Analysts Drop WPP from Value Stocks List

Firms that left the European value stocks list this month included WPP, Nordea Bank, ConvaTec Group and Naturgy Energy Group

Alex Morozov, CFA 7 September, 2018 | 8:48AM
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September’s edition of the Morningstar Europe Core Pick List features our most attractively valued European-domiciled names with sustainable competitive advantages, or economic moats. Our top picks across each sector are chosen based on their uncertainty-adjusted discounts to their intrinsic value.

This month’s list saw a moderate amount of turnover, as trading-level fluctuations and fair value estimate changes were minimal during August.

Firms that left our list this month included WPP (WPP), Nordea Bank, ConvaTec Group and Naturgy Energy Group. Our overall European coverage trades at an average of 104% of our fair value estimates.

Former WPP chief executive Martin Sorrell

Narrow-moat-rated Nordea Bank left the list this month as its stock price appreciated approximately 5%, while analyst Derya Guzel maintained her fair value estimate. Guzel still believes that Nordea benefits from geographical business diversity, mainly comprising the Nordic economies, which provides stable net income generation. While the stock is still undervalued, the recent appreciation allowed other stocks to enter the list this month.

New additions to the list this month include Basf, KBC Group, Sanofi, and Industria De Diseno Textil. Industria De Diseno Textil and KBC Group specifically represent some of the cheaper European names on an uncertainty-adjusted price/fair value basis, and both currently trade at about a mid-teen discount to their respective fair value estimates.

Narrow-moat-rated Industria De Diseno Textil, known as Inditex, is a multi-brand fashion conglomerate. Zara is its flagship brand, generating over 65% of the company’s revenue and around 70% of profits. Other brands include Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Uterque, and Zara Home.

The company operates through over 7,000 stores globally, over 2,000 of which belong to the Zara brand. The stock was added to the list as its share price decreased 10% while analyst Jelena Sokolova maintained her fair value estimate. Sokolova believes the company’s model is defensible against outside competition, as the secret to its success lies in its centralised operations, feedback loop, and scale. About 60% of Inditex’s manufacturing is carried out by suppliers in Spain’s vicinity, and distribution centres are centralised in Spain.

Shipments are made to all stores worldwide twice a week, and stores receive orders in 24-48 hours. Sokolova believes this frequent replenishment model allows the company to be more responsive to immediate trends and achieve better sell-through at full price. These operational advantages tie into her belief that Inditex has earned a narrow moat through cost advantages. These cost advantages arise from design and supply-chain organisation that allows the firm to maximise full-price sell through and minimise discounts.

This results in gross margins higher than most peers, despite comparable product prices. As a result, Sokolova thinks Inditex’s brands should continue to take market share from the incumbent weaker players, as they have in the past.

Consumer defensive maintained its status as the cheapest sector on the list, followed by industrials and communication services. One technology sector stock and one real estate sector stock made the list.

6 UK Stocks Make the European Value List

BT Group (BT.A)

BT Group, formerly known as British Telecom, is the incumbent phone operator and largest supplier of fixed-line phone services in Britain, with about 38% market share. It is also the largest wireless operator and the only company in the UK that owns both its own fixed-line and wireless networks. Despite global services' reduced size as a percentage of BT’s revenue, it is still one of the largest international providers of managed networks and information technology services.

Kingfisher (KGF)

Kingfisher is Europe's largest home-improvement retail group and the third largest globally behind Lowe's and Home Depot. With nearly 1,300 stores in 10 countries across Europe, Kingfisher generates annual sales of just under £12 billion. Its main retail brands are B&Q and Screwfix in the United Kingdom and Castorama and Brico Depot in France. The company also operates the Koctas brand, a 50% joint venture in Turkey with Koc Holding. It sold its majority stake in its China business to Wumei Holdings, a Chinese retailer, in 2015.

British American Tobacco (BATS)

Following the acquisition of Reynolds American, British American is neck-and-neck with Philip Morris International to be the largest listed global tobacco company; slightly larger than PMI on net revenue, but slightly smaller on volumes. British American's Global Drive Brands are Dunhill, Kent, Pall Mall, Lucky Strike, and Rothmans. The firm also sells vapor e-cigarettes, including its Vype brand, heated tobacco, with glo, as well as roll-your-own and smokeless tobacco products. The company holds 31% of ITC Limited, the leading Indian cigarette maker.

Imperial Brands (IMB)

Imperial Brands is the world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2017 volume of 265 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories and is a leading seller of cigars in several countries. Recent acquisitions in the United States make Imperial the third-largest manufacturer in that market. Through its acquisition of Altadis, the firm has a logistics platform in Western Europe.

Sage Group (SGE)

The Sage Group is a global supplier of accounting and business management software. The firm caters primarily to the needs of small to medium businesses; about 80% of its clients have fewer than 25 employees. Sage has more than 6 million customers worldwide, employs over 13,000 people, and generates more than £1.7 billion in revenue. The company was formed in 1981 and was floated on the London Stock Exchange in 1989.


SSE is an energy holding company based in the United Kingdom. The bulk of SSE's profit comes from the company's 11 gigawatts of power generation, unregulated electric and gas supply businesses, and its regulated networks business, which includes electric and gas distribution and transmission systems. The firm is also involved in smaller related businesses such as gas storage, home energy services, contracting, and oil and gas production.

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
British American Tobacco PLC2,475.00 GBX-0.44Rating
BT Group PLC134.25 GBX1.24Rating
Imperial Brands PLC1,965.50 GBX-1.43Rating
Kingfisher PLC260.60 GBX-0.38Rating
Sage Group (The) PLC1,106.00 GBX1.98Rating
SSE PLC1,831.50 GBX-1.72Rating
WPP PLC848.00 GBX-0.82Rating

About Author

Alex Morozov, CFA  Alex Morozov is the director of the health-care team at Morningstar.

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