November’s edition of the Morningstar Europe Core Pick List features the most attractively valued, European-domiciled companies that possess sustainable competitive advantages. Turnover this month was similar to October because of trading-level fluctuations and fair value estimate and moat rating changes.
Firms that left our list this month included communication services company Proximus, Publicis Groupe, Danske Bank, Lloyds Banking Group (LLOY), Grifols and Sage Group (SGE). Our overall European coverage trades at an average of 96% to our fair value estimates.
Narrow-moat Proximus left the list this month, as analyst Allan Nichols maintained his fair value estimate of €28, while the stock appreciated approximately 10% over the past month.
Nichols believes there is still upside as the firm continues to grow revenue in its core Belgian business, but because of the recent appreciation, other names now look more attractive. Narrow-moat Danske Bank left the list this month due to the tangible impact related to revelations around its money-laundering case and potential fines.
Analyst Derya Guzel believes the market is punishing the firm for poor crisis management, but these factors combined with the high uncertainty around the situation allowed other companies to enter the list this month.
New Additions to the Value List
New additions to the list include Vodafone Group (VOD), Industria De Diseno Textil, KBC Group, UBS Group, ConvaTec Group and Atos. Both Vodafone Group and UBS Group specifically represent some of the cheaper European names on an uncertainty-adjusted, price/fair value basis; both currently trade at about a high-teens discount to their fair values.
Narrow-moat Vodafone Group is one of the largest wireless phone companies in the world, with 274.9 million proportionate wireless customers. Vodafone has wireless operations in 17 countries and partnership interests in many others.
More recently it has acquired cable TV operations and access to fibre, either laying its own or gaining wholesale access, to offer broadband services. The stock was added to the list after shares decreased approximately 9% over the month while analyst Allan Nichols maintained his fair value estimate.
Nichols expects revenue growth will be driven by a combination of improved results in Europe, owing to gains in convergence and higher data usage – helped by the end of mobile termination rate cuts – and continued growth from emerging markets, particularly Turkey and Vodacom in Africa. Nichols believes Vodafone has a narrow economic moat due to cost advantages and efficient scale.
Vodafone owns assets throughout the world and where it doesn’t have its own operations, it has formed strategic partnerships. More important than its global size is the scale it has within its various markets and the quality of those networks.
Additionally, the quality of the firm’s network is almost always rated in the top two, allowing it to compete more on quality than on price. Because telecom networks are expensive to build and maintain, the more customers an operator has on its network, the more people it can spread its fixed costs over, thus reducing the average cost per subscriber.
Vodafone’s scale also provides it with some advantages over competitors, allowing it to source equipment at lower prices. The firm can develop a product in one country and roll it out to others at minimal additional expense.
Other UK-listed stocks on the Pick List include BT Group (BT.A), WPP (WPP), British American Tobacco (BATS), Imperial Brands (IMB), BP (BP.), Royal Dutch Shell (RDSB), ConvaTec Group (CTEC) and SSE (SSE).
