The FTSE 100 index has staged a stunning recovery since late March, rising from under 6,900 points to 7,700 points today, a gain of around 12%. Naturally, after such a strong rise in the market, there’s less value available now than there was six weeks ago.
Having said that, despite the stock market’s recent strength, there are still a number of stocks within the FTSE 100 that trade at low valuations and could therefore offer strong long-term value. Here’s a look at two such stocks.
Prudential
Prudential (LSE: PRU) is the largest insurer in the FTSE 100, with a gigantic market cap of £50bn. Well established and financially sound, the company has many blue-chip qualities and an excellent track record of generating shareholder wealth. Over the last decade, PRU has grown its dividend at a compound annual growth rate (CAGR) of an impressive 10%.
Much of Prudential’s appeal lies in its strategy, which is aligned to structural trends. Not only does the group operate in the UK, but it also has significant operations in the US and Asia. That means that, going forward, it’s well placed to service the savings and protection needs of the fast-growing middle class in Asia as well as the retirement income needs of the Baby Boomers in the US and the UK. Earlier this year, Prudential announced that it will be splitting its business into two FTSE 100 companies, with one focused on the UK and Europe, and the other on the US and Asia. But this isn’t expected to happen until 2020.
Despite Prudential’s compelling long-term growth prospects, the stock doesn’t trade at an expensive valuation at present. With City analysts forecasting earnings of 152p per share this year, PRU’s forward-looking P/E ratio is just 12.6. That’s significantly lower than the average FTSE 100 forward P/E of 14.9 and, in my view, a reasonable price to pay for a slice of this high-quality business.
International Consolidated Airlines
Trading at an even lower valuation is British Airways owner International Consolidated Airlines (LSE: IAG). With City analysts expecting the group to generate earnings of €1.09 per share this year, IAG’s forward-looking P/E is just 7.2. Is that the bargain of the year?
In the past, IAG was a struggling, loss-making business. Yet, in the last few years, the company appears to have turned things around. For example, since 2015, net profit has increased by a third and the dividend has increased from €0.20 to €0.27. For the last financial year, adjusted earnings per share rose 14% and the full-year dividend was hiked at 15%. This kind of growth suggests that IAG’s current valuation could be a steal.
However, as my colleague Kevin Godbold points out, you have to be a little careful with airlines as they are highly cyclical businesses. This means they are more likely to suffer during an economic downturn than a more stable business such as Unilever. Having said that, the greatest investor on the planet, Warren Buffett, has been buying airlines stocks in recent years. And with a forward P/E of 7.2 and trailing dividend coverage of almost four times, IAG does offer a margin of safety from both a valuation and income perspective. As such, I rate the stock as a ‘risky buy.’
Of course, there are many more stocks within the FTSE 100 that currently trade at reasonable valuations. If you’re looking for investment ideas, check out the free report below.
