5 UK Stocks on the European Ideas List

August’s edition of the Morningstar Europe Ideas List features the most attractively valued companies that possess sustainable competitive advantages

Morningstar Equity Analysts 3 August, 2016 | 4:25PM
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The Morningstar European Ideas List features our most attractively valued European-domiciled names with sustainable competitive advantages, or economic moats. Equity analysts highlight companies across each sector chosen based on their uncertainty-adjusted discounts to their intrinsic value.

Most stocks traded up during the month, meaning bargains have become more scarce

This month’s list saw an increased amount of turnover, with seven new companies entering the list. These latest changes were evenly spread across multiple sectors, with the financial services sector being the only sector with more than one change.

New additions to the list this month include Diageo (DGE) and ARM Holdings (ARM), as they represent some of the cheapest European names on an uncertainty-adjusted, price/fair value basis. They join three other UK stocks on the list; SSE (SSE), Centrica (CNA) and Petrofac (PFC).

Most stocks traded up during the month, and while this can be a good problem to have, bargains have become more scarce. Several of the new additions—Syngenta, Diageo, and ARM Holdings—entered as three-star stocks. This means that while they are not massively undervalued on an absolute basis, from a relative standpoint they are the most undervalued for their sector.

This means that their respective sectors are not currently presenting numerous bargains.

Additionally, the technology and utilities sectors offer few bargains within our coverage list, with only one or two stocks, all of which are currently trading at three-star valuations, meaning they are trading at fair value, making the list from each of these sectors. With this being said, there are still several cheaper names on the list.

Comms Stocks Hit by Brexit Vote

Fibre-optic telecoms stock SFR Group, is trading at an uncertainty-adjusted price/fair value estimate of 78%, which is worthy of a five-star rating. Morningstar analyst Allan Nichols believes the market’s reaction within the telecom sector to the EU referendum vote has been an overreaction.

He views telecoms stocks as somewhat immune to geopolitical changes. In his view, Brexit will have no effect on cross-border transfers of voice or data, as mobile termination rates for voice have already been reduced to negligible levels, while for data they have been cut in half and will be down to local roaming rates by the end of 2017. While he expects the U.K. economy to slow as a result of Brexit, he doesn’t believe the event will have a material impact on the U.K. operators. Nichols believes that SFR’s narrow moat remains intact. Additionally, he expects SFR to improve margins as it reduces its cost structure.

In-country mergers are almost always accretive, and Nichols anticipates that many functions between the two companies will be combined. In the longer term, there is the potential to benefit from additional consolidation in France if any companies can reach a merger agreement and the regulators allow consolidation.

Only one technology firm, one energy firm, and two utilities firms made our list this month, and none of those firms look particularly undervalued to us currently. The European technology sector remains the most expensive sector, based on our uncertainty-adjusted fair value estimates.

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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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.