FTSE 100 stocks jumped higher yesterday (4 November) after the US election results boosted sentiment. Despite this, many Footsie shares still look cheap as chips.
Here are two that are worth considering with a five-year investing horizon.
Dirt-cheap lender
The first is Barclays (LSE:BARC). Shares of the FTSE 100 bank have tanked almost 20% since the summer.
No doubt, the threat of a UK banking sector tax has dented sentiment. Last week, we finally learned that the surcharge rate will double from 3% to 6% for a fixed 15-month period.
Or will it? After all, Spain introduced something similar a few years ago, and it’s still in place. So there’s a chance the government does the same thing here, costing Barclays more than anticipated.
Be that as it may, Barclays looks great value right now. It’s trading below book value and offering a 4.2% forecast dividend yield. The forward price-to-earnings (P/E) ratio is just 7.1.
Granted, Barclays is quite a complex beast, and investment banking profits can be feast or famine. But it’s still on track to achieve a return on tangible equity (RoTE) greater than 14% by 2028, up from 11.3% last year. So there’s ongoing progress here.
Note the target amongst City analysts is currently 561p — some 28% higher.
Aerospace laggard
Next up is Melrose Industries (LSE:MRO), which owns GKN Aerospace. Shares of the aircraft components supplier are down 29% since February.
One dark cloud hanging over the stock is the Garden Grove incident. This refers to a facility in Los Angeles where an overheating chemical tank earlier this year caused the evacuation of 50,000 nearby residents.
Thankfully, there was no explosion, but the operational and legal ramifications continue. So far, the incident looks set to cost Melrose well over $100m, with ongoing insurance negotiations adding another layer of uncertainty.
Long story short, not a great development for shareholders!
Again though, the stock looks too cheap after the sell-off. We’ve got a forward P/E ratio under 11, a low valuation for a company tipped to grow due to its position as a tier-one supplier to the likes of Airbus, Rolls-Royce, and Lockheed Martin.
In the years ahead, the company should benefit from three trends:
- Record aircraft order books (Airbus and Boeing have a combined backlog of more than 15,000 aircraft).
- Rising engine flight hours (Melrose has revenue-sharing partnerships with blue-chip engine makers).
- Increasing defence spend.
The defence opportunity is particularly attractive. Melrose has airframes and engines components on all the major global platforms, including the F-35, Apache, Black Hawk, and Eurofighter. And by 2029, the ReArm Europe Plan aims to mobilise €800bn of spending.
The company expects to generate £600m in free cash flow by 2029, up from £125m last year. This will be supported by rising engine flying hours, with Melrose taking a small cut of these predictable cash flows.
The company says it should see “decades of cash flows from the Engines aftermarket, with profits that should grow substantially“. The Garden Grove incident hasn’t changed that.
Finally, the price target for this FTSE 100 stock — 647p — is 36% higher.
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Ben McPoland owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
