Despite their recovery, investors can still find value in high-quality European companies across a range of sectors. Morningstar lists 15 large caps that have a Wide Moat rating, or ahead of their peers. They currently trade at an average 20% discount to their fair value, according to Morningstar analysts.
In the Morningstar philosophy, Wide Moat-rated companies have a long-term sustainable lead over their peers and are expected to generate returns above their cost of capital for at least 20 years. Here are the 15 most undervalued European stocks worth considering for the investment portfolio:
GSK is one of the largest pharmaceutical and vaccine companies with a diversified product portfolio spanning several medical fields. This portfolio makes the company resilient in the event of problems with a particular medicine. In addition, according to Morningstar pharmaceutical analyst Damien Conover, GSK has developed next-generation respiratory and HIV drugs that should help reduce competition between generics and premium brands.
Copnover recently lowered its Fair Value from 2,230 British pence (GBX) to 2,200, taking into account headwinds from the US Inflation Reduction Act (IRA), which limits Medicare price increases to inflation and mandates Medicare rebates if drugs are already on the market in longer time.
Swiss Roche is one of the largest pharmaceutical and diagnostic companies in the world. It is the market leader in both biotech and diagnostics. Roche benefits from a strong exchange of information between Genentech and its own researchers, which has a positive impact on R&D productivity and has contributed to the development of personalized medicine that leverages its diagnostic activities.
Recently, the Fair Value was lowered from CHF 433 to CHF 428 after analyst Conover removed the Alzheimer’s drug candidate from his valuation model. He still assumes that Roche’s pharmaceutical division can increase sales by 5% a year until 2026.
Sanofi’s drug portfolio includes several top drugs, including immunology drug Dupixent, which is well positioned to reach top sales of €14bn. This drug has strong pricing power and great blockbuster potential for various medical indications. Fair Value has been lowered to 110 euros from 112 to account for the headwind caused by the IRA. Sanofi should still be able to grow its sales by nearly 5% a year, thanks in large part to its Dupixent franchise.
AB Inbev is the world’s largest beer producer, the result of several ground-breaking deals for Interbrew and Anheuser-Busch, followed by the acquisition of Grupo Modelo, Oriental Brewery and SABMiller. Management has acquired brands with solid growth potential, expanded the distribution network and achieved synergies to improve profitability. The fair value of EUR 80 per share implies a price/earnings ratio of 24 in 2023 and a free cash flow return of 4%.
Adyen is one of the leading online payment platforms. The company has experienced rapid growth thanks to its ability to solve the complex payment needs of large and international trading companies. Adyen offers solutions that span the entire retail value chain, enabling merchants to reduce costs and enabling customers to scale globally extremely quickly. Adyen has also benefited from the rapid growth of e-commerce, helped in part by the pandemic. Fair Value was recently increased from 1,770 euros to 1,870.
Bayer is a large pharmaceutical company and also active in plant protection products. The healthcare division is benefiting from the recent launch of biologics that can support long-term growth. Bayer has solid franchises in hemophilia and ophthalmology (Eylea). It also had a solid franchise in cardiovascular drugs with Xarelto, but this drug is at risk of losing its patent protection in 2026, which could hamper growth as it represents 10% of total sales.
In the crop protection industry, Bayer has strengthened its position with the purchase of Monsanto in 2014. While this has increased its competitiveness in the industry, it has also increased Bayer’s exposure to lawsuits over the side effects of glyphosate use. Reports related to the cander drug led to large class-action lawsuits against Bayer, resulting in a $15 billion legal settlement.
London Stock Exchange Group
Following the acquisition of Refinitiv, LSE Group is a vertically integrated business spanning pre-trade data and analytics to clearing and post-trade reporting. The group owns a number of solid franchisees, such as its FTSE Russell index business, as well as its dominant market data provider Refinitiv or its ownership of LCH’s post-trade clearing business. Our fair value of GBX 9,800 assumes revenue growth of 5% over our explicit period forecast and an EBITDA margin increase to 54% in 2026.
Airbus is one of the largest manufacturers of commercial aircraft and benefits from its duopoly with arch-rival Boeing in the market for aircraft with 130 seats and above. The commercial aircraft division has two main product lines: narrow-body aircraft for use on short-haul routes and wide-body aircraft for long-haul routes. Airbus is also strongly represented in the defense sector and in the production of helicopters.
