Experts are always on the lookout for S&P/ASX 200 Index (ASX: XJO) shares that are undervalued and could grow earnings.
It's not just technology businesses that can deliver good returns. We're going to look at two stocks that are undervalued according to experts from the broker UBS.
Neither of the below businesses are among the ASX's biggest names, but they are ones to watch, according to UBS. Let's take a look.
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Challenger Ltd (ASX: CGF)
UBS describes Challenger as a diversified financial services company with two businesses. Challenger Life is a retirement income business that sells term-based and lifetime annuity products to retail and institutional clients. The other segment is funds management, with in-house investment management and minority equity investments in a number of external boutiques (Fidante Partners).
UBS describes Challenger as the dominant annuity provider in Australia and rates it as a buy. It has a price target of $9.30 on the ASX 200 share. A price target is where the analysts think the share price will be in a year. The Challenger share price target implies a possible rise of 6%. Plus, it's expected to pay an annual dividend per share of 31 cents in the 2026 financial year.
The broker noted that the FY25 fourth quarter annuity sales and second-half spread margins point to a more positive outlook for the life segment.
After seeing the FY25 result, UBS upgraded its estimate for earnings per share (EPS) for FY26 by 4%, consistent with Challenger's guidance mid-point.
UBS continues to see potential positives from new APRA capital standards which are due partway through FY26. These APRA capital changes could potentially boost the return on equity (ROE) by 150 basis points while also reducing volatility, according to UBS.
The broker concluded on the ASX 200 share:
With a more normalised yield curve to drive improved demand for duration, regulatory tailwinds assisting lifetime annuity sales and reducing capital intensity and an undemanding valuation, we reiterate our buy rating.
The Challenger share price is valued at 13x FY26's estimated earnings, according to UBS.
Light & Wonder Inc (ASX: LNW)
The other ASX 200 share I'm covering is Light & Wonder, which UBS describes as a leading cross-platform global game company focused primarily on slot machines in the North American market.
It offers customers gaming machines for outright purchase and leased models, with revenue-sharing arrangements or digital game content. The digital game content is distributed on Apple and Android devices, as well as over the internet for other users.
UBS calls the business a buy with a price target of $199. That implies a possible rise of close to 50% from where it is today.
The broker says that on an underlying basis, industry conditions remain "healthy, gaming ops installs continue to grow" and the Grover acquisition is "contributing as expected".
UBS wrote that, at the time of the note, Light & Wonder was trading at a 44% price/earnings (P/E) ratio discount compared to Aristocrat Leisure Ltd (ASX: ALL).
The broker forecasts that the business could generate $548 million of net profit in FY26 and this could grow to $752 million by FY29.
