Value investors are always on the lookout for shares trading below their intrinsic value. Despite the FTSE 100 hitting a new high this week, I’ve still found several such stocks on the index.
However, a low price doesn’t tell the whole story. Not all stocks are cheap for the same reasons as some might be in financial trouble. To avoid falling into a value trap, it’s important to assess why the price is low and if a recovery’s likely.
How to identify value
The following ratios are used to identify value stocks:
- Price-to-earnings (P/E) ratio compares the stock price to the company’s earnings per share (EPS). Undervalued stocks typically have lower P/E ratios
- Price-to-book (P/B) ratio compares the stock price to the company’s total asset value. A value of 1 indicates a fair price, anything below suggests it’s undervalued
- The debt-to-equity (D/E) ratio compares the company’s debt to the total value of all issued shares. Ideally, this metric should be below 1 (100%)
With that in mind, here are two undervalued FTSE 100 shares to consider.
Kingfisher
Kingfisher’s (LSE:KGF) a leading home improvement retailer operating brands such as B&Q and Screwfix. It has a P/E ratio of 13.7 and a P/B ratio of 0.7, suggesting the price could be undervalued.
The company’s gross profit margin’s exhibited volatility in the past, peaking at 29.54% in October 2022 before declining to 21.99% this month.
Analysts have mixed opinions about where the stock might be headed, with some estimating a 53% rise and others, a 10% loss. It’s also one of the most shorted stocks in the UK, likely due to a profit warning issued last November expecting earnings to decline.
There’s no denying that Kingfisher’s current low valuation looks attractive. However, the UK property market’s struggling at the moment, limiting the level of home improvements required.
It may recover eventually but, for now, I’ll put the stock on the back burner.
Standard Chartered
Despite being the UK’s fifth largest bank, Standard Chartered (LSE: STAN) doesn’t have much presence in this country. It operates mainly in emerging markets including Africa, Asia and the Middle East.
With a P/E ratio of 9 and a P/B ratio of 0.8, the value proposition’s clear. But does it have growth potential?
Over the past four quarters, the stock’s beaten analysts’ expectations for earnings. In Q1 2024, it did particularly well, posting an EPS of 42p — way ahead of the expected 29p. EPS is now forecast to reach £1.49 in 2025.
However, the bank’s net margin fell in 2023 to 8.2% from 10.5% in 2022. This is despite a 30% revenue increase. During the same period, deposits dipped slightly from £383bn to £368bn. Looking ahead, there’s a risk that interest rate cuts could eat into the bank’s profits from loans.
It’s a complex situation to assess, as reflected by the lack of agreement between analysts. Approximately half of analysts viewing the stock have put in a Buy rating, with the other half leaning towards Hold or Sell. This may be partly due to fears that new US tariffs could prompt an economic downturn in the East.
While the undervalued price is attractive, I’ll keep an eye on US tariff developments before deciding on whether to buy.
This post was originally published on Motley Fool
