5 Undervalued European Stocks

European stock markets rebound after European Central Bank's reassurance of monetary stimulus yesterday. We highlight five undervalued stocks across the region

Karen Kwok 16 February, 2016 | 4:36PM
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Investor confidence in European stocks rebounded yesterday as European Central Bank President Mario Draghi insisted that policymakers will act if market turmoil threatens price stability.

Stocks in the UK and Europe closed higher on Monday as a result of the speech; the pan-European Stoxx 600 index climbed 3% on Monday, taking its two-day gain to 6%, as bank stocks rose on reports that the ECB is in talks to buy non-performing Italian bank loans.

Draghi defended European banks, whose shares fell rapidly last week as concern rose over their balance sheet health. Draghi said that the euro area banks have significantly strengthened their capital positions over the past few years and the quality of the banks' capital has substantially improved.

Edith Southammakosane, director at ETF Securities said that more needed to be done.

“While European banks recovered slightly last Friday, the market sell-off during most of last week weighed on investors’ confidence towards the stability of the European financial system,” she said. “As a result, the market pressure is rising for the European Central Bank to add more stimulus at its next meeting.”

Banks are not the only stocks which have seen valuations fall. Across equity sectors, share prices are deflated, creating buying opportunities for those looking to add European exposure to their portfolios. Morningstar Select reveals 18 stocks which are currently rated five-star by equity analysts, signifying they are trading at significantly less than their fair value. We highlight five below.

Credit Suisse Group AG (CSGN)

Credit Suisse is a global financial services company and operates the second-largest private bank in Switzerland with about CHF 1.3 trillion in assets under management. In 2015, 54% of risk-weighted assets were allocated to investment banking, 37% to private banking and wealth management, 4% to asset management, and 5% to nonstrategic businesses. The stock is rated with five stars by Morningstar analysts.

The recent European bank shares sell-off is overdone, Morningstar analyst Erin Davis says. She sees the rout as an opportunity for investors to increase stakes in the highest-quality names at attractive discounts.

Credit Suisse has proved to be one of the Europe’s strongest banks through the credit crisis, and its strong reputation is helping it to grow at home and aboard. The combination of Credit Suisse’s emphasis on its steady businesses and controlling risk will result in more-stable profits. Operating profitability is exceptional, with normalized post-tax returns on equity of well over 20%, Davis says.

However, the bank remains exposed to currency movements that strong franc will weigh on revenue, Davis adds.

Electricite de France SA (EDF)

Electricite de France, or EDF, is one of the world's largest energy companies, controlling the French power grid along with a massive global generation fleet. Its French nuclear fleet comprises 58 plants. It operates the largest power supply business in France, which acts as a broker between generators and retail end users, and holds stakes in numerous other energy businesses throughout the world, including a small but growing Chinese footprint. The Group is targeting roughly €6 billion in divestitures in part to finance the Hinkley nuclear project in the UK. It is rated by Morningstar analyst as an undervalued stock.

The company’s upside exposure to rising carbon and power prices is significant, Morningstar analyst Mark Barnett says. Nuclear plants are low-variable-cost, carbon-free generation that can run economically in nearly any power price environment.

The company has upside from new build nuclear in the United Kingdom and possibly China, as well as from developing European capacity markets, Barnett says. However the U.K. new build carries enormous risks and the Chinese are pushing to developer their own reactor designs for construction both at home and abroad to compete with EDF. The Hinkley Point nuclear project and its potential subsequent development could create significant value for shareholders although the final investment decision has been delayed.

The company shares soared 10% during trading today. The company cut its dividend after reporting a steep decline in annual profits due to asset impairments and provisions.

Novartis AG (NOVN)

Novartis develops and manufactures health-care products in four main operating segments: branded drugs, generic pharmaceuticals, eye care products, and consumer products. It is rated as an undervalued stock.

The company operates across multiple segments which provide greater stability in earnings, Morningstar analyst Damien Conover says. It is well-positioned for steady long-term growth. Several drugs will be launched during the next several years in critical therapeutic areas. Conover believes the company’s research and development in unmet medical needs should yield several new drugs with solid pricing power.

However, like all branded pharmaceutical firms, Novartis faces a number of considerable threats, including extended new drug approval times, pricing pressure from the managed-care industry, and political pressure to rein in drug costs, Conover says. Further, following several acquisitions and divestitures, the company faces integration risk in bringing together all of the business lines while staying focused on key strategies.

Mediobanca (MB)          

Mediobanca is one of the leading players in Italian finance with just over €70 billion in assets. The bank is Italy's largest investment banker and operates private banking, retail, and consumer banking efforts. It is rated by Morningstar analyst as an undervalued stock.

Mediobanca is the number one investment bank in Italy within M&A, positioning it to earn huge fees as the banking industry undergoes a forced round of consolidation, Morningstar analyst Stephen Ellis says.  It has strong asset quality because of its conservative underwriting and lower relative operating costs, which will serve the universal bank well as we expect system nonperforming loans to increase in the coming years, Ellis says. The bank’s results saw strength on the consumer and retail side. Also the bank has a stronger balance sheet and risk controls than peers.

However, the bank also remains exposed to the general health of the Italian economy, and since Italy’s currency is the euro, it lacks the ability to change interest rates or devalue its currency to otherwise spur its economy forward, Ellis says. According to Ellis, the recent trend in Europe toward negative interest rates has some effect on Italy which could create profitability issues.

Volkswagen AG (VOW3)

Volkswagen AG is one of the world’s largest automobile manufacturers. The company's financial services group provides dealer financing to support floor plans, consumer financing for vehicle purchases, and other financial services. This is rated as an undervalued stock.

The company’s diesel-emissions cheating scandal last year triggered consumer rebellion against the brand. Also potentially the Environmental Protection Agency in the US might fine and court litigation that may result from criminal investigation of diesel engine emission test manipulation to skirt regulatory requirements in several world regions, Morningstar analyst Richard Hilgert says.

Although Hilgert thinks that Volkswagen shares appear to be oversold under the impact of the scandal, the company’s growth is hindered due to unexpected drop in global vehicle production and difficulty in penetrating the US vehicle market. Cautious is warranted as the shares are likely to be volatile from heavy news flow hitting the markets for several months, according to Hilgert.

However, the company’s presence in global markets reduces reliance on any one regional economy and improves growth prospects as developing markets offset mature ones, Hilgert added.



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
Credit Suisse Group AG6.43 CHF-3.19Rating
Mediobanca SpA9.51 EUR-1.67Rating
Novartis AG85.90 CHF-1.26Rating
Volkswagen AG149.64 EUR0.00

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk