Europe’s Most Undervalued Stocks

Cars, tobacco, and a historically-troubled Italian defence company top the list of stocks currently trading at a discount in Europe

Sunniva Kolostyak 11 November, 2021 | 2:44PM
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European map under magnifying glass

Wondering which stocks are cheap at the moment? Look no further: we’ve scoured our data looking for the most undervalued stocks under Morningstar coverage.

A key part of value investing is finding stocks that are not only cheap, but that have the potential of bouncing back and bringing solid returns over the long term. These European companies are the cheapest of our 5-star-rated stocks, the most extreme end of our valuation scale.

Renault (RNO)

61% Discount

France’s Renault (RNO) is the most undervalued company in Europe, according to Morningstar estimates. The company is part of the wider Renault-Nissan-Mitsubishi alliance, which makes almost 8 million vehicles a year: Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi (and Japan’s Nissan is also 5 Stars).

The company has posted negative returns for several years. So far this year it is down 4.08%, which is still better than the disappointing return of -15.22% in 2020. Over the past 5 years, Renault has been down 9.33% year-on-year. Like other car companies, it has been hit by the chip shortage, and management believes 500,000 units will be lost as a result. We believe these chip and Covid-19 headwinds are temporary. For patient long-term investors, this 5-star rated stock is attractively valued.

Just Eat Takeaway (TKWY)

60% Discount

Online food delivery boomed during lockdown in 2020 and Just Eat’s shares soared to record highs, but some people believe food delivery will fade when we reach the end of the pandemic. Moreover, Deliveroo’s IPO flop has hurt investor sentiment towards the sector, in the short term at least. But Just Eat has one of the most recognisable brands in the industry and has used its first mover advantage to build a dominant share in its key markets. In the UK for example, it has 16 million active customers and, in the US, it has taken over rival GrubHub.

The company is down 33.98% this year, but up 22.29% on a five-year annualised basis. Our analysts think online food delivery can remain popular, and Just Eat Takeaway is our top pick in this fast-growing industry.

Prosegur Compania De Seguridad (PSG)

50% Discount

Spanish security firm Prosegur Compania De Seguridad is one of the largest such companies in the world, and specialises in cash-in-transit and in-person guarding, with a small but fast-growing alarms business. The company’s operations are more geographically consolidated than those of peers, operating in just 25 countries where it holds large market share, primarily in Latin America and Western Europe. The company has struggled with growth in the Latin American market, but our analysts think the company could be set for moderate improvements from an operating margin perspective.

Morningstar’s equity analyst Michael Field says: “With inflation the current investor watchword, Prosegur was quick to highlight the positive relationship much of their business has with it. Historically, inflation has driven sales growth, particularly in the cash business, where the volumes of cash being transported and counted are directly increased by inflation.”

The company has grown 7.15% this year after being down 30.16% in 2020. Over the past five years, it has an average return of -9.32%.

Leonardo (LDO)

48% Discount

Leonardo is one of the largest European defence firms, and 30% of its shares are owned by the Italian government. The group’s divisions include helicopters; defence, electronics, security systems, as well as aeronautics. The company has a somewhat checkered history, plagued by corruption, political meddling, and a seemingly constant restructuring program, which has weighed on its potential to produce attractive margins.

The company is also recovering from 2020, when its shares were down 42.11%. So far this year, Leonardo is up 12.15%. After a series of disposals and portfolio streamlining, the group is in a position to focus on its core markets, and we believe that despite short-term external market turbulence, the group will be able to generate economic profits over the next 10 years. Its 5-year annualised return is -9.89%.

Imperial Brands (IMB)

47% Discount

The only UK company on our European list is Imperial Brands. The world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2020 volume of 239 billion cigarettes sold, IMB operates in more than 160 countries. The company tops our list of top dividend payers for the second month in a row, with yields of 8.82%. And, it is one of only three UK companies covered by Morningstar with both a wide moat and five stars.

Morningstar analysts think that Imperial has a sustainable competitive advantage because smokers are loyal to its brands (while the nature of the product itself also creates "loyalty" of a different kind). Tight regulation in the tobacco industry also keeps competitors at bay and market shares stable. While imperial is down 6.66% on a 5-year annual basis, it has returned 6.72% so far this year.

How We Rate Stocks

Using the price/fair value (P/FV) ratio, investors can get an idea of where a company's share price stands in relation to its estimated fair price. For example, a P/FV ratio of 1 suggests a stock is perfectly fairly valued, whereas one with a ratio 0.50 is 50% undervalued.

Valuations change every day based on movements in the company’s share price, while Morningstar analysts also move their fair values up and down regularly, especially after financial results. As company prospects can change dramatically, particularly in dynamic emerging markets, our list of most undervalued stocks is likely to change on a daily and weekly basis.

Are these 5-star stocks a buy recommendation? Not necessarily. As the official methodology points out, the star rating is meant to be a “guidepost” and investors “must consider their own specific investment goals, risk tolerance, tax situation, time horizon, income needs, and complete investment portfolio, among other factors”.

Our methodology for 5-star stocks is explained further below:

“We believe appreciation beyond a fair risk-adjusted return is highly likely over a multiyear time frame. Scenario analysis developed by our analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximising upside potential. This rating encourages investors to consider an overweight position in the security relative to the appropriate benchmark.”

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
Rating
Imperial Brands PLC1,813.00 GBX-1.44Rating
Just Eat Takeaway.com NV14.15 EUR-4.61
Leonardo SpA Az nom Post raggruppamento9.43 EUR-3.78Rating
Prosegur Compania De Seguridad SA1.67 EUR0.00Rating
Renault SA24.23 EUR0.00

About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk