Key Takeaways
- 22 UK stocks screen as undervalued, according to Morningstar analysts, despite the FTSE 100 hitting record highs during earnings season.
- AstraZeneca is the largest undervalued stock in the index, with failed merger talks weighing on it.
- Undervalued UK stocks have already attracted bid interest, analysts say.
Though the FTSE 100 Index hit new intraday highs during earnings season, Morningstar analysts say the UK stock market still houses a sizable pool of undervalued stocks, including the third-largest UK company, AstraZeneca AZN.
The UK’s biggest companies broadly beat expectations during the recent earnings season, according to analysts, despite a first half dominated by geopolitical and domestic uncertainty. Some 78% of FTSE 100 companies that have reported beat expectations, with the beats spread across sectors, according to Deutsche Bank.
Despite the UK index being on the cusp of further record highs, 22 UK stocks under Morningstar coverage still screen as undervalued. Two, Melrose Industries MRO and RELX REL, have 5-star ratings, meaning they’re significantly undervalued. According to Morningstar analysts, RELX is the most undervalued stock in this group, with a price/fair value estimate ratio of 0.6. Supermarket giant Tesco TSCO is trading closest to its fair value estimate with a P/FVE ratio of 0.93.
Undervalued UK stocks across different industries have attracted overseas rivals this year, analysts say, with asset manager Schroders SDR, airline easyJet EZJ, and ingredient firm Tate & Lyle TATE all agreeing to takeover bids. “US sponsors have been disproportionately active [in London], treating the LSE as a source of underpriced assets,” says PitchBook associate data analyst Charlie Farber.
Three undervalued FTSE 100 stocks are highlighted here. AstraZeneca is the largest UK stock to screen as undervalued. Rentokil Initial RTO has posted the largest year-to-date decline among undervalued stocks. The UK’s largest pure defense play, BAE Systems BA., has posted gains of more than 30% but remains undervalued.
AstraZeneca
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Fair Value Estimate: GBX 13,500.00
- Morningstar Uncertainty Rating: Medium
- Discount to Fair Value: 13%
Pharma giant AstraZeneca, the third-largest stock in the FTSE 100, is newly undervalued after a share price fall of 13% so far this year. The stock sold off at the start of August, following a Financial Times report that talks over a USD 400 billion megamerger with US-listed Bristol-Myers Squibb have unsettled investors.
“The discussions lead us to wonder if Astra’s confidence in its ability to reach USD 80 billion in revenue by 2030 is faltering,” says Karen Andersen, director at Morningstar. The rumored merger talks, which Astra reportedly walked away from, followed a steady earnings update for the first half of 2026, with results in line with analyst expectations.
In the second half, Morningstar analyst Jay Lee expects “pivotal readouts”—the point in a clinical trial where results are analyzed and made public—to come for a handful of the firm’s cancer drugs.
Rentokil Initial
- Morningstar Rating: ★★★★
- Economic Moat: Narrow
- Fair Value Estimate: GBX 510.00
- Morningstar Uncertainty Rating: High
- Discount to Fair Value: 31%
Shares in Rentokil plummeted 20% following second-quarter results on July 30. The pest control specialist announced a restructuring of its North American business amid weaker demand, and it removed its 20% operating margin target for North America, which is a key measure of profitability.
“We are less concerned about short-term weakness in demand, as [competitor] Rollins saw a similar impact and the market has historically been resilient. We, and we believe the market, are more focused on restructuring and the removal of margin guidance,” says Morningstar analyst Ben Slupecki. “If executed properly, we believe [restructuring] is best for the business in the long run, as operating inefficiencies, such as a lack of a standardized operating model or platform, contribute to the margin, moat, and multiple differences relative to Rollins.”
After the results, Slupecki lowered the stock’s fair value estimate by 9% to £5.10. Rentokil shares currently trade in 4-star territory, which suggests they are undervalued.
BAE Systems
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Fair Value Estimate: GBX 2,600.00
- Morningstar Uncertainty Rating: Medium
- Discount to Fair Value: 14%
Despite the defense spending boom, analysts say there may still be upside to shares in aerospace and arms manufacturer BAE after a 30% rally so far in 2026. BAE still trades below its fair value after accounting for the recent rally. It comes after a positive first half, in which sales rose 9% to £15.8 billion.
Management expects momentum to continue into the second half of 2026, raising its forecasts for full-year sales growth to 8%-10%.
