Over the past 18 months or so, investors have had to deal with a lot of uncertainty and volatility in the financial markets. Many observers are predicting that this environment will persist too – after all, higher interest rates and sticky inflation could lead to an economic slowdown.
Against this backdrop, investors may want to own companies that can provide certainties in terms of cash flow and business fundamentals. That’s why our analysts created the Best Companies to Own list, identifying 117 names that fit certain Morningstar criteria.
When identifying these companies, we ensure they have significant competitive advantages (we call it an economic moat) that are either stable or expanding. The best businesses also have predictable cash flows and are managed by teams that have a history of making smart capital allocation decisions.
After all, when you buy a share, you own a piece of that company. It is important to understand the quality of the company you own, for the same reason you would test drive a new car before buying it.
The idea behind this list is to identify the solid, high-quality businesses our analysts believe in, where having a stake puts investors in a far better position than the option of chasing market movements or the short-lived boom of a low-quality company.
Beware, though; the best companies are not always the best stocks to buy. The price you pay to own a company, solid or not, is also very important. This is why we focus on the best companies with the most undervalued share prices to date.
And more precisely, in this article we focus on the 10 best European companies of high quality (i.e. with a ‘stable’ or ‘positive’ economic moat), with an ‘exemplary’ Morningstar Capital Allocation Rating (this rating – also called Stewardship Rating – is a judgement on how the company’s management is able to increase shareholders’ return through good capital allocation) and with a positive Morningstar Star Rating (which means that they are undervalued compared to the fair value estimated by our analysis).
Without further ado, here are the 10 best European stocks.
Among these 10 firms, Just Eat (JET for the London Stock Exchange listing and TKWY for the Dutch option), which shows an undervaluation of as much as 79% according to Morningstar’s analysis (albeit with a fair value uncertainty considered ‘very high’) and Ayden (ADYEN), the only company to combine a ‘wide’ Economic Moat with a positive trend and an ‘exemplary’ capital allocation, are certainly worth mentioning.
Just Eat Takeaway.com NV (JET/TKWY)
Star Rating: ★★★★★
Economic Moat: Narrow
Fair Value: EUR 81
Fair Value Uncertainty: Very High
Just Eat Takeaway reported a first-quarter 2023 trading update with total orders down 14% and gross transaction value down 8% (down 8% at constant currency), lower than expectations. Southern Europe, Australia, and New Zealand continue to be the main detractors, but top-line performance was disappointing across the board.
Order declines were broadly expected due to tough comparable and a lower number of low-contribution orders, while lower GTV declines are the result of higher average order values (restaurants passing on inflation and Just Eat reducing the number of low-value orders) as well as positive currency effects. On guidance, management upgraded its outlook for fiscal 2023 adjusted EBITDA to EUR 275 million from EUR 225 million and introduced top-line guidance (GTV growth from negative 4% to 2% with growth skewed toward the end of the year given soft comps from last year).
“Management also expects free cash flow (excluding working capital movements) to turn positive in mid-2024, which we think is achievable given recent profitability improvements and cost controls,” says Ioannis Pontikis, senior equity analyst at Morningstar. “We expect to adjust our midterm growth outlook (lower) and EBITDA estimates (higher) after we digest results, but we don't expect to materially change our EUR 81 fair value estimate as our long-term value drivers remain intact. Shares trade deep in 5-star territory.”
Adyen NV (ADYEN)
Star Rating: ★★★★
Economic Moat: Wide
Fair Value: EUR 1,870
Fair Value Uncertainty: High
Adyen is capturing the e-commerce market by storm by solving the complex payment needs of large and global merchants. It combines the entire merchant acquiring value chain, including the settlement into a single platform, offering local acquiring services globally, reducing costs for merchants, and allowing its clients to scale worldwide in an instant. Being exposed to the fast-growing e-commerce space has been a boon for Adyen and will continue to be the core growth driver.
In December 2022, Morningstar’s analysts raised their fair value estimate for Adyen to EUR 1,870 per share from the previous EUR 1,770. “We refreshed our model slightly, although the change in fair value came predominantly from the time value of money since our last update. Our fair value estimate implies a 2022 enterprise value/EBITDA ratio of 58, which reflects the very strong growth rates we expect from Adyen,” Niklas Kammer,equity analyst at Morningstar, explains.
“Our forecast is based on strong volume growth in the e-commerce segment, increasing volumes from in-store transactions, and issuing will contribute as well. We expect a 29% acquiring volume CAGR over the next five years as Adyen boards more large merchants and expands with existing clients. Over our full 10-year explicit forecast our assumption declines to a 19% CAGR,” the analyst says.
Kammer does expect significant margin gains given Adyen’s scalable business model, and he pencils in significant staff growth over the next 10 years. “We believe Adyen will need to invest in marketing, sales, and engineers if it wants to pursue its high-growth outlook. Our EBITDA margin expands from 64% in 2021 to 76% in 2031.”
