowed the company to sidestep a significant legacy labor force. Additionally, none of CNOOC's sales are subject to government price controls. We believe CNOOC is currently undervalued due to its cost efficiency. Our projections indicate that CNOOC will maintain an average all-in cost of approximately USD 30 per barrel over our explicit five-year forecast period, reflecting the company's strong track record in cost management. Therefore, we anticipate that the firm will continue to be profitable in the long term, even under our midcycle Brent oil price forecast of USD 60 per barrel.

Sumitomo Mitsui Trust Group has underperformed compared to other major Japanese banks, possibly due to its perceived lower exposure to the benefits of rising yen interest rates. Nevertheless, the sale of equity holdings is expected to generate more capital for SMTG than for its peers, facilitating increased dividend growth and share buybacks.

United Overseas Bank seems to have greater potential for enhancing shareholder returns, including buybacks, than we had previously anticipated. Although it has less potential for growth in wealth management compared to some of its competitors, we believe its net interest margin will remain strong even if interest rates decrease.

Daiichi Sankyo is a global leader in antibody-drug conjugates (ADCs) for cancer treatment. Its flagship product, Enhertu, is a HER2-targeting ADC that has become a transformative therapy for certain HER2-expressing cancers. Additionally, Daiichi has a pipeline of other ADC candidates targeting various cancers. We consider the shares to be modestly undervalued based on our cautious evaluation of the currently available clinical data; however, we anticipate share price volatility due to the company's reliance on future clinical readouts. In September, a disappointing result for Dato-DXd (a TROP2-targeting ADC) in second-line lung cancer negatively impacted Daiichi’s near-term growth outlook. Nevertheless, we believe the company will continue to experience strong growth, primarily driven by Enhertu.

Yaskawa, a wide-moat company, is the largest global supplier of servo motors, holding approximately 20% of the market share, and is recognized as one of the Big Four industrial robot manufacturers. We project that Yaskawa's earnings from 2024 to 2028 will grow at a compound annual growth rate of 5.5%, primarily fueled by the increasing demand for robotics products amid ongoing labor shortages. The company is evolving from a traditional product manufacturer to a solution provider through its “i3-Mechatronics” initiative, where the "I's" represent integrated, intelligent, and innovative solutions. We believe Yaskawa's shares are undervalued, as the market appears overly focused on competition from local rivals, particularly in China. Nonetheless, we anticipate that Yaskawa will maintain its market share in critical industries such as automotive and semiconductor manufacturing, bolstered by its significant intangible assets, including a long-standing reputation and partnerships with top-tier customers, as well as the high switching costs faced by its clients.

We believe that Hitachi Construction Machinery shares are currently undervalued, as the market is overly focused on its North American operations, which are facing sluggish demand due to high interest rates and ongoing restructuring. However, the temporary decline in new machine sales is a natural aspect of the cyclical nature of capital investment in construction and mining. This situation will eventually be resolved, as the growing population and the resulting increased demand for buildings, infrastructure, and energy will continue to drive the need for construction and mining equipment. We believe that Hitachi Construction Machinery will benefit from this trend, thanks to its long-standing track record and improved aftermarket services. In the long term, the company is poised for stable growth, primarily fueled by its mining and value chain business, bolstered by its strong reputation and enhanced parts and service support from recent acquisitions.

Narrow-moat-rated ST Engineering is a prominent global independent provider of aircraft maintenance, repair, and overhaul (MRO) services, as well as Singapore's primary defense contractor. We project that ST Engineering's earnings will grow at a compound annual rate of 13% from 2024 to 2027, driven by the expansion of its MRO capacity, increasing demand for passenger-to-freight conversion, and savings in costs and interest expenses. The company maintains a stable annual dividend of SGD 0.16 per share while continuing to prioritize bolt-on acquisitions.

China Overseas Land & Investment (COLI), with its significant presence in higher-tier cities in China, is well-positioned to capitalize on the ongoing recovery in homebuyer sentiment. We believe that the demand for residential properties in wealthier cities will prove to be more resilient, resulting in stronger sales growth for COLI compared to smaller competitors. Furthermore, we anticipate that high average selling prices, combined with effective cost control measures, will allow COLI to sustain healthy profit margins over the long term. In our opinion, investors are undervaluing COLI's potential for long-term growth and margin enhancement, especially as the company continues to actively acquire land in key cities.

We favor Wharf REIC due to its premier retail properties, Harbour City and Times Square, which are the largest retail assets in their respective regions. We anticipate that the company will gain from the resurgence of tourism in Hong Kong. Additionally, Wharf REIC stands to benefit from the trend of luxury retail consolidation, as luxury brands are downsizing their presence in other parts of the city while increasing their space in prime shopping destinations like Harbour City.

GlobalWafers is well-positioned to capitalize on the upcoming cycle as non-AI semiconductor demand rebounds.

Nice is the global leader in cloud-based contact center as a service (CCaaS) software, holding approximately 15% market share. We believe the market is overly pessimistic regarding cloud revenue growth, which has led to the stock’s valuation multiples declining to multiyear lows. However, we view this as a timing issue and anticipate a recovery in cloud revenue growth. The industry has shifted its growth focus from small and medium-sized businesses to large enterprises, a transition for which Nice is well-positioned. Although Nice has secured numerous large enterprise deals, the conversion from bookings to revenue has been slow due to the complexities involved in implementing software at large enterprises and the additional delays in decision-making as companies develop their artificial intelligence strategies. We consider this a temporary challenge. We expect strong secular drivers to emerge once again, including the increasing adoption of CCaaS in the market and the advantages of AI for CCaaS providers, as customers seek to reduce their largest expense: labor costs.

We maintain our outlook that the supply and demand for multilayer ceramic capacitors (MLCCs) will remain strong and tighten, driven by the recovery in smartphone production and increased content in automotive applications. While we consider all passive component suppliers in our coverage to be undervalued, we believe that shares of narrow-moat Taiyo Yuden present the best opportunity for accumulation. Although we recognize the risks posed by the Russia-Ukraine conflict and the ongoing chip shortage, we anticipate sustained robust demand for high-end MLCCs in the long term. There will be a need for smaller sizes and larger capacities for MLCCs used in smartphones, while automotive MLCCs will require larger capacities, higher reliability, and greater breakdown voltage. We believe Taiyo Yuden will be well-positioned to benefit from this trend.

We are optimistic about Grab Holdings due to its leading market position in Southeast Asia's ride-hailing sector. The ride-hailing segment has reached a pivotal moment and is now cash-flow positive, marking a notable improvement compared to last year. Furthermore, its delivery business is achieving higher operating margins, and Grab has increased its long-term margin expectations for this segment. We see several new long-term growth drivers, including its advertising business, which remains underutilized.

We favor Sony due to its strategic emphasis on acquiring and utilizing appealing content to create recurring-revenue streams that facilitate long-term monetization from customers, particularly in gaming, streaming music, and movies. The company maintains a disciplined approach in its consumer electronics sector to safeguard profitability and cash flow through careful inventory management. Overall, Sony's business portfolio is significantly less susceptible to economic fluctuations, allowing it to generate robust earnings growth even in uncertain conditions. The company is targeting double-digit operating income growth as part of its three-year midterm plan.

We believe the market has a differing perspective on the outlook for lithium prices, which is a crucial factor in valuing IGO. In our view, lithium prices are approaching a cyclical bottom, presenting an appealing entry point for investors. Currently, lithium is trading significantly below our estimate of the marginal cost of production, and we anticipate a price recovery as demand from end markets increases and higher-cost supply is phased out. IGO's main asset is its minority stake in Greenbushes, recognized as one of the highest-quality and lowest-cost hard rock lithium mines globally. This asset provides IGO with a narrow economic moat. We project that lithium demand will nearly triple by 2030 compared to 2023 levels, primarily driven by the growth in electric vehicle sales. To accommodate this demand, IGO intends to expand Greenbushes' capacity by approximately two-thirds by the end of the decade.

Shares in no-moat TPG Telecom are currently undervalued. The benefits of a more rational mobile market are becoming evident. In a three-player mobile network landscape, each player is increasingly focused on achieving returns on their substantial capital investments, particularly in the rollout of 5G. We anticipate that rational competitive behavior will persist, likely supported by ongoing growth in fixed wireless services. The completion of the AUD 5.3 billion sale of the corporate telecom unit will enhance the advantages of being a mobile-centric entity, while the proceeds from the sale will alleviate any remaining market concerns regarding TPG’s balance sheet. The positive effects of cost-cutting and business simplification initiatives are already starting to materialize, coinciding with a moderation in the current capital expenditure surge related to 5G and IT modernization. The presence of major shareholders whose holdings have recently come out of escrow following the Vodafone merger may be causing some investor unease. However, these concerns are adequately reflected in the share price, especially considering the long-term growth prospects for the telecom industry as it transitions to 5G.

