Stock Valuation Upgrades

Morningstar analysts have been upgrading their fair value estimates on a handful of London-listed companies such as Rio Tinto and BHP Billiton

Alanna Petroff 21 December, 2012 | 4:33PM

Morningstar analysts have recently upgraded their fair value estimates on four London-listed companies, while one technology company received a valuation downgrade. Below are all the companies that received upgrades and downgrades in the last few days:

Rio Tinto (RIO)
Valuation Upgrade

This stock has just officially become a five-star stock, meaning that Morningstar analysts believe the market as a whole is significantly undervaluing the company. This global miner is currently trading around 3,500p per share, but Morningstar analyst Mark Taylor believes the company is worth closer to 5,500p per share.

In his latest research report, Taylor explains why he likes Rio Tinto:

"Through selective acquisitions and grass-roots exploration, Rio Tinto has assembled a large portfolio of long-lived, low-cost assets. Operations include world-class hubs in aluminium, coal, copper, diamonds, gold, iron ore, industrial minerals, and uranium. This competitive resource base sets Rio Tinto apart from most of the rest of the pack and supports above-average returns for both the resource industry generally and its more select diversified mining peers."

 BHP Billiton (BLT)
Valuation Upgrade

Taylor also recently boosted his fair value estimate for BHP. The stock is currently categorised as a four-star stock, which means Taylor believes the market is undervaluing the company by a significant margin.  

Reed Elsevier (REL)
Valuation Upgrade

The information services provider recently received a large boost to its fair value estimate from Morningstar analyst Michael Corty. However, Corty's valuation is still somewhat below the current market price, which is now resting around 640p per share.

In his latest research report, Corty explains what he expects from Reed Elsevier over the next few years:

"We expect sales to increase at a 2.7% annual clip during the next five years, led by 3% growth in the Elsevier publishing unit, 3.2% growth in LexisNexis, and roughly 2% growth for the two combined smaller segments. We project the company's operating margin to average about 19% during the next five years, a bit lower than the 20% margin generated in 2011. We think it will be tough for Reed Elsevier to generate material profitability improvement with limited internal growth over the next several years."

InterContinental Hotels Group (IHG)
Valuation Upgrade

While Morningstar analyst Chad Mollman recently boosted his fair value estimate for the hotel operator, he still believes the market is overvaluing the company. His current fair value estimate is roughly 200p lower than the current market price.

Imagination Technologies Group (IMG)
Valuation Downgrade

This technology company, which provides the intellectual property that is used in semiconductors, recently received a fair value estimate downgrade from Morningstar analyst Brian Colello. Of course, the firm is still seeing fantastic revenue growth, but Colello says he is anticipating revenue growth to be somewhat lower compared to his previous estimates.

"Despite generating 20%-plus revenue growth in each of the past three years, we expect terrific revenue growth of 26% from Imagination in fiscal 2013, down from our prior projection of 30% growth ... Looking ahead, we project average revenue growth of 19% from fiscal 2014 to fiscal 2017," stated Colello in his latest research report.

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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
BHP Billiton PLC1,695.20 GBX-1.10
Imagination Technologies Group PLC  -
InterContinental Hotels Group PLC4,887.00 GBX0.80
Reed Elsevier PLC1,645.00 GBX0.67
Rio Tinto PLC4,263.50 GBX0.51
About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.