A stock market crash throws up plenty of bargain FTSE shares, and the current one’s no different. Some top companies are now trading at low valuations and make tempting buys today.
Some of these businesses were experiencing difficulties even before the coronavirus pandemic. The following two look like massive bargains for the stock market recovery, if you’ve the patience to hold on for the recovery and beyond.
I was reading an investment note from Ian Lance at RWC Partners, who says the stock market crash has thrown up opportunities in ‘value’ shares. He defines these as unloved companies with long-term potential. Many are trading at irrationally low prices, and his first pick was Royal Mail (LSE: RMG).
Royal Mail share price is too low
This interested me, because I’ve been rattled by the Royal Mail share price, which had fallen sharply even before the stock market crash. This has shrunk the group’s market-cap to just £1.72bn and led to its demotion from the FTSE 100. However, Lance reckons the sell-off has been overdone, and he’s the figures to prove it.
Royal Mail owns a European parcels business, GLS, which makes a 6-7% margin in a normal market conditions. Annual growth has clocked in at mid-to-high single digits, as it benefits from the rise in internet shopping.
Last year, GLS made an operating profit of £180m. On a multiple of 11 times earnings, Lance says GLS alone would be worth £2bn. That’s £300m more than the entire group is valued at right now, after the stock market crash. Effectively, you’re getting Royal Mail’s UK business for free, with some to spare.
That’s pretty persuasive and maybe the message is getting through. The stock is up 36% since April. There may still be an opportunity here though, as it still trades 30% lower since the start of the year. Royal Mail still faces plenty of challenges, as the domestic letters business continues its inexorable decline, while competition elsewhere is stiff. Those threats are already priced in. The opportunities aren’t.
BT share price fell before the stock market crash
The BT Group (LSE: BT.A) share price took an absolute hammering long before the recent stock market crash. Again, Lance has spotted a value opportunity.
He says its Openreach division generates £2.6bn of earnings before interest, tax, depreciation and amortisation (EBITDA), and values it at £22bn. “The enterprise value of the entire group is currently £31bn meaning that all the other businesses are being valued at £9bn.” This is just three times historic earnings of £2.8bn. Now that looks tempting.
Selling a stake in Openreach could raise some much-needed funds. Unlike Royal Mail, the BT share price has barely recovered from the stock market crash, and trades 40% lower this year. Measured over five years, it’s lost three quarters of its value.
The group still faces challenges, but if you’re looking for a value play and understand the risks, it could be another tempting contrarian buy.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020