In a volatile world, investors should have on their radar the companies that offer a degree of certainty in terms of cash flow and fundamentals. That's where ‘Best European Companies for Your Portfolio’ comes in, a list we published on Sep. 26.
The European stocks on this list have significant competitive advantages over their rivals, predictable cash flows and are managed by teams that have a history of making smart capital allocation decisions.
Nevertheless, the best companies are not always the best stocks, because, of course, the price of the company's shares is also important. That is why we are focusing here on the 10 companies on the list that are currently the most undervalued in euros, according to Morningstar metrics, the price/fair value estimate.
10 Undervalued Quality Stocks for Q4
The 10 most undervalued stocks from the list of the best European companies for your portfolio (as of Oct. 4 2024, all values in euros) are:
• Edenred EDEN
• Elekta EKTA B
• Rentokil Initial RTO
• Melrose Industries MRO
• GSK GSK
• British American Tobacco BATS
• Roche ROG
• Reckitt Benckiser RKT
• Rheinmetall RHM
• Pernod Ricard PER
Edenred EDEN
• Analyst: Benjamin Slupecki, CFA
• Price/Fair Value: 0.45
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Credit Services
Endenred tops the list of undervalued stocks. Edenred is the world's leading provider of prepaid corporate services, with its main business being services for employees, such as meal vouchers. ‘We believe that the fact that Edenred is successfully rolling out its employee benefits programmes to new geographies is a strong indicator that the company can continue to do so,’ said Morningstar equity analyst Benjamin Slupecki. ’We also view management's strategy of diversifying into other areas, such as spending management, as largely positive given the corresponding attractive margins and larger market potential in these segments.’
Elekta EKTA B
• Analyst: Alex Morozov, CFA
• Price/Fair Value: 0.55
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Medical Devices
Elekta, based in Sweden, develops, manufactures, and markets treatment planning systems for neurosurgery and radiotherapy, including stereotactic radiosurgery and brachytherapy. The company has installed more than 7,000 linear accelerators, Gamma Knife and Unity platforms, and brachytherapy installations. The company's sales are evenly distributed across its various regions, with the Americas representing 31%, Europe, the Middle East, and Africa representing 35%, and Asia Pacific representing the remainder.
Rentokil Initial RTO
• Analyst: Grant Slade, CFA
• Price/Fair Value: 0.58
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Exemplary
• Industry: Specialty Business Services
Investors sent Rentokil Initial's shares sharply lower after the company's September 2024 update, which included a downgraded outlook for its North American pest control business. Reportedly, Rentokil's recent incremental investments in sales and marketing resources have yet to come to full fruition as the flow of new customer leads fell short of expectations, curbing organic growth in the first two months of the second half of 2024. ‘Excluding the North American pest control business, Rentokil's global pest control and hygiene services businesses continue to perform well,’ notes analyst Grant Slade.
Melrose Industries MRO
• Analyst: Loredana Muharremi, CFA
• Price/Fair Value: 0.62
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Specialty Industrial Machinery
Melrose Industries is a UK-based company that manufactures engines and structural products for all major original equipment manufacturers in the commercial and military aerospace industry. The company generates approximately 75% of its sales in the commercial aerospace industry and the remainder in the military aerospace industry.
GSK GSK
• Analyst: Damien Conover, CFA
• Price/Fair Value: 0.66
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Drug Manufacturers - General
GSK is one of the largest pharmaceutical companies by sales. It is active in a number of therapeutic areas, including respiratory diseases, cancer, antivirals, and vaccines. GSK uses joint ventures to achieve additional economies of scale in certain markets, such as HIV. ‘We continue to view the stock as undervalued, as the market does not fully appreciate GSK's growth potential and is overly concerned about the Zantac litigation, which appears manageable,’ said Morningstar analyst Alex Morozov.
British American Tobacco BATS
• Analyst: Kristoffer Inton
• Price/Fair Value: 0.69
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Tobacco
British American Tobacco is the world's second-largest tobacco company by sales, selling cigarettes in more than 180 countries. However, with global cigarette consumption declining at a rate of about 5% annually, BAT has invested in several next-generation products that can deliver nicotine with less risk. This strategy makes sense, but we think the company is spreading itself too thin. This means that it is involved in everything, but does not do anything properly, according to Kristoffer Inton.
Roche ROG
• Analyst: Karen Andersen, CFA
• Price/Fair Value: 0.69
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Exemplary
• Industry: Drug Manufacturers - General
Swiss pharmaceutical company Roche is also significantly undervalued. The company's top-selling pharmaceutical products include a range of cancer treatments from its acquired partner Genentech. The diagnostics business was strengthened by the acquisition of Ventana in 2008. Oncology products account for 50% of pharmaceutical sales, and centralised and point-of-care diagnostics account for more than half of diagnostics sales.
Reckitt Benckiser Group RKT
• Analyst: Diana Radu, CFA
• Price/Fair Value: 0.7
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Household & Personal Products
Reckitt Benckiser was formed in 1999 by the merger of the British company Reckitt & Colman and the Dutch company Benckiser. The company, which was recently renamed Reckitt, markets a portfolio that includes a variety of consumer household and health brands, including Lysol, Finish, Durex, and Mucinex, many of which are the number one or two in their categories worldwide.
Rheinmetall RHM
• Analyst: Loredana Muharremi, CFA
• Price/Fair Value: 0.71
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
• Industry: Aerospace & Defense
Rheinmetall is a group that is active in various markets with technologically leading products and services. The main focus of sales is on the security technology and mobility segments. The divisions of vehicle systems, weapons and ammunition, and electronic solutions are among the leading suppliers of innovative products for German and international armed forces in the defence and security industry. The core competence of the divisions of sensors and actuators, and materials and trade, lies in the reduction of emissions, pollutants and fuel consumption.
Pernod Ricard PER
• Analyst: Verushka Shetty
• Price/Quantitative Fair Value: 0.74
• Quantitative Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: None
• Industry: Beverages - Wineries & Distilleries
Pernod Ricard is the second largest spirits company in the world by volume, after Diageo. Its main markets are Europe, the United States and Asia. Pernod's main spirits brands include Absolut Vodka, Beefeater Gin, Chivas Regal and The Glenlivet Scotch Whisky, Jameson Irish Whiskey, Malibu Rum and Martell Cognac. The company's strategic wine portfolio, which accounted for approximately 4% of sales under the group's focus brands in fiscal 2023, includes Jacob's Creek, Brancott Estate, Campo Viejo, Mumm and Perrier-Jouet.
Companies not formally covered by a Morningstar analyst have quantitative ratings. These companies are statistically modelled against companies that are analyst-covered, allowing our models to calculate a quantitative moat, fair value and uncertainty rating.
