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The FTSE 100 has been brushing up against record highs this year, a sign that global confidence is flowing back into equities. It’s an encouraging backdrop, but it also makes the hunt for cheap UK shares more difficult.
With valuations stretched in some parts of the market, I think it’s wise to check out companies trading at discounts to their intrinsic value.
The domestic economy still feels sluggish. Inflation remains sticky, and with consumers continuing to feel the effects of the cost-of-living crisis, there’s always the risk of a downturn. That’s why I’ve been weighing up shares where the numbers suggest value’s still on offer.
To do that, I’ve leaned on valuation tools such as discounted cash flow (DCF) models and enterprise value (EV) to EBITDA. Two stocks in particular stand out to me right now.
easyJet
It’s been a tough year for easyJet (LSE: EZJ), with the share price falling around 20% since January. The most recent blow came last weekend when a cyberattack targeted European airports. Airline shares fell between 1% and 2% in the immediate aftermath, reflecting the market’s nervousness around sector risks.
Valuation-wise though, easyJet looks appealing. Analysts currently estimate the shares are undervalued by about 25% when measured against future cash flow projections. Its EV/EBITDA ratio sits at a low 2.3, while its forward price-to-earnings (P/E) ratio’s just 6.
Taken together, these numbers point to a stock that’s trading well below its potential intrinsic value.
That said, I think investors should carefully weigh up the risks. Airlines remain highly exposed to external shocks, whether that’s oil price spikes linked to geopolitical conflict or operational issues like cyberattacks. A rise in jet fuel costs, for example, can quickly erode profit margins. And as we’ve seen this week, technology vulnerabilities can also add unexpected costs and reputational damage.
Still, for investors who can stomach the volatility, I reckon easyJet’s a stock worth considering at current prices.
TP ICAP
Unlike easyJet, TP ICAP (LSE: TCAP) has held up relatively well this year, with the share price up 6.6%. The world’s largest interdealer broker plays a crucial role in facilitating trades across equities, commodities and fixed income.
In August, the stock dropped 8.1% after posting weaker-than-expected half-year operating profits. But that fall might have presented a value opportunity. Right now, TP ICAP trades at an EV/EBITDA ratio of just 2.27, alongside a forward P/E ratio of 8.6.
These figures suggest the market’s pricing in stronger earnings and cash flow in the near future, which could support further gains if performance stabilises.
Of course, there are risks to consider here too. TP ICAP is highly sensitive to global market conditions, foreign exchange fluctuations, and regulatory changes. Any dip in trading activity or shift in regulation could squeeze margins.
But overall, I think it’s a stock investors may want to check out as a potentially cheap way to gain exposure to financial markets.
Hunting for value
With the FTSE 100 still hovering near record levels, I think it’s more important than ever to be cautious. Both easyJet and TP ICAP have faced issues recently but stand out as UK shares that currently look undervalued on key metrics.
For long-term investors willing to weigh up the risks, both offer an intriguing value opportunity that’s worth considering as we head into the fourth quarter.