Domino's Pizza is a high-quality company with significant growth potential. Although there has been recent softness in same-store sales growth and a slower pace of store openings, this does not diminish the vast growth opportunities within the firm's global network. We project a 20% compound annual growth rate in earnings over the next five years. A substantial portion of our long-term earnings growth forecast is linked to franchisees launching new stores. The profitability of franchise stores and the demand for new locations depend on same-store sales growth, which we anticipate will rebound starting in fiscal 2026, alongside a broader recovery in the fast-food sector. While management is currently reassessing its ultimate targets, we estimate that Domino's global footprint will expand by 50% to reach 5,800 stores—approximately 20% below the previous management's goal.

Negative sentiment stemming from short-term challenges, management changes, and structural shifts in the automotive industry has led to an underappreciation of the fundamental strength and resilience of Bapcor’s automotive-parts business. A decline in discretionary spending is impacting retail in the short term, and the new management team will need to demonstrate its capabilities. Additionally, the rise of electric vehicles presents a long-term challenge for the trade business. Nevertheless, we believe that the current pessimism overlooks the inherent resilience in automotive spare parts, and Bapcor is well-positioned to navigate the gradual technological transition successfully.

We believe the market has a short-sighted perspective on IDP Education, influenced by recent declines in volumes and regulatory uncertainties. While we acknowledge that the short-term outlook appears weak, forecasting a decline in IDP’s earnings for fiscal 2025, we anticipate that the company will continue to capture market share as the industry favors quality operators like IDP. We see significant long-term value, as the caps on foreign students are temporary and a response to cyclical issues. The pricing outlook is also positive in the near term, with IDP negotiating better terms and universities planning to increase tuition fees due to an undersupply. We expect IDP to benefit from the long-term macroeconomic factors that support the international education sector.

The market is currently undervaluing Endeavour's long-term earnings outlook, which is defensive in nature. Consumers are opting for cheaper alternatives and purchasing in bulk for at-home liquor consumption. We believe that the current performance in liquor retailing is indicative of a cyclically weak trading environment, primarily due to heightened cost-of-living pressures. Nevertheless, we anticipate that liquor sales momentum will improve, with sales growth expected to reach stable levels in the mid-single digits starting from fiscal 2026. In the long run, we view liquor demand as defensive, supported by inflation, population growth, and a structural trend towards premiumization. Additionally, in the smaller hotels segment, earnings are demonstrating resilience despite the recent implementation of gaming regulations in Victoria.

Woodside shares have declined approximately 30% since mid-2023, significantly underperforming the broader market. Although oil prices have also dropped by more than a third from their previous levels, this price reaction appears unjustified. The shares are currently the most undervalued relative to our fair value estimate since the end of the COVID-19 bear market. While some believe that the era of hydrocarbons is coming to an end, demand for oil and gas continues to grow. Predictions of an imminent peak followed by a rapid decline in demand are likely to be premature. Substantial investment in hydrocarbons is necessary in most demand scenarios to compensate for naturally declining supply. Our valuation of Woodside is based on two key assumptions: a hydrocarbon production growth of 15% to 225 million barrels of oil equivalent per day and a Brent price of USD 60 per barrel. We project a marginally negative five-year EBITDA compound annual growth rate (CAGR) of 2.0%, resulting in an EBITDA of USD 8.1 billion by 2028, considering that our midcycle Brent price is 20% below current levels.

We consider ASX to be a natural monopoly that provides essential infrastructure for Australia’s capital markets. Although the regulatory environment is becoming increasingly challenging, we believe the business is well safeguarded by its significant economic moat, which is supported by network effects and intangible assets. Additionally, we view the energy transition as an often-overlooked tailwind. We anticipate that it will drive demand for resources, in which Australia possesses strong natural advantages, leading to new listings and sustained revenue from trading and clearing activities.

