Why I think these 3 FTSE 100 shares could be undervalued

Robert Stephens, CFA, discusses the recovery potential of three FTSE 100 companies in the wake of Covid-19.

The FTSE 100 may have entered a bull market and surged past 6,000 points this week, but there are still undervalued companies available throughout the index in my opinion.

Covid-19 has not thus far hurt the financial performance of BAE Systems (LON:BA.), for instance. But its shares have fallen 8% in 2020, as Covid-19 may yet disrupt its trading outlook.

Other companies such as British Land (LON:BLND) and WPP (LON:WPP) face futures filled with great uncertainty. However, their low valuations following large share price falls may factor in uncertain prospects and offer margins of safety.

BAE Systems

BAE’s last investor update was on 3 April, when it announced that it had experienced no material impact from Covid-19 in Q1. This still hasn’t prevented the company from deferring a decision on its dividend until 30 July 2020, since it highlighted that some disruption could take place in its second quarter.

Uncertainty about its dividend outlook may have contributed to the stock’s falling price. It now trades on a price-earnings ratio of 11.8, which may undervalue a business that has a solid market position in key defence markets such as the US.

BAE has worked hard to reorganise its business model over the last few years to become more efficient. It has also diversified its operations to try and reduce its exposure to Saudi Arabia as geopolitical risks in the region have mounted. On a long-term view, the company’s profit and share price outlook could be stronger than the market is pricing in.

British Land

Landlords such as British Land could be among the worst-hit businesses by Covid-19. Not only has the business waived rent for its smaller customers for three months, it may experience lower demand for retail, office and leisure units in the long run. In response, it has suspended dividend payments.

Covid-19 could accelerate the shift of consumers to online retail options. This is likely to pose problems across British Land’s retail portfolio, and it would be unsurprising for asset prices to experience a more challenging period in future. The company, though, can afford to experience a 50% drop in asset prices without breaching its banking covenants.

Investors seem to be assuming there will be a large fall in asset prices. British Land trades at 45% of its net asset value. Its recovery may be protracted, but it could be undervalued after its 33% slump in 2020.

WPP

Advertising and PR company WPP could experience further falls in its sales after the 4.9% revenue drop it reported for the first quarter. Most of its employees are working from home, but a weak economic outlook may lead to its customers reigning in their spending on advertising.

WPP’s asset disposals have strengthened its financial position over the last few years. It is conserving cash through suspending buybacks and dividends, while it looks to reduce operational costs where possible through measures such as salary reductions and freezing new hires.

The company’s financial future is very uncertain at the moment. But its 40% share price slump in 2020 to a ten-year low could factor in a challenging outlook, while including scope for a recovery over the long term.

Robert Stephens, CFA: Robert Stephens, CFA, is an Equity Analyst who runs his own research company. He has been investing for over 15 years and owns a wide range of shares. Notable influences on his investment style include Warren Buffett, Ben Graham and Jim Slater. Robert has written for a variety of publications including The Daily Telegraph, What Investment and Citywire.