Non-US Companies That Are Undervalued, Have Moats

• Morningstar has added eleven “interesting and inexpensive” international stocks to its Global Markets ex-US Index. 
• European bank stocks are among the top shares that were listed. Several reported strong second quarter results. 
• These equities are also expected to outperform for years to come, said Morningstar’s analysts.
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Global equities have been on the rise this week, overshadowing market fears over COVID-19 case flare-ups. Morningstar’s stock picking team has reaffirmed the value of several big names that it bills as “superior foreign stocks” that it believes are undervalued right now. 

In the past month, Morningstar added eleven of what it says are “interesting and inexpensive” international stocks to its Global Markets ex-US Index. While all of the stocks are foreign, they are also listed on US exchanges, thus making it easier for domestic investors to access them. Four of the companies are based in the United Kingdom, five others are from elsewhere in Europe and two are based in Asia.

European banks are a prominent fixture on the list. Corporate earnings season began last week for the continent’s biggest names, with analyst consensus projecting a 140% year-on-year increase in earnings per share for the second quarter, according to Factset data aggregated in a separate note by Bank of America’s European equity quant strategy team.

European bank earnings estimates are also “surging on lowered credit-risk fears, with the net balance of monthly EPS [earnings per share] hikes vs. downgrades at a four-year high,” according to Bloomberg. 

The Morningstar research team also said the equities all shared the ability to “fend off competition and outearn” their capital costs for years to come. Each company has been ranked as a “wide-” or “narrow-moat” stock, based on its lowest price/fair value.

It was legendary investor Warren Buffett that originally coined the term “economic moat”, basing it on the image of the body of water protecting a medieval castle. The wider the moat, the harder it is for an invader to get across.

Morningstar has identified five sources of a moat: 

• “Switching costs are those obstacles that keep customers from changing from one product to another
• The network effect occurs when the value of a good or service increases for both new and existing users as more people use that good or service
• Intangible assets are things such as patents, government licenses, and brand identity that keep competitors at bay
• A company with a cost advantage can produce goods or services at a lower cost, allowing them to undercut their competitors or achieve higher profitability
• Efficient scale benefits companies operating in a market that only supports one or a few competitors, limiting rivalry”

Timescale ultimately determines whether Morningstar dubs a company as a wide or narrow economic moat.

“A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat,” Morningstar said. 

Here are the top picks: