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Quarter-End Insights

Consumer Cyclical Investors: Shop Carefully in 2015

Those firms with moats will continue to take share, despite near-term uncertainty about foreign exchange, European spending, and Asia Pacific regional growth.

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  • We believe the market has appropriately priced in consumers' current spending capacity across the globe, and the consumer cyclical sector is slightly overvalued. We believe that many companies in this sector have become increasingly lean over the last five years, leading to decelerating operating margin expansion in years ahead.
  • Globally, investors and analysts are pressing for more transparency from management of companies, leading to better clarity on capital allocation and operating margin goals across many firms.
  • Foreign exchange remains the broadest near-term risk for companies we cover, with both the euro and the Canadian dollar weakening materially against the dollar over the last few months. We expect this to reverse over the long term.
  • While foreign-exchange risk will probably not affect a company's moat rating, the ability to pursue operational excellence within an industry and continue to drive expense leverage could change the cost structure of a business, improving a company's moat, while affecting peers negatively. We expect to see best-in-breed businesses emerge as those companies that consistently drive on the importance of low cost and brand equity segregate themselves from the rest of the group.

Broadly speaking, we view the consumer cyclical sector as slightly overvalued at current levels, trading at a median price/fair value estimate just above 1. Although there are a few pockets of opportunity across our various industry groups--including resorts and casinos, home improvement stores, luxury goods, recreational vehicles, and leisure--we generally believe that the market has appropriately priced in consumers' current spending capacity across the globe.

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