Key Takeaways
- Consumer cyclicals dominate the list of undervalued stocks.
- Fair value estimate changes across European stocks covered by Morningstar have been modest.
- European firms are still dealing with tariffs, but there are company-specific factors at work, too.
As European earnings season has come and gone, now is the perfect time to look at the impact this has had on the real valuations of companies.
If we drill down into the list of stocks that have had the biggest upgrades or downgrades in this period, we can find a group of companies that now have 4- or 5-star ratings, meaning they are highly attractive at these levels.
Most of this list consists of stocks where we have lowered our fair value estimate. Essentially, earnings season hasn’t been kind to many of these stocks. But, despite our downgrades to their fair values, the stocks are so beaten up that they still represent great value.
Dutch insurance firm NN Group NN is the only stock here that we have upgraded. The rest have had fair value estimate downgrades between 18% and 30%, with UK housebuilder Barratt Redrow BTRW seeing the biggest drop.
This table is littered with consumer cyclicals, the cheapest sector in Europe currently after downgrades by Morningstar analysts.
Automotive stocks like Renault RNO and Mercedes-Benz MBG are still trying to work around tariffs, while investors are getting used to the idea that UK interest rates are falling more slowly than they anticipated, meaning homebuilding stocks like Persimmon PSN and Taylor Wimpey TW. are getting hit.
It’s not all the usual suspects, however: One-off factors are hitting utility firm Orsted ORSTED and payments companies Edenred EDEN and Nexi NOXA, creating 4-star opportunities.
It’s impossible to say how quickly these stocks will catch up, but for investors with a long-term horizon, post-earnings season is a great time to take a look.
An Uneventful Earnings Season for European Stocks?
Despite how volatile earnings season might have felt for investors, the long-term impact will be more muted. Across Morningstar’s entire European stock coverage, our fair value estimates have been changed by less than 1%. To put this into perspective, there were two quarters last year where analysts made 20% upgrades to their fair value estimates of stocks.
What Fair Value Changes Have European Stocks Seen?
That’s the bigger picture. But broken down by sector, some of these changes are quite meaningful.
Financial-Services Stocks Upgraded
Stocks in the financial-services sector have seen their Morningstar fair value estimates upgraded by more than 4% overall. This comes on the back of a few things, most notably higher interest rates in Europe for longer than economists had predicted, meaning higher profitability for banks. At the same time, for anyone who’s renewed their motor or home insurance recently, premiums are finally catching up with inflation, meaning greater profitability for those businesses.
Industrial Stocks Upgraded
Not all industrial companies are equal, but those with exposure to structural trends, like data center growth and energy transition, have seen their order backlogs grow and grow. In times of global trade uncertainty, such reliable growth has been keenly appreciated by investors. This sector has been consistently, and meaningfully, upgraded for the last four quarters in a row. This latest earnings season has prompted Morningstar analysts to upgrade their fair value estimates for stocks in the sector by almost 3% overall.
Consumer Cyclical Stocks Downgraded
Consumer cyclicals took the biggest hit over the period, with fair values downgraded by more than 5% by Morningstar analysts.
Subsectors of consumer cyclicals, such as automotive stocks, have been warning for some time now about the effect of tariffs on profits. But as always, these things are difficult to pin numbers on, and here we’ve had to readjust our expectations downward.
How Did the Stock Market React to European Earnings Season?
For the most part, the market movements of sectors in the Morningstar Europe Index mimicked our fair value estimate changes. Financial services was the largest gainer over the last two months that covers earnings season, rising by almost 4%, while consumer cyclicals fell by 3%. Technology is a clear outlier, with the largest fall of any sector of more than 7%, dragged down by the selloff in ASML ASML in July.
