June’s edition of the Morningstar Europe Core List features the most attractively valued European-domiciled companies that possess sustainable competitive advantages. This month’s list saw increased turnover, with six new companies entering the list. These latest changes were evenly spread across multiple sectors.
Firms that left our list this month included Syngenta (SYNN), Pearson (PSON), Diageo (DGE), Technip (TEC), Elekta (EKTA B), and Safran (SAF).
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.
How are European Stock Markets Faring?
The FTSE 100 decreased by 0.18% in May, while our overall European coverage became ever so slightly less expensive than last month and now trades at an average of 102% of our fair value estimates.
While earnings season was gradually winding down, turnover increased for our June pick list. A large reason for this was increased volatility in the prices of several of the stocks leaving and entering the list. Elekta is ever the rollercoaster ride, and May was no exception; at least for May, however, the rollercoaster was climbing higher, with shares rising 12% during the month.
This positive change in share price caused Elekta to leave our list. Morningstar analyst Alex Morozov acknowledges that risks remain, but with the long-term opportunities for radiotherapy in general and wide-moat-rated Elekta’s strong competitive positioning within the space, he still believes that shares are meaningfully undervalued and that they offer a compelling long-term reward profile.
Safran also saw its share price rise during the month, posting an increase of 4.7%. While shares remain undervalued with a fair value estimate of €71, they have at least been moving in the right direction and are leaving the list this month for positive reasons. Pearson experienced similar outcomes during the month, with shares increasing in price by 4.2%.
Analyst Philip Gorham has reiterated his fair value estimate for the firm, and believes that Pearson remains a business with structural but fading competitive advantages within its higher-education publishing business, earning the firm a narrow moat and a negative trend rating.
Diageo is Dropped from Undervalued List
Diageo, a large player in European consumer staples, is also leaving the list this month, but this is largely due to Danone BN becoming a higher-conviction idea from our analysts, as Diageo remains an interesting opportunity for long-term investors.
Morningstar analyst Philip Gorham believes Diageo has several self-help levers it can pull in the medium term to help offset recent headwinds, including cutting costs, to which management has already made a commitment. Developing a coherent beer strategy in Africa is another potential lever, and the recent move to take greater control of Guinness Nigeria is an opportunity to squeeze out costs and develop better long-term brand management.
Which New Stocks Make the List?
Recent results show that this could be in the very early stages of playing out. Other drops from the list were primarily the result of other names decreasing in price and therefore becoming more undervalued than previously listed names. New additions to the list this month include Air Liquide (AI), Burberry Group (BRBY), Danone, Bureau Veritas (BVI), SSE (SSE), and Bayer (BAYN), as they represent some of the cheapest European names on an uncertainty-adjusted price/fair value basis.