Ramsay is experiencing robust patient revenue growth; however, group profitability is being affected by inflationary pressures, reduced government support, and increased investment in digital initiatives. Despite these challenges, we anticipate long-term margin expansion as Ramsay reduces its reliance on agency staff, normalizes case mix and volumes for nonsurgical services, improves capacity utilization, and realizes efficiencies from digital investments. Notably, labor shortages are beginning to ease, and Ramsay is actively investing in recruitment and training. The company has also negotiated higher reimbursement rates to address cost inflation and has improved its balance sheet by divesting its stake in Ramsay Sime Darby. For further details, please refer to our Ramsay Stock Pitch published in December 2023.

Aurizon shares present an attractive yield, supported by high-quality rail infrastructure and haulage operations. Significant downside is already reflected in the share price, and our analysis indicates that the risks for investors are tilted towards the upside. Haulage volumes are gradually recovering after an extended period of wet weather. Earnings are expected to benefit from Consumer Price Index-linked tariffs, along with recent developments and acquisitions. We believe that environmental concerns are exaggerated, creating an opportunity for investors to acquire a higher-than-average-quality company at a discount. Aurizon primarily transports coking coal from globally competitive mines, and a commercially viable alternative to coking coal for steel production remains distant.

Brambles, the world’s largest supplier of reusable wooden pallets, typically leads the markets in which it operates. This leadership is attributed to its scale and first-mover advantage, which limit competition and create a cost advantage, resulting in our wide moat rating. A significant portion of the company’s earnings comes from large beverage and food companies, which we view as defensive, thereby reducing Brambles’ correlation to the economic cycle. Consequently, we project steady revenue growth at a compound annual rate of 6% over the next decade. Additionally, earnings are expected to improve due to enhanced operating margins, driven by the company’s efficiency initiatives in pallet repairs and transportation, as well as the adoption of new digital technology.

Dexus boasts a high-quality office portfolio, enhanced by the growing trend toward hybrid working. The majority of its office towers are classified as premium or A grade, predominantly situated in the central business districts of major Australian capital cities, with a notable concentration in Sydney. As the demand for quality real estate persists, well-located, high-grade buildings like those in Dexus' portfolio are expected to remain in high demand. Additionally, the industrial portfolio is currently undervalued in terms of rent, positioning Dexus to implement significant price increases upon the expiration of current leases. We anticipate that the funds-management segment will continue to attract investor inflows, supported by its scale, management expertise, and strong track record. Currently, Dexus is trading significantly below its net tangible assets of AUD 8.97 per security and offers a fiscal 2025 distribution yield of 5%, providing a solid margin of safety for investors as they await recovery.

We consider SiteMinder to be a strong industry leader with a substantial and highly attainable market opportunity. We anticipate that the hotel industry will consolidate around larger software providers, such as SiteMinder, which can distribute significant fixed technological and regulatory costs across a broader customer base. In our opinion, economic downturns will further expedite this trend. Additionally, we believe that SiteMinder's new platform products will raise switching costs and foster network effects, leading to considerably higher terminal margins.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate strong near-term revenue growth, driven by elevated inflation that enhances Consumer Price Index-linked tariffs and the completion of ongoing developments. APA is well-positioned to benefit from the transition to renewable energy, with continued investments in wind and solar farms. Additionally, the group's core gas transmission networks will gain from the increasing use of gas to support intermittent renewable power supply. APA is also poised to assist remote mines in Western Australia in replacing diesel generators with a combination of solar panels, batteries, and gas turbines, which is expected to lower carbon emissions and operating costs for these mines.

Kering, the second-largest luxury group by revenue, is currently trading at an appealing discount. While the momentum of its flagship brand, Gucci, is slowing, the brand's strong recognition, substantial marketing resources, control over over 90% of its distribution, and access to top managerial and creative talent position Gucci to sustain its pricing and desirability over the long term.

We are adding Renault to the Best Ideas list. With annual vehicle sales of 2.3 million, Renault ranks approximately 12th globally in size. Despite this ranking, the company’s well-executed transformation strategy has enabled it to achieve operating margins comparable to larger competitors. Currently, Renault operates at full capacity (90%). The company benefits from a favorable mix, including the faster-growing, higher-margin Dacia brand and an increasing proportion of C models, moving away from its historically dominant B model portfolio. Additionally, Renault is gradually reducing its shareholding in Nissan, which provides a cash buffer and potential upside if the entire stake is acquired. Notably, Renault has no exposure to US import tariffs.

