The ten companies that according to Morningstar are undervalued and that offer interesting opportunities, combining corporate quality and competitive prices are: Edenred, Pernod Ricard, Elekta, GSK, Roche, Rentokil Initial, British American Tobacco, Reckitt Benckiser, Melrose Industries and Rheinmetall.
An investor needs to think carefully about what to put in their portfolio and, above all, keep an eye on the economic moat. The latter is an indicator that summarizes five simple concepts that are behind a successful company: cost advantage (produce at a lower cost than competitors), a different product/service (perceived as premium), the network effect (considering that the more people use a product or service, the more profitable it becomes), presence in sectors with barriers/regulations that hinder competition and, finally, boast a recognizable and appreciated brand (since there is a predisposition among consumers to pay more for something they know and already trust).
The competitive advantage
It is therefore essential to give the right importance to the economic moat for evaluate a company’s long-term sustainability and resilience. A strong competitive advantage can in fact protect the profits and share value of the company, even in times of crisis or in a difficult competitive context. Morningstar experts have identified the ten best European companies that, based on these valuations, are undervalued today. These stocks represent interesting opportunities, because they combine corporate quality and affordable prices. In a context of economic uncertainty, it is essential to identify solid companies, with stable cash flows and a good competitive advantage.
Edenred the most underrated
These companies are characterized by a leadership position, have a competitive advantage and a proven capital management ability, as well as a discount price. Edenred is the most underrated, although it is a world leader in prepaid business services. Its geographic expansion and diversification are positive for future growth, thanks to attractive margins and market potential in these segments. There is in the group Pernod Ricardthe second largest alcohol company in the world, with main markets in Europe, the USA and Asia. Its brands are famous, including Absolut Vodka, Beefeater Gin, Chivas Regal, The Glenlivet Scotch Whisky, Jameson Irish Whiskey, Malibu Rum and Martell Cognac.
Opportunities in the health sector
There are several companies that operate in the health sector, including the Swedish one Elective (systems for neurosurgery and radiotherapy) which has installed over 7 thousand devices, including linear accelerators, Gamma Knife and brachytherapy systems. Its sales are well distributed worldwide. The British GSK is a major pharmaceutical company, active in areas such as antivirals, cancer, vaccines and respiratory diseases. Use joint ventures for economic scale, for example in the HIV market. Morningstar analysts believe it is undervalued, as the market undervalues its growth potential and overestimates fears related to the Zantac litigation. Swiss too Roche is undervalued, whose main products include cancer treatments developed with Genentech. The diagnostics sector, strengthened by the acquisition of Ventana, generates more than half of diagnostic sales, both centralized and point-of-care.
ONE, Rentokil and Reckitt
In the services segment, it stands out Rentokil Initialwhich fell sharply after the revision of estimates for pest control activities in North America. Recent investments have not yet brought the desired results, with a lower-than-expected flow of new customers and slow organic growth. Another undervalued company is the British American Tobaccothe second largest tobacco producer in the world. As cigarette consumption declines globally, BAT has invested in next-generation, lower-risk products. Reckitt Benckiserborn 25 years ago from the merger between the British Reckitt & Colman and the Dutch Benckiser, markets a broad portfolio of home and health products, including leading brands such as Lysol, Finish, Durex and Mucinex, many of which are first or second place in their categories globally.
The potential of the high tech/military sector
Opportunities also exist among high tech or military support companies. Among these, the British Melrose Industrieswhich produces engines and products for major suppliers in the commercial and military aerospace industries. Of the group too Rheinmetallwhich operates in various sectors, with a focus on safety and mobility technologies. Its weapons, vehicles, ammunition and electronic solutions divisions are among the leading suppliers of innovative products for the German and global militaries. The sensor-actuator and materials & trade divisions focus on reducing emissions, pollutants and fuel consumption.
