While the FTSE 100 may be trading at a relatively high level, I’m considering whether shares in Aviva plc (LON:AV) (AV.L), Tesco PLC (LON:TSCO) (TSCO.L), AstraZeneca plc (LON:AZN) (AZN.L) and Rolls-Royce Holding PLC (LON:RR) (RR.L) could be underrated by the stock market.
Aviva’s single-digit P/E ratio suggests that the company is not particularly popular among investors at the moment. The insurer, though, seems to have strong growth prospects, as well as an improving dividend outlook.
Sure, Aviva has undergone a significant restructuring in recent years. But with it having generated excess capital, it is now paying-down debt and investing in acquisitions. As a result, its growth potential seems to be improving.
AstraZeneca’s track record of growth is poor. Generic competition has resulted in falling EPS in recent years, with this trend forecast to continue in the current year.
After significant investment in its pipeline, though, AstraZeneca is expected to return to EPS growth next year. This could lead to a period of improved performance for the pharma stock. With a PEG ratio of around 1.6, I think it could still offer a margin of safety in spite of strong share price performance in the last few years.
Tesco’s investment prospects appear to be improving in my view. Sure, there are risks ahead from a high level of competition and weak consumer confidence. But the company’s strategy appears to be working well, with double-digit growth forecast in the next two years.
With the Tesco share price trading on a PEG ratio of around 0.9, I think that the stock could be underrated at the moment. Its supply deal with Carrefour could enhance margins and make it more competitive on price.
Rolls-Royce’s financial outlook could be set to improve over the medium term in my view. The company may benefit from rising defence spending in the US, which could catalyse demand for its products.
With the company focused on becoming more innovative and efficient, its financial outlook seems to be improving. This could lead to a higher valuation than the PEG ratio of around 0.4 on which Rolls-Royce shares currently trade.