Most observers of the UK markets now expect a strong to medium recovery in UK share prices in the second half of 2021. Most indicators point to the fact that valuations will soon have regained their pre-pandemic levels on almost all sectors. However, there are still some pockets of value to be found! In this article we take you through 2 UK shares that still look unpriced today. These are the sort of companies you can buy today for their long-term growth potential.
Why To Buy These 2 UK Shares Today For Long-Term Growth
Global advertising giant WPP are our first pick. Very few people will not have been influenced by a WPP ad campaign at some point in their lives, and WPP look great right now on several fronts. Firstly, the departure of previous CEO Martin Sorrell in 2018 opened the way to a massive modernization of what was then looking like an out of date business model.
New CEO Mark Read was already reforming the internal workings of the company before Covid, and he has shown a consistent desire to drive through these reforms. The main focus of the restructuring has been on simplifying what had become an overly complex and dispersed business with too many moving parts.
In fact, WPP was close to becoming a textbook example of diseconomies of scale. Other plans to rejuvenate the company include reducing debt and investing in technology. These should leave WPP leaner, will allow cost base and higher degree of staff morale.
Secondly, the fundamentals are very promising. The current price to earnings ratio (P/E ratio) is 13.6, and this suggests the shares have quite a bit more to climb yet. On top of this realistic valuation, the shares are currently yielding around 3%. This is a tasty combination of decent yield with very good growth prospects.
Finally, the long run looks great for WPP. The internal restructuring in combination with the reopening of the global economy should see WPP thriving for the next decade. Advertising spending will rise as more and more sectors of the economy return to normal.
Clearly, WPP and other traditional marketing companies face a big structural challenge from the social media giants like Google and Facebook. These companies have effectively been able to cut out the middlemen agencies like WPP. However, the big tech firms have their own problems today!
Changes to corporation tax in the US and elsewhere, the backlash against tech platforms for not properly policing the content they are providing, and scandals over misuse of personal data mean these companies are unlikely to gain too much ground from the likes of WPP so fast anymore.
DFS are exactly the sort of retailer who were absolutely battered by the lockdowns. With showrooms shut across the country, revenue for the furniture retailer collapsed. This led to a plunge in the share price, which has now been mostly recovered. However, there are some reasons to think DFS still represents good value at today’s price.
Starting with the fundamentals, DFS shares yield an impressive 6% and have a current estimated forward P/E ratio of just 8. This is low – in fact too low for some! Warren Buffet famously saw companies on P/E ratios less than 10 as like ‘cigars’. They might have one last ‘puff’ in them, but they could also be on their last legs… However, DFS is unlikely to belong to this club.
The main point is that DFS is the UK market leader in home furnishings, and the pandemic has reminded us all of the importance of the home! After all, most of us spend much, much more time at home these days than ever before! With the reopening of non-essential retail now well established, shoppers have been flocking back to DFS showrooms in droves.
Added in, there are the mass of online orders that couldn’t be executed during the pandemic with supply chains disrupted and delivery networks overloaded. All of this means DFS’s revenue should be set to rocket.
Brokerage Numis are now forecasting a swing from losses to pre-tax profit of £110 million in the year to July 2021. This mean earnings per share of 33.9p, and a dividend of nearly 17p. These are good numbers to hear for shareholders, and even better is the fact that 2022’s numbers are estimated to be even better.
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