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5 Undervalued UK Stocks

The FTSE 100 came close to another record high last week - the UK market is up 10% year to date. But there is some value to be found in domestic stocks

Emma Wall 24 October, 2017 | 10:36AM

Screwfix parent company Kingfisher is undervalued

Last week saw a slew of profit warnings from UK companies. But the bad news failed to halt the ascent of the FTSE 100. As the index of blue chip stocks marked the 30 year anniversary of Black Monday the domestic market could not have looked better – coming within spitting distance of a record high on Friday.

“Some market watchers and professional investors have been warning of the potential for correction or a more severe slide in the markets for some time” commented Jason Hollands of Tilney. “But markets have continued to remain buoyant despite scepticism in some quarters and in the face of undoubted geopolitical uncertainties, which include the Trump administration, Brexit, the rise of populism in Europe and nuclear tensions with North Korea. Stock market volatility has been as calm as a duck pond for most of 2017.”

This rise has been fantastic for those investors with skin in the game, but makes tricky viewing for those who have failed to enter the fray. Is it too late to invest in UK stocks?

The advice of many portfolio managers seems to be; proceed with caution. But it you are taking the long term view and believe in the fundamental drivers of the UK stock market, we highlight five stocks Morningstar equity analysts deem undervalued below.

Barclays (BARC)

Thanks to its extensive restructuring for the last three or so years, Barclays has improved its financial health. Barclays’ capital position is sufficient to observe any short-term headwinds that may arise from litigation and conduct cost, a possible downturn in the investment banking business or a slowdown of the UK economy due to Brexit, given its diversified business both on a geographical and a segment level. 

Centrica (CNA)

Centrica's British Gas brand name has significant value, but brand loyalty to a commodity product can be fleeting, as the decline in Centrica's share of the residential gas market illustrates. Although British Gas remains the dominant market share leader, its share of natural gas retail customers has steadily declined, but still remains over 35%.

Sainsbury's (SBRY)

Sainsbury’s has withstood the onslaught of the hard discounters relatively well, thanks to good management and the benefits of previous restructuring. The main risk is intense competition. Cash flows are sensitive to changes in pricing, customer volumes and operating costs.

Given Sainsbury's’ low margins, any unforeseen increase in costs or fall in sales could disproportionately hit margins, leading to a significant fall in earnings relative to expectations.

Kingfisher (KGF)

The U.K. Screwfix banner, targeted at small trade professionals, offers one of the few growth opportunities in developed-market do-it-yourself retail. Although analysts think Kingfisher has some defences against the e-commerce channel, particularly in its private-label brands, online competition has grown in recent years.

Higher interest rates, flat housing price growth, or tighter lending standards could slow turnover, postponing home-improvement projects and hindering Kingfisher’s sales.

Reckitt Benckiser (RB.)

The acquisition of Mead Johnson and the disposal of the foods segment are two significant steps towards the repositioning of RB’s portfolio in businesses with pricing power and wide margins.

Pricing power has deteriorated in several food, household, and personal-care categories in recent years, amid greater competition from the hard discounters’ private-label lines and lower barriers to entry in the e-commerce channel. However, consumer health and near-food categories such as infant formula are among the product categories that analysts believe retain pricing power.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Barclays PLC199.05 GBX0.23
Centrica PLC144.50 GBX2.12
Kingfisher PLC332.50 GBX-0.36
Reckitt Benckiser Group PLC6,721.00 GBX-0.18
Sainsbury (J) PLC238.00 GBX-2.74
About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk