5 Most Common Shares: Morningstar's View

Morningstar's equity analysts provide their views and valuations on the five most frequently researched stocks on Morningstar.co.uk

Holly Cook 20 January, 2014 | 2:30PM
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If you follow our quarterly reports into the most frequently researched stocks on Morningstar.co.uk, then you’ll know that each quarter there are several usual suspects that feature on the list, alongside more topical event-driven additions.

For those investors keen to know more about these stalwarts—companies that pop up again and again in investors’ portfolios as they promise steady growth and relatively reliable dividend—we’ve produced a summary of highlights from our Morningstar analyst reports on each stocks.

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Click on a company name below to access the full research report. Click on a company ticker to see our free share price reports for each company.

Vodafone (VOD)

Morningstar Rating: 3 Stars

Morningstar Fair Value Estimate: 218 pence per share

Uncertainty Rating: Medium

Economic Moat: Narrow

Bulls Say

Vodafone has sold most of its minority assets and is in the process of selling Verizon Wireless. These divestitures reduce its debt load and increase its focus on operations it controls. India, in particular, is showing signs of improvement.

The firm generates significant free cash flow, which it is using to increase dividends, make acquisitions and reinvest in the business.

Vodafone acquired Kabel Deutschland, increasing its position in offering converged telecom services as well as reducing cost.

Bears Say

Competition is increasing globally. European rivals are merging and becoming more global, and strong emerging-markets players are developing. This competition is driving down ARPU.

Vodafone could overpay for more acquisitions like Kabel Deutschland.

The Indian government is a thorn in Vodafone's side. After the Indian Supreme Court ruled in Vodafone's favor regarding its $2.5 billion tax dispute with the Indian government for its acquisition of Hutchison Essar in 2007, the government proposed a new law retroactive to 1962, which could require the firm to pay the tax.

Lloyds Banking Group (LLOY)

Morningstar Rating: 3 Stars

Morningstar Fair Value Estimate: 94 pence per share

Uncertainty Rating: High

Economic Moat: Narrow

Bulls Say

As non-core assets shrink and government ownership falls, Lloyds is re-emerging as the bank it once was--a strong, conservative and impressively profitable retail-focused institution.

Lloyds' funding has improved significantly. Short-term wholesale funding is only £50 billion, compared to about £160 billion in 2009.

Asset quality has stabilised in Lloyds' core businesses and it is likely to improve further as the UK economy returns to growth.

Bears Say

Some 7% of Lloyds' loans are impaired. At best, losses will pressure profits for some time, but they may cause serious pain if the crisis in Europe deepens.

Lloyds' already-thin net interest margins is well below historical levels and is likely to remain depressed until Europe's economy recovers and interest rates rise.

While Lloyds has run off more than half of its non-core assets, they remain 9% of total assets and more than 100% of equity. If management's valuation of these assets proves too optimistic, a substantial portion of Lloyds' book value could be wiped out.

Tesco (TSCO)

Morningstar Rating: 4 Stars

Morningstar Fair Value Estimate: 380 pence per share

Uncertainty Rating: Medium

Economic Moat: None

Bulls Say

Tesco's scale should allow the company to invest in price and ultimately maintain its leading market share position in the UK.

Tesco already competes in multiple channels and should be able to leverage its reputation to retain its core customers as their shopping habits change. Tesco is well positioned to capture its fair share of growth in the online channel, although AmazonFresh could pose a larger threat down the road.

International growth opportunities could drive profitability higher as Tesco's stores mature and if revenue reaches critical mass for leveraging fixed costs.

Bears Say

The UK grocery industry is mature, relatively concentrated and overstored. Because customer switching costs are virtually non-existent, players have become more price competitive (at the expense of margin) in an attempt to drive store traffic.

Operating costs are higher for firms with large store network costs. Traditional brick and mortar retailers may be challenged if consumers increasingly purchase items from online retailers.

Low consumer confidence and weak spending patterns, particularly for higher-margin discretionary items, could weigh on Tesco's top and bottom lines.

GlaxoSmithKline (GSK)

Morningstar Rating: 3 Stars

Morningstar Fair Value Estimate: 1,777 pence per share

Uncertainty Rating: Medium

Economic Moat: Wide

Bulls Say

Glaxo is well-positioned in developing orphan drugs, which tend to carry strong pricing power and usually face less competition.

Outside of the potential generic competition to Advair, the company faces only minor near-term patent losses.

Glaxo's pipeline is emerging with several new potential blockbusters. Rather than launching several drugs with slight enhancements, Glaxo's next generation of drugs addresses unmet medical needs.

Bears Say

Even though device patents may hold off generic Advair competition until 2016, these patents are weaker than composition-of-matter patents, which opens the door to generics in the near term, especially in Europe, where regulators seem more willing to approve generic inhaled drugs.

Glaxo is trying to follow up Advair with its next-generation respiratory drug BREO, but the new drug posted poor Phase III data, creating challenges for the firm in the respiratory area.

Glaxo's key vaccines Cervarix and Synflorix lost the first-mover advantage to Merck and Pfizer, respectively.

Barclays (BARC)

Morningstar Rating: 3 Stars

Morningstar Fair Value Estimate: 320 pence per share

Uncertainty Rating: Very High

Economic Moat: None

Bulls Say

Barclays' new management will reform corporate governance, smooth over problems with regulators, and ensure more of the bank's income is returned to shareholders.

Prudent management practices such as bold measures to fix underperforming units and a strict adherence to generating economic profits should benefit shareholders.

Barclays Capital's push into emerging markets, such as China and Africa, will diversify the company's revenue stream and help stabilise profits, which will be especially valuable in the current difficult economic environment.

Bears Say

Regulatory changes and the poor economic outlook in Europe may make it difficult for Barclays to outearn its cost of equity on an ongoing basis.

Barclays escaped buying ABN Amro and avoided RBS' fate more by accident than by design. Barclays has not left behind its empire-building ambitions, and next time it may not be that lucky.

High compensation costs, especially in Barclays' investment bank, threaten to eat up much of shareholder value.

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
Barclays PLC260.45 GBX0.08Rating
GSK PLC1,329.00 GBX0.68Rating
Lloyds Banking Group PLC53.93 GBX-0.50Rating
Tesco PLC366.04 GBX-0.10Rating
Vodafone Group PLC66.60 GBX0.15Rating

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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