We believe that investor confidence in the industry is currently low due to the demand reset following COVID-19. However, we are optimistic about the industry's recovery, and we see Diageo as well-positioned to benefit from long-term trends, such as the rising consumption of spirits and the shift towards premium products.

We are adding Reckitt Benckiser to our Best Ideas list, anticipating approximately 20% upside for this wide-moat company. Our investment thesis focuses on the robust fundamentals of its core business, which boasts peer-leading gross margins. Additionally, we are optimistic about its transformation journey, particularly in reducing the operating cost base that has inflated over the past five years. We also expect a favorable resolution to the ongoing litigation regarding the infant nutrition business in the US. Further details can be found in our Stock Pitch dated December 5, 2024.

Prudential is a long-term savings and insurance company primarily operating in Asian markets. The company's share price is currently depressed due to uncertainties surrounding its earnings and dividends, which have been exacerbated by divestments and a rapid turnover of chief executives. However, we believe that the strategic plan in place will yield financial benefits, allowing the company to reinstate its dividend.

We have recently upgraded Philips' moat to wide, reflecting its status as a leader in imaging and image-guided therapies. The company's history is mixed, with several self-inflicted setbacks damaging its reputation and investor confidence. However, we believe that resolving the sleep care issues, concentrating on its high-performing segments, and the introduction of a new management team can help shift the narrative. Our valuation indicates a discount compared to larger competitors on a multiple basis, which we find justified due to their stronger competitive positions and Philips' broader range of potential outcomes. The company has significant work ahead to regain investor trust, but even with an increased margin of safety, we view the shares as undervalued at current levels. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, along with substantial component sourcing difficulties and margin compression in imaging. At present, Philips significantly trails its imaging peers in profitability, but we anticipate that the company will begin to close this gap, albeit not entirely.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. The challenges posed by declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs are diminishing as we approach 2025, allowing the strength of the firm's portfolio of leading drugs to come to the forefront. We also see the firm's research and development expenditures becoming more efficient, and recent acquisitions in obesity and immunology appear poised for multi-billion-dollar sales potential. As a leader in biotech and diagnostics, this Swiss healthcare giant is uniquely positioned to advance global healthcare towards a safer, more personalized, and cost-effective model. The synergy between its diagnostics and drug development teams provides Roche with a distinctive in-house perspective on personalized medicine. Furthermore, Roche's biologics represent three-quarters of its pharmaceutical sales; while biosimilar competitors have encountered development challenges, Roche's innovative pipeline may render these products less relevant upon their launch.

We believe that Melrose, with its wide economic moat, is an attractive investment opportunity as it currently trades at approximately a 65% discount to our fair value estimate of GBX 800. Melrose Industries, through its GKN Aerospace division, is a prominent supplier of engine and structural components, with 70% of its revenue derived from long-term contracts where it serves as the sole-source provider. In the engine segment, the company boasts a well-diversified portfolio across both narrow-body and wide-body aircraft, functioning as a Tier 1 supplier with established positions on 90% of active engines, and engaging in risk and revenue-sharing partnerships for 74% of these engines. The company maintains long-term partnerships with all major engine original equipment manufacturers, including Pratt & Whitney, GE, Safran, and Rolls-Royce. With its RRSP contracts, Melrose is well-positioned to capitalize on the recovery of the civil aerospace sector post-pandemic and the substantial growth anticipated in the engine aftermarket. Despite the pandemic's challenges, air travel has demonstrated resilience, particularly in the leisure segment, alongside a rising demand for narrow-body aircraft. By 2023, global flight hours had returned to 2019 levels and are projected to grow at an average rate of 8% throughout our forecast period. Aerospace manufacturers have ramped up production efforts, and we expect this trend to persist in the long term to meet the soaring demand for aircraft and engines, a situation exacerbated by a shortfall of approximately 2,500 aircraft due to the pandemic and issues surrounding the Boeing 737 MAX. By 2029, we anticipate that 57% of the engine segment's future profits will be derived from the aftermarket, up from an estimated 53% in 2024. While the majority of GKN's portfolio consists of non-rotating parts that last the entire lifespan of an engine, the RRSP contracts entitle the company to aftermarket sales generated by its partners. Furthermore, profit growth in the engine division is expected to be bolstered by a doubling of repair service sales by 2026 and enhanced defense partnerships, particularly with the Swedish Gripen and F-35 jets. Lastly, we foresee the structures division also benefiting from positive trends in both civil and defense markets, along with improved profitability as GKN restructures its portfolio and exits unprofitable contracts.

