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Quarter-End Insights

Consumer Cyclical: Poised to Perform in the Second Half

With macroeconomic stabilization, cost-efficiency efforts, improved inventory levels, and a relatively healthy consumer, we are optimistic about the sector.

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  • On a valuation basis, the consumer cyclical sector appears to be roughly fairly valued, with a market-cap-weighted price/fair value estimate ratio of 0.97 as of Aug. 31.
  • After a brief disruption at the time of the announcement, the impact of Brexit on the consumer appears minimal, and many companies have indicated a rebound in consumer cyclical sales in Great Britain.
  • Overall, the consumer appears to remain healthy, with retail and food services sales up 2.6% year over year in the second quarter, following 3.8% growth in the first quarter. We expect this strength to continue with employment rates and wage increases providing a tailwind.
  • Previously bloated retail inventory levels, which had led to high levels of discounting in the first half of 2016, now appear under control and should yield improved average unit retail in the back half of the year.

In our opinion, the consumer cyclical sector appears poised for strong performance in the back half of 2016, fueled by consumer strength, global macroeconomic stabilization, and improved expense and inventory management. That said, much of this upside appears to be priced into the stocks with a market-cap-weighted price/fair value estimate ratio of 0.97 as of Aug. 31. We would be strategic in locating stocks with an attractive margin of safety.

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