Our fair value of EUR 149 per the stock is driving a slow recovery from the pandemic with aircraft deliveries in 2023 slightly below 2019 levels. The primary driver of our Fair Value is the company’s ability to increase delivery of its narrow-body aircraft, which is a positive contribution to margin.
Safran is a French supplier of aerospace equipment with a strong presence in engines. The propulsion division accounts for 65% of the company’s result and is a significant driving force for the long-term share price development. It also relies heavily on Safran’s ability to efficiently deliver next-generation propulsion technology.
The company expanded its flight equipment offering when it acquired Zodiac Aerospace, which has a solid presence in interior equipment but was in need of a major restructuring. Our fair value of EUR 160 praises a return to profitability in the propulsion industry in 2024 thanks to the recovery of global air traffic.
This Swedish-based lock specialist is poised to take advantage of two long-term industry trends: the shift to software-driven products, which increase functionality, productivity and cost benefits, and growth in new markets that embrace more advanced locking solutions.
Assa Abloy has one of the widest portfolios of locking products, from basic mechanical locks to software controlled systems. Our fair value of SEK 300 per share assumes average annual revenue growth of 8% and a medium-term profit margin of 16%-17% as the company continues to scale and generate synergies from ongoing acquisitions.
The Dutch ASML is the undisputed leader in lithography equipment for the semiconductor industry. The chip machine builder is reaping the rewards of its strong commitment to Extreme Ultra Violet (EUV) technology, which is now considered key to the most advanced chip manufacturing processes. These processes are controlled only by a very limited number of chip manufacturers (TSMC, Samsung Electronics and Intel).
ASML’s machines enable chipmakers to pursue Moore’s Law, which correctly predicted that the number of transistors on a silicon wafer can continually increase. Our fair value of EUR 700 per share is based on our expectation that ASML will be able to reach the upper end of the EUR 24 to EUR 30 billion range. for expected turnover in 2025.
ABB is a Swiss-Swedish leader in electrical equipment and industrial automation. Automation is one of the fastest growing categories in the industrial space and ABB is one of the best placed players in what has been dubbed “Industry 4.0” or the Industrial Internet of Things. The robotics and industrial control equipment industry has a leading market share and enjoys loyal customer bases that make it difficult for competitors to gain a foothold.
Nevertheless, developments in industry demand have forced ABB and its competitor to innovate and renew their product offering. ABB has also lagged behind its main competitors, Siemens and Schneider Electric, in software, although the group has a partnership with Dassault Systemes. Our fair value of 35 Swiss francs is built on average revenue growth of 4% and 6% EBITA growth between 2022 and 2025.
The Swiss elevator specialist Schindler derives approximately 70% of its sales from Western markets. There, growth depends more on upgrades to the installed base than on the delivery of new elevators. This is broadly in line with how the global elevator market is structured, with the US and Europe accounting for 60% of the global elevator upgrade market.
We estimate that half of Europe’s elevators are 20 years or older, which should encourage a replacement/refurbishment cycle that will drive Schindler’s growth in the medium term. Our Fair Value has been lowered to 210 Swiss francs from 225 francs previously due to lower revenue expectations for 2022. Furthermore, the EBIT margin is expected to increase from 8.1% in 2022 to 12% in 2026.
Our analyst believes that Reckitt’s portfolio is well positioned in categories that benefit from long-term consumer health and hygiene growth drivers. The recent acquisition of Mead Johnson has added a leading position in infant nutrition, a business with pricing and healthy margins.
However, this business has been affected by a declining birth rate and tougher competition in China, forcing Reckitt to sell its Chinese operations in 2021. This allows it to focus more on faster growing operations and reinvest the proceeds from its cost reduction plan in research and development and e-commerce. Our fair value of GBX 6,700 explains Reckitt’s recent difficulties and is dependent on our expectation of a medium-term operating margin of 24%.
As market dynamics change in China and Europe, Kone has built relationships with developers and end users who need to protect its position as a global top player in elevators. Kone is the largest player in China and the second largest in Europe for new equipment. Elevators are more software-intensive, which allows for better usage management to reduce energy consumption and control access for security reasons.
Kone is also investing in connecting the majority of its existing elevators, the so-called ‘installed base’, to the cloud, providing online diagnostics to minimize downtime. Our fair value of EUR 56 is based on medium-term revenue growth in the period 2022-2026 of approximately 4% and an EBIT margin recovery relative to our medium-term forecast from 11% in 2022 to approximately 14% at mid-cycle level.
All 15 shares with their key data in a handy overview: