We recently compiled a list of the 10 Best Undervalued UK Stocks To Buy Now. In this article, we are going to take a look at where British American Tobacco p.l.c. (NYSE:BTI) stands against the other undervalued UK stocks.
The Economy of the United Kingdom
According to a report by KPMG, the economy of the UK is going through a combination of consumption tailwinds and falling inflation which is expected to support modest positive growth in the country for the remainder of 2024 and in 2025. The United Kingdom’s economy is projected to achieve GDP growth of 0.5% in 2024, and 0.9% in 2025, while inflation is expected to hold steady at 2.6% in both 2024 and 2025. Unemployment rates are also projected to be 4.5% in 2024 and 4.9% in 2025. The interest rates are anticipated to drop towards 3% by the end of 2025 and elections are likely to resolve political uncertainty, which would encourage business. However, geopolitical uncertainty, conflicts, and trade tensions could lead to inflation spikes and sharp shifts in monetary policies. Despite the uncertainty, KPMG’s analysts remain optimistic about the future. Yael Selfin Vice Chair and Chief Economist at KPMG United Kingdom said:
“Global economic prospects are better for 2025, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisition activity could also continue to gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the political shifts, which could see more insular and protectionist economic policies.”
Investors view the UK market as particularly appealing due to its current valuations, which are similar to those of emerging markets when measured on a forward price-to-earnings basis. The UK equity index stands out for its substantial exposure to the energy sector, which could benefit significantly if the global economy outperforms expectations. Additionally, in times of escalating geopolitical tensions, the energy sector might also see gains, driven by rising prices. The composition of the UK equity market is well-structured, especially in terms of dividend yields and volatility. Compared to European equities, UK stocks are less volatile and offer higher dividend yields, making them an attractive option for investors at this time. Goldman Sachs is also anticipating modest growth in the United Kingdom’s 2025 and 2026 economic growth and forecasts the FTSE 100 Index to rise to 7,900 by the end of 2024. Goldman Sachs said:
“Low valuation, improving global demand and low supply aiding commodities stocks, and continued buybacks all support FTSE 100. We do not expect UKX to underperform as it did in 2023,”
According to Emma Wall, Head of Investment Analysis at Hargreaves Lansdown, the UK offers one of the best value opportunities among developed markets, particularly for those looking for undervalued investments. Despite its high performance in the FTSE 100, it is highlighted as being on a 45% discount compared to the U.S. market. Emma Wall sees the best value opportunity in the UK, citing the significant discount, international revenues, lack of leverage, and expectations of high dividend payouts as key reasons for this analysis.
The UK market presents a unique and compelling opportunity for investors, as the global economy shows signs of improvement and inflation stabilizes, the UK will benefit from economic growth despite some uncertainties, with that in context let’s take a look at the 10 best undervalued UK stocks to buy now.
Our Methodology
For this article, we used the Finviz screener to screen for UK-based companies that are trading at a forward P/E ratio of under 20 as of August 9. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of an array of tobacco products, emphasizing the selection and consumer choice.
British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Investors: 19
Forward P/E ratio as of August 10: 7.61
British American Tobacco p.l.c. (NYSE:BTI) is one of the largest tobacco companies in the world that manufactures and sells cigarettes, electronic cigarettes, and other products such as nicotine pouches in over 170+ countries worldwide. In 2023, British American Tobacco p.l.c. (NYSE:BTI) added about 3 million new customers and its nicotine pouches Vuse and Velo, played a significant role in the overall performance of the company as revenues from these products increased by 18% and 21% year over year, respectively.
British American Tobacco p.l.c. (NYSE:BTI) has a competitive advantage to drive portfolio growth and transformation within the wider tobacco industry by offering its vapor, heated tobacco, and modern oral tobacco products. The company aims to become a leader in smokeless nicotine alternatives and plans to generate 50% of its revenue from non-combustible products by 2035.
On July 18, the U.S. Food and Drug Administration (FDA) approved the marketing of various products under the Vuse brand and granted Marketing Granted Orders (MGOs) for the Vuse Alto device and its Golden Tobacco and Rich Tobacco flavor pods at nicotine levels of 1.8%, 2.4%, and 5%. British American Tobacco p.l.c. (NYSE:BTI) views these authorizations as a significant step in its multi-category approach to providing reduced-risk products, aligning with its goal of delivering “A Better Tomorrow.” The approvals represent the largest portfolio of vapor product authorizations given to any organization in the U.S.
Should you invest in British American Tobacco p.l.c. (NYSE:BTI)? The stock has a forward P/E ratio of 7.61, which is a 55% discount to the sector median of 17.19. For the year 2023, the company reported a revenue of $33.92 billion, a 3.1% increase in organic revenue compared to the previous year. Profits from operations were also up 3.1%. Revenue is expected to grow by almost 2% this year to $34.57 billion and net earnings and earnings per share are expected to grow by 4.86% by this year.
As of the first quarter, the stock is held by 19 hedge funds with stakes worth $588.68 million. Orbis Investment Management is the largest stakeholder in the company and has a position worth $385.39 million, as of March 31. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $37.66, which represents a 16% upside potential from its current level.
Overall BTI ranks 8th on our list of the best undervalued UK stocks to buy. You can visit 10 Best Undervalued UK Stocks To Buy Now to see the other undervalued UK stocks that are on hedge funds’ radar. While we acknowledge the potential of BTI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BTI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.