Despite the considerable rally in UK equities over the last year there are still bargains to be had. The FTSE 100 is up to 7,397 today, rising nearly 8% year to date, but there are 16 undervalued stocks in the UK, according to Morningstar equity analysts.
The Morningstar Fair Value Estimate tells investors what the long-term, intrinsic value of a stock is, helping them see beyond the present market price. Morningstar calculates the fair value estimate of a company based on how much cash we think the company will generate in the future.
When determining the fair value estimate, Morningstar also takes into account the predictability of a company’s future cash flows – the uncertainty rating. A stock with a higher uncertainty rating, requires a larger margin of safety before earning a four or five-star rating. We highlight three undervalued stocks below.
Babcock International (BAB)
Babcock is one of the largest suppliers to the UKMinistry of Defence. Based on long-term agreements, the firm offers maintenance and retrofit of warships and nuclear-powered submarines to the Royal Navy and provides fleet management for the British Army.
The UK promotes Babcock as a strategic support partner to the British Army and the Royal Navy, and the firm has ownership or operational control of key naval infrastructure. Control over the docks of Devonport, the only place in the U.K. where large ships can be taken out of the water, gives Babcock an unbeatable advantage, and is a key reason why we believe it possesses a moat.
Hikma Pharmaceuticals (HIK)
Since going public in 2005, Hikma has grown rapidly thanks to emerging-market access, developed-country market share gains, and acquisitions. Manufacturing and operational improvements should continue to benefit the firm, but we have longer-term concerns about the stability of pricing and market share in the generics industry.
Despite its small share in the global generics market, Hikma has a few traits that place it apart from its peers. First, it's one of the world’s largest generic injectable drug manufacturers by volume.
Hikma lacks the capabilities of industry leaders, namely large-scale manufacturing, vertically integrated operations, and an adept legal department.
Meggitt (MGGT)
Headquartered in the United Kingdom, Meggitt specialises in smart engineering of components and subsystems providing critical functionality in challenging market applications within civil aerospace, military, and energy markets.
Meggitt’s Aircraft Braking Systems business is a market leader in military, business aviation, and regional aircraft, and we like the firm’s strong positions on aircraft such as the Bombardier C Series, numerous helicopters, and the F-35 fighter aircraft. Once an aircraft is delivered, the owner typically uses original equipment manufacturers for maintenance of mission-critical componentry, such as wheels and brakes.
Moreover, Meggitt’s positions on helicopters, which use large amounts of dynamic parts, and on regional jets, which land three times more often than wide-body commercial transports, enable the company to drive significant aftermarket revenue.
