5 Stocks With the Biggest Estimated Discounts to Fair Value…

Stocks with the largest estimated discounts to fair value

• Schroders (SDR): £4.20 per share from £5
• Burberry Group (BRBY): £13.30 per share from £15.70
• Melrose Industries (MRO): £7.40 a share from £8.70
• WPP PLC (WPP): £8.20 per share from £9.40
• BP PLC (BP.): £4.90 per share from £5.60

A large reduction or increase in the fair value estimate can signal to investors that a company’s fortunes are changing. However, it is important to consider how a stock is trading compared to the estimate.

Both Schroders, which has a 4-star Morningstar rating, and Burberry, which has a 5-star rating, are trading below their estimates, meaning our analysts believe they are attractively priced for long-term investors. Burberry has just been kicked out of the FTSE 100.

Here’s what Morningstar analysts had to say about these stocks.

Schroders (SDR)

• Analyst: Johann Scholtz, CFA
• Estimated fair value: £4.20
• Decrease in fair value: 16%
• Economic moat: Narrow
• Morningstar rating: 4 stars
• Morningstar Uncertainty Rating: Medium

Schroders had the biggest cut in fair value for the second quarter, coming to £4.20 from £5. Its shares are currently trading at £3.29.

“We now have a more bearish view on Schroders’ near-term outlook. Fee margins and client flows are likely to be weaker than we previously estimated. However, we believe Schroders is well positioned to benefit from longer-term trends “, he writes. Johann Scholtz, equity research analyst at Morningstar.

“Apart from a brief period during the pandemic, stocks have not traded at these levels in over a decade. We don’t think its long-term fundamentals have deteriorated to such an extent as to warrant 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 we take a weaker view on Schroders’ medium-term outlook, we believe the firm is on the right strategic path. It has allocated capital to expand into private markets and wealth management. These businesses have better growth prospects, higher switching costs and suffer from less margin pressure than traditional public market asset management,” he adds.

Schroders currently trades significantly below its estimated fair value and has a Morningstar rating of 4 stars.

Burberry Group (BRBY)

• Analyst: Jelena Sokolova, CFA
• Estimated fair value: £13.30.
• Decrease in fair value: 15%
• Economic moat: Narrow
• Morningstar rating: 5 stars
• Morningstar Uncertainty Rating: High

Burberry cut its fair value estimate to £13.30 from £15.70 due to a slowdown in sales amid a wider decline in certain areas of luxury spending worldwide. Shares in the company are currently trading at £6.31.

“We still see value in the stock. The luxury sector is going through one of its downcycles, which historically have not lasted more than a year or two, so we still see potential for Burberry to regain brand momentum,” senior analyst Morningstar. , writes Jelena Sokolova.

“Burberry has lagged benchmarks in recent quarters and lagged behind industry growth for about a decade, parting ways with three CEOs in that time frame. Essentially, we believe Burberry’s problems include reliance on a slower-growing apparel segment for the majority of sales, with a fairly low contribution from trench coats, an area where the brand is strongest.”

“Leather has been an investment category for a long time, but Burberry does not have the strong brand recognition of other players in this space. We believe that the big picture of pricing structures and bringing more affordable offers should be a priority for the future CEO. We also think it’s important to focus the brand on outerwear, where it’s strongest, in terms of marketing and communication,” she adds.

Burberry trades at an overall discount of 51% to Morningstar’s estimate and has a Morningstar rating of 5 stars.

Melrose Industries (MEL)

• Analyst: Loredana Muharremi, CFA
• Estimated fair value: £7.40
• Decrease in fair value: 14.9%
• Economic ditch: Lat
• Morningstar rating: 5 stars
• Morningstar Uncertainty Rating: Average

Melrose Industries cut its fair value from £8.70 to £7.40. Its shares currently trade at £4.63.

“Wide-moat Melrose delivered strong results in the first half of 2024. It reported a 12% increase in total group revenue, mainly driven by a 21% increase in the engine division due to robust performance in parts repair, defense exchange and RRSP portfolio grew 6%, constrained by supply chain issues and customer de-stocking,” writes Loredana Muharremi, equity research analyst at Morningstar.

“Despite these positive results, management has revised full-year 2025 revenue guidance to £3.8bn from £4bn previously due to ongoing supply chain issues and capacity constraints. However, the company maintained its operating income targets. We have adjusted our fair value estimate to £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.

• Analyst: Eric Compton, CFA
• Estimated fair value: £8.20
• Decrease in fair value: 12.7%
• Economic moat: Narrow
• Morningstar rating: 3 stars
• Morningstar Uncertainty Rating: High

WPP’s estimated fair value was cut to £8.20 per share from £9.40. Its shares currently trade at £7.16.

“WPP Group narrowed its second quarter as management cut its full-year revenue growth outlook. We lower our fair value estimate to (book) for the reduced near-term growth outlook and a less bullish long-term margin profile. We continue to forecast that the company will struggle to achieve its medium-term growth objective of 3%-5%,” writes Morningstar analyst Eric Compton.

“Our revised fair value estimate is still approximately 17% above the current price at the time of writing. We don’t think the assessment is demanding. However, we think WPP will have to prove it can at least keep up with its peers in terms of revenue. growth and is starting to see 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 3-star Morningstar rating.

• Analyst: Allen Good, CFA
• Estimated fair value: £4.90
• Decrease in fair value: 12.5%
• Economic moat: None
• Morningstar rating: 3 stars
• Morningstar Uncertainty Rating: High

BP saw its fair value fall to £4.90 a share from £5.60. Its shares currently trade at £4.12.

“BP remains committed to investing in and developing its hydrocarbon-free businesses as it seeks to transition to an integrated energy company from an integrated oil company. However, it has revised its previous plans to cut output by 25% by 2025 and 40% by 2030. It will now increase output slightly by 2025 and cut it by about 25% from 2019 levels by 2030, largely through divestments, should also improve upstream profitability as higher margin volumes from major projects come online and costs are reduced should welcome this change given the improved outlook for oil and gas prices ,” writes Allen Good, director of equity research.

“Extended life is the result of greater investment, but not at the expense of businesses in transition, 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 plans to double its portfolio of liquefied natural gas stocks, expand its fuels and lubricants business in emerging markets, sell more food in its retail stores, charge electric vehicles and develop hydrogen production.

BP trades close to the current fair value estimate and has a Morningstar rating of 3 stars.