Big companies lead the discounts among UK stocks. The region's equities are trading at very cheap valuations and, Morningstar analysts say, the best opportunities are among multinational companies that could benefit from the devaluation of the pound in the coming years, with the entry into force of Brexit.
GROWTH AT 7% PER BAT
British American Tobacco (BATS) has a strong lead position (Economic moat) within the sector thanks to the loyalty that consumers have towards its brands and the high economies of scale that allow it to produce at lower costs than the competition. The stock trades at around £42, at a discount rate of around 7% to fair value, and is rated with a four-star Morningstar rating (report updated 2 August 2018).
“In the medium term, we expect a progressive contraction in profit margins for companies in the sector following the greater diffusion of electronic cigarettes which will produce a decline in the production volumes of blondes. Compared to its main competitor, Philip Morris, BATS has entered this segment late, but we do not believe that the advantage of first mover is sustainable in the long run. We are confident that the British group is able to recover market shares and that the e-cigarette business could also be one of the major drivers of future growth for BATS”, says Philip Gorham, equity analyst at Morningstar.
“Emerging markets, which account for more than 80% of the volume and nearly 60% of the group's revenue, will continue to be the most vital region for the company, while the recent acquisition of Reynolds America ensures greater exposure to that Use which guarantees higher profit margins. Based on these hypotheses, we estimate an average increase in revenues of 7% over the next five years”.
STRONGER PORTFOLIO FOR GLAXO
GlaxoSmithKline is one of the largest pharmaceutical companies in the world and has managed to build a strong position of advantage within the sector thanks to an extensive and well-diversified brand portfolio that protects it from the expiration of some patents, a network of distribution higher than that of competitors and leadership in the respiratory diseases segment. This ensures them not only to achieve high profit margins, but also to reinvest capital in research and development for the production of new generation drugs.
“By expanding its product portfolio to include not only respiratory products but also vaccines, HIV retroviral therapies and over-the-counter medicines, Glaxo has reduced its reliance on sales of Advair, its proprietary product. most successful, and focuses on emerging markets and cost rationalization to drive growth in revenues and profit margins,” says Damien Conover, analyst at Morningstar. “Over the next five years we expect an average revenue growth of around 4% and an expansion of EBIT from 14 to 25% and we estimate a fair value of £17,90” (report updated on 25 July 2018).
Source: Morningstar.it
