3 Undervalued UK Stocks

Looking for contrarian investment ideas for your portfolio? We reveal three UK companies that Morningstar equity analysts consider undervalued

Emma Wall 2 February, 2017 | 4:08PM
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Looking for a contrarian investment idea? The Morningstar Rating for stocks can help investors uncover stocks that are truly undervalued, cutting through the market noise. Four and five-star ratings mean the stock is undervalued, while a three-star rating means it's fairly valued, and one and two-star stocks are overvalued.

The Morningstar Fair Value Estimate tells investors what the long-term, intrinsic value of a stock is, helping them see beyond the present market price.

These three companies are currently all rated four stars by Morningstar equity analysts.

Cobham (COB)

Cobham's string of profit warnings continued, with new CEO David Lockwood expecting the firm's 2016 trading profit performance to be £245 million, below the range of £255 million to £275 million set out in October 2016. The new management team is commencing a thorough closing balance sheet review, including major contracts and asset carrying values. The trading profit disclosed above is before any adjustments that may arise from this review. At this stage, Morningstar equity analysts are not revising their fair value estimate of £1.64 as their full-year profit estimates were in line with the management’s revised target. Equity Analyst Jeffrey Vonk says Cobham is the most technically advanced supplier and dominates the aerial refuelling systems market, with over 2,000 aerial refuelling systems delivered to defence customers worldwide.

Vodafone (VOD)

On January 30, Vodafone confirmed media speculation that it is in discussions with the Aditya Birla Group regarding the possible merger of Vodafone India and Idea Cellular.

Equity analysts have long stated that they viewed India as both the upside and the risk for Vodafone. The firm’s subscriber growth has long exceeded our projections, but it has struggled to translate that growth into earnings and cash flow. Over the past two years, the market was beginning to recover from previous price wars, only to now see RJio start them again. Analysts view this merger as a strong response, and see Vodafone’s shares as undervalued.

With the completion of “Project Spring”, Vodafone is nearing the end of its restructuring. The company has successfully transitioned from one of the world’s largest wireless-only telecom firms to a diversified operator offering converged mobile and fixed-line services in most of its developed markets.

Imperial Brands (IMB)

Under CEO Alison Cooper, Imperial Brands is slowly transforming from an also-ran – albeit a highly profitable one – to a significant player and potential consolidator in the global tobacco industry. But despite recent value-creating acquisitions in the United States, analysts think there is more work to do, and of the three wide-moat European cigarette manufacturers Morningstar covers, analysts prefer the competitive positioning of Philip Morris International and British American Tobacco on the basis of their superior scale. Brand loyalty to Imperial's value brands is weaker than that to British American and particularly to Philip Morris International, which owns Marlboro, the only truly global cigarette brand.

Given that Imperial is at a structural disadvantage to its bigger rivals, analysts think a valuation discount to Philip Morris and British American is appropriate.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Imperial Brands PLC2,009.00 GBX0.10Rating
Vodafone Group PLC71.76 GBX1.59Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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