We believe that Rheinmetall, which possesses a wide economic moat, presents compelling value, currently trading at approximately a 68% discount to our fair value estimate of EUR 2,220. The company generates 80% of its revenue from the defense sector, with a product portfolio that is closely aligned with NATO priorities, particularly in areas such as artillery, armored vehicles, and air defense. Rheinmetall is also recognized as the world's largest fully vertically integrated ammunition producer. The rise in global security threats is driving growth in the defense market, especially in Europe, where military budgets have historically lagged since the Cold War. In light of increasing geopolitical tensions, potential U.S. disengagement, and pressure from Washington, we anticipate that European defense spending will increase from 2.2% of GDP to 3.1% by 2029, and further to 3.5% by 2032. NATO is expected to formalize a new defense spending target in June, with indications suggesting a target of 3% to 3.5% of GDP by 2030. Additionally, EU proposals to relax fiscal rules and unlock up to EUR 800 billion in funding could enable participating countries to elevate defense spending to 3.5% of GDP by 2029. This environment presents a significant opportunity for Rheinmetall to leverage its well-diversified geographical presence and extensive product portfolio. As Germany's leading defense contractor, Rheinmetall is poised to benefit from a substantial shift in Germany's defense spending, following Parliament's approval of a proposal to exempt defense spending above 1% of GDP from debt limits, effectively removing any cap on future military budgets. We project that Germany’s defense spending will reach 3.5% by 2029-2030, averaging around 3% in the midterm. The sales of Rheinmetall's weapons and ammunition division are expected to continue to surge due to the ongoing Russia-Ukraine conflict and the necessity to build stockpiles for Ukraine and NATO countries in anticipation of a ceasefire. The company aims to ramp up production from 100,000 rounds in 2022 to 1,100,000 by 2027, with the potential to double this target if necessary. Furthermore, Rheinmetall's electronics division is anticipated to grow, driven by its involvement in German military digitization and NATO's European Sky Shield Initiative. Beyond Europe, Rheinmetall is strengthening its presence in Australia and expanding its operations in the United States. The Lynx infantry fighting vehicle is a contender in the U.S. XM30 combat vehicle program, which aims to replace approximately 3,800 M-2 Bradley vehicles.

Cyclical rather than structural weakness has created a buying opportunity in wide-moat Spirax, presenting a potential 50% upside from current levels. Analyzing the fiscal 2024 results for the first and second halves indicates that the business is on track to achieve 250 basis points of EBIT margin expansion in the medium term, supported by a recovery in biopharma end markets. This recovery underpins our projected 9% EPS compound annual growth rate through 2028. Currently, the shares are trading at 24 times depressed earnings, which is a conservative valuation for a company that has historically grown at approximately twice the rate of global industrial production and possesses a strong competitive moat. Additionally, valuation multiples are significantly below their long-term average.

We anticipate a compound annual growth rate of 10% for Veolia's earnings per share and dividend from 2023 to 2028. This projection represents the second-highest EPS growth and the highest dividend growth within our coverage. The growth in earnings will be fueled by efficiencies, including the remaining synergies from the Suez integration, as well as growth investments. Recently, we upgraded our economic moat rating from none to narrow. We believe the market is underestimating the company's competitive advantages and the reduction in its cyclicality resulting from its transformation, which contributes to the significant undervaluation of its shares.

NXP Semiconductors, which possesses a wide economic moat, is among our top selections in the analog and mixed-signal chip sector. The stock is currently trading at an appealing discount to our fair value estimate of $300, providing long-term investors with a solid margin of safety. We recognize that soft manufacturing activity, particularly in Europe, may impact the near-term performance of chipmakers with exposure to the automotive and industrial sectors. However, as conditions improve, we expect NXP and its peers to benefit from a cyclical recovery in the medium term. We do not foresee any structural decline in demand within its core end markets. We are particularly impressed by NXP’s significant exposure to the automotive sector, which accounts for nearly 50% of its revenue. The company is well-diversified within automotive, boasting a strong product portfolio that includes processors, microcontrollers, and analog components. We believe NXP will capture its fair share of the growing electrification and safety automotive markets, including radar and battery management systems. Overall, NXP’s automotive business is well-positioned to benefit from the secular trends of increasing chip content per vehicle, and we feel the market is overly focused on a short-term demand slowdown.

