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The lingering effects of Brexit compounded by the pandemic led to years of low returns for FTSE shares. But recently the UK market has made an impressive recovery, hitting new highs this year. While some companies continue to accept takeover bids from US firms, there are those that are beginning to see the advantage of remaining in the UK.
President Trump’s trade tariff war has sent fear through the US market, making the UK look even more appealing for long-term stability. This presents new opportunities for UK investors to take advantage of undervalued shares with promising growth potential.
To find undervalued shares, I look at key valuation ratios like price-to-earnings (P/E) and compare them to industry peers and historical averages. Strong cash flow, debt reduction and consistent profitability are also signs of value.
Here are two examples of well-established UK companies with shares that look cheap right now. They may be worth considering.
Centrica
As the owner of British Gas, Centrica (LSE: CNA) is exposed to today’s challenging energy market. Regulatory pressure on energy prices is a constant threat to profitability, not to mention fluctuations in wholesale gas prices and competition from smaller, more agile providers.
However, the exposure to energy security and renewables provides long-term growth potential.
Recently, Centrica has benefitted from higher gas prices, resulting in a 25% gain over the past six months. This growth has been driven by improved efficiency, helping to bolster its balance sheet.
Despite the price appreciation, the stock still looks undervalued, with strong cash flow and a low P/E ratio of 5.74. Debt has been reduced from £5.3bn in 2020 to £3.47bn in its latest 2024 results. Meanwhile, free cash flow has almost doubled, from £778m to £1.12bn.
Add to this an attractive 3% dividend yield and it’s an appealing choice for value investors.
Overall, the stock appears cheap relative to earnings and assets. I think investors seeking long-term stability and income would be wise to consider it.
International Consolidated Airlines Group
International Consolidated Airlines Group (LSE: IAG) is the parent company of British Airways, Iberia and Aer Lingus. Despite gaining 76% in the past year, the stock still appears undervalued with a low P/E ratio of 6.6.
That said, the airline industry has been somewhat unstable in recent years. Not only is it highly cyclical but oil price volatility and geopolitical issues present an ongoing threat to profitability. This is further compounded by competition from low-cost carriers like easyJet and Ryanair.
Despite these challenges, demand for travel continues to improve, helping the company achieve solid revenue and profit growth. Recently, it’s been laser-focused on cost-cutting and debt reduction, helping recover some Covid-era losses. Debt from the pandemic remains somewhat high at £14.34bn, which poses a moderate financial risk but overall, the recovery has been impressive.
It maintains a solid market position in transatlantic and European routes and could benefit further from a potential long-term recovery in business travel. As fuel costs stabilise and economic conditions improve, the stock could really take off.
For investors looking to secure long-term wealth, it’s certainly one worth thinking about.
