Second-quarter earnings for UK-listed stocks covered by Morningstar analysts have been a mixed bag. That means Morningstar analysts have made Fair Value Estimate revisions to the some of the UK's best-known brands.
When Morningstar data was collected for August 30, the average FVE change was 4.3%. Schroders (SDR) saw the largest fair value cut for the second quarter. Schroders has seen a decline in profits due to choppy market conditions.
A large cut or increase in a fair value estimate may signal to investors that a company's fortunes are changing. However, it's important to consider how a stock trades compared with the estimate.
Both Schroders, which has a Morningstar Rating of 4 stars, and Burberry, which has a 5-star rating, are trading below their estimates, meaning our analysts think they're attractively priced for long-term investors. Burberry has just been kicked out of the FTSE 100.
Here's what Morningstar's analysts had to say about these stocks.
Schroders (SDR)
• Analyst: Johann Scholtz, CFA
• Fair Value Estimate: £4.20
• Fair Value Decrease: 16%
• Economic Moat: Narrow
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
Schroders had the largest fair value estimate cut for the second quarter, going to £4.20 from £5. Its shares currently trade at £3.29.
"We now take a more bearish view of Schroders' short-term prospects. Fee margins and client flows will likely be weaker than we previously forecast. However, we believe that Schroders has positioned itself well to benefit from longer-term trends," writes Johann Scholtz, equity research analyst at Morningstar.
"Apart from briefly during the pandemic, the shares have not traded at these levels in over a decade. We do not believe that its longer-term fundamentals have deteriorated to such an extent to justify a nearly 50% decline from their 2021 highs.
"The results did little to dispel the notion that traditional asset management in the UK is in secular decline. While taking a dimmer view of Schroders' medium-term prospects, we believe the firm is on the correct strategic course. It has allocated capital toward expanding in private markets and wealth management. These businesses have better growth prospects, have higher switching costs, and suffer from less margin pressure than traditional public market asset management," he adds.
Schroders is currently trading significantly below its fair value estimate and has a Morningstar Rating of 4 stars.
Burberry Group (BRBY)
• Analyst: Jelena Sokolova, CFA
• Fair Value Estimate: £13.30.
• Fair Value Decrease: 15%
• Economic Moat: Narrow
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: High
Burberry saw its fair value estimate cut to £13.30 from £15.70 due to the business experiencing a slowdown in sales amid a wider contraction in certain areas of luxury spending across the world. Shares in the company are currently trading at £6.31.
"We still see value in the shares. The luxury sector is going through one of its downcycles, which historically haven't persisted for longer than one or two years, so we still see potential for Burberry to recover brand momentum," Morningstar senior analyst, Jelena Sokolova writes.
"Burberry has been lagging peers in recent quarters and lagging industry growth for around a decade, parting ways with three CEOs during this time frame. Fundamentally, we think Burberry's issues include reliance on a slower-growing apparel segment for the bulk of sales, with a rather low contribution from trench coats, an area in which the brand is strongest."
"Leather has been an investment category for a long time, but Burberry doesn't have the strong brand recognition of other players in this area. We believe the overview of price structures and bringing in more affordable offerings should be a priority for the incoming CEO. We also think it's important to focus the brand on outerwear, where it is the strongest, in terms of marketing and communications," she adds.
Burberry is trading at an overall 51% discount to Morningstar's fair value estimate and has a Morningstar Rating of 5 stars.
Melrose Industries (MEL)
• Analyst: Loredana Muharremi, CFA
• Fair Value Estimate: £7.40
• Fair Value Decrease: 14.9%
• Economic Moat: Wide
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
Melrose Industries saw its fair value estimate cut to £7.40 from £8.70. Its shares are currently trading at £4.63.
"Wide-moat Melrose delivered strong results in the first half of 2024. It reported a 12% increase in overall group revenue, primarily driven by a 21% rise in the engines division, thanks to robust performance in parts repair, defense aftermarket, and the RRSP portfolio. The structures division saw 6% growth, constrained by supply chain issues and customer de-stocking," writes Loredana Muharremi, equity research analyst at Morningstar.
"Despite these positive results, management has revised the full-year 2025 revenue guidance down to £3.8 billion from the previous £4 billion due to ongoing supply chain issues and capacity constraints. However, the company maintained its operating income targets. We have adjusted our fair value estimate from £8.60 to £7.40 to reflect the updated guidance."
Melrose Industries is currently trading below its new fair value estimate and has a Morningstar Rating of 5 stars.
WPP (WPP)
• Analyst: Eric Compton, CFA
• Fair Value Estimate: £8.20
• Fair Value Decrease: 12.7%
• Economic Moat: Narrow
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
WPP's fair value estimate was cut to £8.20 per share from £9.40. Its shares are currently trading at £7.16.
"Narrow-moat WPP Group muddled through its second quarter as management lowered its full-year revenue growth outlook. We are lowering our fair value estimate to [account] for the lowered near-term growth outlook and a less optimistic longer-term margin profile. We continue to forecast that the company will struggle to meet its medium-term goal of 3%-5% growth," writes Morningstar analyst Eric Compton.
"Our revised fair value estimate is still roughly 17% above the current price at the time of writing. We do not think the valuation is demanding. Still, we believe WPP will have to prove that it can at least keep up with peers on revenue growth and start seeing some of its restructuring efforts pay off with improved margins before its valuation gap with peers begins to close."
WPP is trading below its new fair value estimate and has a Morningstar Rating of 3 stars.
BP (BP.A)
• Analyst: Allen Good, CFA
• Fair Value Estimate: £4.90
• Fair Value Decrease: 12.5%
• Economic Moat: None
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
BP saw its fair value estimate drop to £4.90 per share from £5.60. Its shares are currently trading at £4.12.
"BP remains committed to investing and growing its nonhydrocarbon businesses as it seeks to transition to an integrated energy company from an integrated oil company. However, it has revised its previous plans to reduce production by 25% by 2025 and 40% by 2030. It will now increase production slightly through 2025 and reduce it by about 25% from 2019 levels by 2030, largely through divestments. During that time, it should also improve upstream profitability as higher-margin volumes from major projects come online and costs are reduced. Shareholders should welcome this change, given the improved outlook for oil and gas prices," writes Allen Good, director of equity research.
"The extended life is a result of greater investment, but not at the expense of the transition businesses, to which BP remains committed. Its ambitious growth plans for renewable generation capacity remain intact, with targets of 20 gigawatts in 2025 and 50 GW in 2030 from 6.2 GW currently. It also plans to double its liquefied natural gas equity portfolio, expand its fuels and lubricants business in emerging markets, sell more food in its retail stores, charge electric vehicles, and develop hydrogen production."
BP is trading close to its current fair value estimate and has Morningstar rating of 3 stars.
