4 UK Stocks that Beat their European Counterparts

Read on for attractively valued UK-listed stocks which Morningstar equity analysts deem to be the market leaders in Europe

Morningstar Equity Analysts 7 November, 2016 | 11:45AM
Facebook Twitter LinkedIn

November’s edition of the Morningstar Europe Core List features the most attractively valued European-domiciled companies that possess sustainable competitive advantages over their peers – also known as an “economic moat”. The stock picks across each sector are chosen based on their uncertainty-adjusted discounts to their intrinsic value, as calculated by Morningstar equity analysts. Of the 25 stocks that qualify, four are UK companies, listed below.

Sky (SKY)

Sky has succeeded in aggregating some of the best content available and marketing its services. More than a decade ago, the firm began to enter exclusive deals to carry major sporting events in the United Kingdom. In addition, it acquired rights to many first-run movies and U.S.-produced television series, which are becoming increasingly popular in the U.K.

While it resells the majority of its purchased content to other television carriers, it also produces its own shows to distinguish its product. The completion of a new production facility in 2011 has enhanced the company's content-creation capability.

Carnival (CCL)

Carnival is the largest company in the cruise industry, operating 10 global brands with more than 100 ships in service and passenger capacity of more than 215,000, allowing the firm to reach a diverse group of consumers in a lightly penetrated vacation segment. Efficient scale, the lowest unit costs in the industry, and intangible brand assets provide the company with a narrow economic moat.

Carnival's market remains largely un-tapped, with only half of the potential market ever having cruised – although the firm believes 75% of the addressable market will plan to cruise in the next few years. The potential for growth remains significant. 

Pearson (PSON)

Over the past two years, Pearson has experienced almost the perfect storm of negative events: declining university enrolments, the loss of testing contracts in the United States, a slowdown in emerging markets, and benign growth in primary and secondary educational spending. This caused the share price to fall by more than half between March 2015 and January 2016.

Pearson now finds itself at a crucial juncture. Having shed predictable but declining publishing businesses such as the FT and The Economist, Pearson’s portfolio is now focused on the educational sector. As digital learning slowly replaces traditional textbook-based learning, there is a large structural opportunity for Pearson to not only transition to a higher-margin product but also further integrate itself with schools and universities, increasing the sustainability of its revenue stream.

Diageo (DGE)

Diageo was created in 1997, following the merger of Grand Metropolitan and Guinness. Mergers and acquisitions remain part of the firm's DNA, and subsequent transactions – some transformative, others bolt-on – have established Diageo as the global industry leader. Although the beverages industry is fairly concentrated, analysts believe there is more consolidation to come.

Outside the top five firms, the industry is highly fragmented, and local players often dominate in niche product categories or local markets. These firms present a new wave of merger opportunities for the industry consolidators, including Diageo, to strengthen their presence in emerging markets.

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.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carnival PLC1,523.60 GBX1.87Rating
Diageo PLC3,729.50 GBX0.32Rating
Pearson PLC616.00 GBX1.92Rating

About Author

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