It’s rare to find undervalued large caps outside a recession. Large caps are so well covered by City analysts and the financial press, any company that becomes undervalued is soon snapped up by investors and the special offer quickly disappears.
However, there are currently two businesses in the FTSE 100 that looked undervalued relative to their international peers. These companies are some of the largest in the industry and have a reputation for steady growth and defensive dividends.
Growth and dividends
AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) are the two undervalued large caps in question. These two pharmaceuticals giants have seen their shares rally sharply since the beginning of the year, but recently investors have started to book profits and the shares have given up some of their recent gains. Still, the fundamentals of these companies haven’t changed over the past few weeks. Glaxo and Astra remain attractive on several different metrics.
Firstly, Glaxo and Astra are both trading at extremely attractive P/E multiples compared to their international peers. While many of these firms’ international peers trade at P/E multiples of 20 more, these two UK giants currently trade at P/E multiples in the mid-teens. Shares in Glaxo trade at a forward P/E multiple of 16.5 and Astra’s shares trade at a forward P/E multiple of 15.6.
There’s a reason why investors are giving Astra wide berth. This year the company loses its exclusive manufacturing rights to blockbuster drug Crestor, and it looks as if the market is waiting to see how quickly sales deteriorate following this key landmark. City analysts have pencilled-in an earnings decline of 1% for 2016 and 3% for 2017 as Crestor sales fall and other treatments pick up the slack.
On the other hand, there’s no apparent reason why Glaxo’s shares are trading at a discount to international peers. If anything, shares in the company should be trading at a premium to international competitors and the wider market.
City analysts expect earnings per share growth of 27% for this year and 7% for 2017. Based on this year’s growth forecast, shares in the company are trading at a PEG ratio of 0.6. A PEG ratio of less than one indicates that the shares offer growth at a reasonable price, yet another indicator that Glaxo is undervalued.
Top income picks
Another metric that shows just how undervalued these two stocks are is the dividend yield. Technically, if a share’s dividend yield is above the market average, it implies that the market believes the payout isn’t sustainable. The FTSE 100 average dividend yield is 3.8% and at time of writing, shares in Glaxo and Astra both support a higher yield.
Astra’s shares yield 4.4%, and Glaxo’s shares 5.1%. But both payouts are well covered by earnings per share.
In today’s low-interest-rate world, few large cap companies yield more than the market average making Astra and Glaxo a rare breed indeed.
