With the FTSE 100 having disappointed in 2016, it’s perhaps unsurprising that a number of shares are trading on low valuations. However, internal challenges as well as tough operating environments have also caused these three stocks to trade at what appear to be major discounts to their intrinsic values.
Debenhams
The outlook for the UK retail sector remains tough and this is a key reason why Debenhams’ (LSE: DEB) share price has fallen by 3% this year. This puts it on a price-to-earnings (P/E) ratio of just 9.2, which indicates that there’s significant upward rerating potential on offer.
Despite the wider retail sector being forecast to record a tough year as uncertainty surrounding the UK economy continues, Debenhams is expected to report a rise in earnings in each of the next two financial years. For example, in the current year its bottom line is due to rise by 2%, followed by 4% next year.
With Debenhams having a relatively loyal customer base, enviable locations and such a low share price, it would be unsurprising for it to become a bid target. That’s especially the case since it has a sound balance sheet and the capacity to invest in its estate to generate improved sales and profitability in the long run.
Shire
Also trading on a very appealing valuation is pharmaceutical company Shire (LSE: SHP). It’s expected to record a rise in its bottom line of 16% in the next financial year but despite this, the company’s shares trade on a price-to-earnings growth (PEG) ratio of just 0.8. This indicates that they offer strong growth prospects at a very reasonable price.
Of course, Shire’s valuation is so appealing because of its recent combination with Baxalta. A number of investors are concerned that the two companies won’t make a perfect fit and as with any major merger, there are always integration risks as well as the potential for fewer synergies than were previously anticipated.
However, with Shire offering defensive qualities and a low valuation, it could become increasingly popular over the medium-to-long term. This could cause its shares to easily outperform the wider index, making now a sound time to buy it.
Tullow Oil
With the oil price having recovered to around $50 per barrel this year, it’s of little surprise that Tullow Oil’s (LSE: TLW) share price has surged by 47% year-to-date. Despite this, it still offers excellent upward rerating potential, with Tullow Oil trading on a PEG ratio of only 0.1.
A key reason for such a low valuation is that Tullow Oil is expected to increase production over the coming months as its focus continues to transition away from exploration and towards production. This seems to be a sensible strategy to adopt given the depressed outlook for the price of oil. And with Tullow Oil set to generate significantly improved cash flow over the medium term, its financial standing could improve and cause investors to upgrade its valuation.
