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Quarter-End Insights

Consumer Defensive: Bargains Harder to Come By

After another strong year for consumer defensive stocks, the sector remains relatively less attractive than our overall universe.

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  • The consumer defensive sector is currently slightly overvalued, in our opinion, trading at around 2% above our fair value estimate, versus a 2% market discount in the global universe. 
  • The emerging-markets slowdown is showing up in consumer product manufacturers' earnings reports, with broad weakness in Asia becoming a new headwind for many companies. Generally, we regard this as a cyclical impact, and we still believe emerging markets will drive long-term volume growth for the consumer staples firms with strong exposure and an appropriate product portfolio. Europe, on the other hand, appears to be stabilizing.
  • The confirmation arrived this quarter that  Anheuser-Busch Inbev (BUD) is focusing investors' attention on the potential for ongoing transactions in the sector. Companies in the household and personal products category, in particular, appear to have capacity for financing deals.
  • With organic growth fairly limited, cost-cutting remains an important driver of earnings growth.

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.