Which UK Stocks are the Best Value in Europe?

The Morningstar Europe Stock List features the most attractively valued companies that possess sustainable competitive advantages

Alex Morozov, CFA 3 August, 2017 | 9:08AM
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August’s edition of the Morningstar Europe Stock List features the most attractively valued European-domiciled companies that possess sustainable competitive advantages.

This month’s list saw a fairly modest amount of turnover relative to last month. Changes in fair value estimates and trading fluctuations caused a few firms to drop off the list and others in our coverage universe to be added.

The FTSE 100 increased by 0.90% in July, while our overall European coverage universe trades at an average of 106% of our fair value estimates. Four firms were replaced by other companies in their sectors due to a lower price/fair value estimate. Wolters Kluwer was replaced by Pearson (PSON) in the consumer cyclical sector, while Unilever (ULVR) replaced Anheuser-Busch InBev in the consumer defensive sector, Nordea Bank replaced KBC Group in the financial services sector, and GlaxoSmithKline (GSK) replaced Sanofi in the healthcare sector.

New additions to the list this month include LafargeHolcim, a basic materials stock, Pearson, Unilever, Nordea Bank, and GlaxoSmithKline. While none of the new additions are pound-the-table bargains at this time, GlaxoSmithKline and Nordea Bank are two names within our European coverage that currently trade at a more appreciable discount on an uncertainty-adjusted price/fair value basis.

The healthcare sector once again continues to trade at the most pronounced average uncertainty-adjusted discount, followed by basic materials and industrials. Meanwhile, as has been a long-term trend, only one energy firm and one technology firm made the list.

Headquartered in the United Kingdom, wide-moat-rated GlaxoSmithKline is one of the world’s largest pharmaceutical companies as measured by total sales. The pharma giant produces drugs across multiple therapeutic classes, including respiratory and antiviral, while also developing vaccines and a number of healthcare-related consumer products.

Morningstar healthcare director and analyst Damien Conover believes that Glaxo’s wide moat is derived from “patents, economies of scale, and a powerful distribution network.”

Glaxo’s patents support “strong pricing power” and allow the firm time to develop new drugs ahead of potential generic competition. Economies of scale also afford Glaxo the opportunity to cut costs in operations following patent losses, while its distribution network allows the firm to partner with small pharma firms that “lack its resources.” While the firm’s blockbuster drug represents “just over 10% of total revenue,” Conover believes that Glaxo also benefits from “the complexity of receiving regulatory approval for a generic version of an inhaled drug, particularly in the United States.”

Conover believes this, combined with Glaxo’s historical shift of slight drug modification and improvement to true innovation, supports his moat rating.

The UK names that make the list are BT Group (BT.A), Pearson, Kingfisher (KGF), Imperial Brands (IMB), Unilever, Lloyds Bank (LLOY), Glaxo, Babcock International (BAB), Shire (SHP), Centrica (CNA), National Grid (NG.) and SSE Plc (SSE).

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
Babcock International Group PLC466.00 GBX-0.89
BT Group PLC142.15 GBX1.35Rating
Centrica PLC115.70 GBX-1.95Rating
GSK PLC1,414.00 GBX-0.39Rating
Imperial Brands PLC2,359.00 GBX-0.08Rating
Kingfisher PLC299.40 GBX0.94Rating
Lloyds Banking Group PLC54.82 GBX0.74Rating
National Grid PLC983.20 GBX-0.41Rating
Pearson PLC1,156.00 GBX-0.17
SSE PLC1,766.00 GBX-0.65Rating
Unilever PLC4,733.00 GBX-0.42Rating

About Author

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

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