Morningstar Magazine - April/May 2018 - 25

continues to be integrated across a wide number
of smart home and other devices) and new retail
formats will join the list of monetization
opportunities in the years to come.

healthcare company to help control healthcare
costs for their U.S.-based employees. Given
the capital and clout of the three partners,
speculation that they will disrupt the healthcare
space by leveraging their impressive capital
war chest and business expertise caused
valuations of pharmacy benefit managers,
managed-care organizations, drug wholesalers,
and retail pharmacies to fall materially.

tried before by sizable corporations and businesses
without any major change within the dynamic
and complex healthcare marketplace. The capital
and management clout of the three partners is
undoubtedly great; however, their core competencies are not healthcare-related, and it will
take significant time for a legitimate operation
to develop.

We've raised our fair value estimate from
$1,250 per share to $1,600, with $75 of the increase
attributed to time value of money, $100 due
to a lower effective tax rate, and the remainder
from more optimistic five-year revenue
growth and margins estimates stemming from the
We believe some investors are underappreciating the moaty nature of the healthcare
aforementioned emergent cash flow drivers.
Our model now assumes 21% average annual
supply chain and the formidable competitive
revenue growth from 2018 to 2022, including 26%
advantages that have insulated its major players.
growth from third-party seller services, 34%
All potential new competitors would face
Bitcoin close price
Log-periodic power law model
from retail subscription services, 38% from AWS,
significant headwinds trying to break into any
6,000
and 43% from other sources. While Amazon's
vertical along the chain because the dynamics
of
USD
growth will still require fulfillment, technology, and
the healthcare market are very difficult to
navigate. The reactive downward move in stock
content investments, we see a path to 6%
5,000
margins over the next five years (compared with
prices created an opportunity for investors
2.3% in 2017).
to acquire solid wide-moat firms at discounts.
4,000
We would highlight CVS Health CVS, McKesson

Additionally, we believe a potential new
partnership would lack the scale and size to
provide efficiencies and pricing power on
par with the major healthcare-services firms.
This is especially the case given the local density
necessary to obtain decent provider pricing
and the sourcing joint ventures among
the retail pharmacies, drug distributors, and
pharmacy benefit managers. The buying
power of a combined trio of Amazon, Berkshire,
and JPMorgan will still pale in comparison
to what the healthcare-services firms have built
over the past several decades.

R.J. Hottovy, CFA, is an equity sector strategist with
Morningstar Research Services.

MCK, and Cardinal Health CAH as being
particularly good opportunities. The moats for
3,000
these companies are still intact and will
continue to allow them to produce significant
competitive advantages and economic profitability
2,000
the next several
Theover
log-periodic
power decades.
law model
forecasts a bitcoin crash late this year.
1,000
While the exact operating structure, products
Amazon.com AMZN, Berkshire Hathaway BRK.A,
and services, and ultimate mandate for the
0
and JPMorgan Chase JPM announced in
Amazon-Berkshire-JPMorgan partnership are yet
01/2017
03/2017
05/2017
07/2017
09/2017
11/2017
11/2016
January that the trio will form an independent
to be developed, these partnerships have been

Vishnu Lekraj is a senior equity analyst with Morningstar
Research Services.

Healthcare Alliance
Won't Breach Moats

Equity (Cumulative Ex-Category Average Return)

Women

0
1
Months

Men

Some mutual fund investors have expressed
concerns about owning gun manufacturers, such

Fixed Income (Cumulative Ex-Category Average Return)

Mixed Gender

Finding Gun Stocks in
Fund Portfolios

Women

Men

Mixed Gender

2.5

2.0

1.5

1.0

0.5

-0.5

0
1
Months

-0.5

Source: Morningstar. Data from 01/01/2003 - 09/30/2017.

http://www.Amazon.com

Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018