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2 top value FTSE 100 stocks I’d buy right now

There was a time — and not so long ago — that the market rated British American Tobacco  (LSE: BATS) and cruise ship operator Carnival  (LSE: CLL) on earnings multiples of over 20.

Today, you can pick up BAT’s shares for just 8.9 times earnings and Carnival’s for 11.5 times. I rate these as two of the FTSE 100‘s top value stocks right now, although there are certainly other great value blue-chips worth considering.

Brutal derating

BAT’s derating to the bargain basement of single-digit earnings multiples has seen its share price decline from an all-time high of 5,600p in the summer of 2017 to around 2,800p today. This 50% fall from grace has come despite revenues, earnings and dividends all continuing to rise.

What’s more, City forecasts show further advances in revenues for 2019 and 2020, earnings increasing at 8% a year, and rising dividends that give prospective yields of 7.5% this year and 8.1% next year. In view of this outlook, why are the shares so absurdly cheap?

Reports of death greatly exaggerated

Regulatory headwinds appear to have been building over the last couple of years. Regulators have also begun to extend their scrutiny beyond traditional tobacco products to next-generation products (such as heat-not-burn and e-cigarettes) that BAT and its peers have been investing in for the future.

The whole sector has fallen out of favour with investors. However, BAT has suffered more than most. Its acquisition of Reynolds American in 2017 increased its exposure to the menthol cigarettes market and also its debt. Recent noises from US regulators about banning menthol cigarettes has damaged investor sentiment towards BAT particularly, while the increased level of debt has led some to question the sustainability of its dividend.

Historically, the market has seriously underestimated the ability of tobacco companies to overcome what seemed at the time like existential threats to the industry. I’m convinced the latest reports of BAT’s death are, once again, greatly exaggerated. As such, I rate the stock a ‘buy’.

Set fair

Carnival’s stock hasn’t suffered such a deep derating as BAT’s. Nevertheless, its shares have fallen from an all-time high of well over 5,300 in the summer of 2017 to nearer 4,300p today. The industry looks set fair to prosper long into the future. And with Carnival owning some of the world’s most famous cruising brands, and enjoying the competitive advantages of market-leading scale, I find it hard to understand why the market is currently rating it on such a low earnings multiple.

The company reported record revenues in its annual results released shortly before Christmas. City analysts are forecasting further top-line growth in 2019 and 2020, earnings increasing at 10% a year, and rising dividends that give prospective yields of 3.8% this year, and 4.1% next year.

Carnival’s chief executive Arnold Donald was evidently as baffled as me by the market’s continuing indifference to the value on offer after the company’s results. In transactions on Boxing Day and 11 January, he purchased over $1m worth of shares. The price is up a bit since then, but I continue to rate the stock a ‘buy’. Investors today might just find they can afford to cruise into the sunset in a few decades time!

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.