We believe Fineos possesses investment merits that are not typically found in profitless technology companies. The market appears to underestimate the revenue potential stemming from the adoption of cloud software by insurers and the increasing loyalty of Fineos' insurer customers. Fineos is well-positioned to secure new business, bolstered by long-standing customer relationships and referrals. Although the company is not yet profitable, it reinvests to strengthen switching costs with its loyal customer base, acquire new business, and maintain its competitive edge. We anticipate share gains through increased product offerings per client, the addition of new clients, and expansions into new regions and adjacent markets. Additionally, there are opportunities for cost efficiencies through client transitions to the cloud, automation of manual processes, and hiring in emerging economies. We expect Fineos to be able to self-fund its future growth.

ASM International offers a compelling multiyear growth narrative that positions the company for ongoing success. Investors can anticipate above-average growth over the next decade as semiconductor manufacturing continues to evolve. The industry's transition to new 3D transistor structures is expected to significantly increase demand for atomic layer deposition technology, providing strong support for ASM's advanced solutions. The company has exceptional exposure to leading-edge semiconductor nodes, placing it at the forefront of technological innovation within the industry. Furthermore, ASM is backed by a strong management team that has consistently shown strategic vision and operational excellence in navigating complex market dynamics.

ASML offers a strong long-term investment opportunity, positioned for remarkable growth over the next ten years. The shift in the industry towards advanced 3D transistor architectures is expected to significantly increase demand for atomic layer deposition technology, providing a considerable advantage. With unmatched access to leading-edge semiconductor nodes, ASML is at the leading edge of technological progress. The company's outstanding management team has consistently shown strategic insight and operational effectiveness, further enhancing its market standing and future potential.

Narrow-moat Infineon Technologies is among our top picks in the technology sector. Our EUR 43 fair value estimate provides an attractive margin of safety for long-term, patient investors. We remain optimistic about the long-term secular tailwinds in the automotive market, as Infineon is poised to benefit from increased chip content per vehicle, particularly in electric vehicles (EVs). Additionally, we appreciate Infineon’s green industrial power business and its involvement in renewable energy. However, we do observe some warning signs in the broader EV market, including excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than anticipated. Despite Infineon's position as a leader in power semiconductors for EVs, we expect chip content per vehicle to continue rising over time. We believe that these near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the current cyclical downturn in the semiconductor sector. In the long term, we are not overly concerned about the expansion of trailing-edge chip manufacturing capacity in China, as domestic chipmakers may attempt to displace companies like Infineon. We believe that Infineon’s diverse product portfolio and the high switching costs for its customers will help the company maintain its relevance in the Chinese market and likely in most other global markets as well. Furthermore, we are not particularly worried about Infineon's significant expansion plans in the silicon carbide (SiC) semiconductor market. Even if overcapacity occurs, we anticipate that Infineon will emerge as a leader in auto and industrial SiC applications, capable of efficiently utilizing its facilities.

Adyen boasts a Morningstar Economic Moat Rating of wide and an Exemplary Capital Allocation Rating. The company features a scalable business model, operates with no debt, maintains wide operating margins, and exhibits strong growth potential. Recently, shares have declined due to the global tariff war and a shift from tech stocks to defensive companies. This current price level may present an attractive entry point for investors aiming to enhance their exposure in the payment-services sector.

RWE's transition from a coal-heavy company to a leader in renewable energy showcases a strong strategy and execution that remain undervalued in the market, even with a clear exit from coal following its agreement with the German government. The acquisition of ConEd's clean energy business positioned RWE as the fourth-largest renewable energy player in the US, a highly attractive market following the implementation of the Inflation Reduction Act. RWE enjoys significant exposure to European power prices and clean spark spreads, attributed to its substantial share of liberalized renewable capacity and combined-cycle gas turbine plants. Furthermore, the company typically gains from commodity price volatility through its trading operations.