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Quarter-End Insights

Consumer Cyclical: Assessing Disruptions in Restaurant, Retail, and Travel

Changing consumer preferences and technological innovations have led to valuation shifts across different consumer cyclical industries.

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  • Our consumer cyclical universe trades at an average price/fair value of 1.02, suggesting that market valuations are generally aligned with our longer-term revenue growth and margin expansion forecasts. Sentiment among affluent consumers appears relatively healthy, although we continue to take a more balanced view of the spending power of lower- to middle-income consumers.
  • From a valuation perspective, one of the most intriguing categories is restaurants, marked by the rise of moat-disruptive fast-casual players such as  Chipotle (CMG) and  Panera (PNRA). Coupled with fewer high-growth opportunities across the traditional retail sector and the lack of a major disruptive presence such as  Amazon (AMZN), we believe this has attracted investors to the restaurant category, resulting in inflated valuations in many cases.
  • Although we believe pressure from e-commerce led to structural changes across the retail industry, we still find several instances of retailers that are better insulated from e-commerce competition than others, including  Tractor Supply (TSCO).
  • We believe the market continues to overlook the longer-term growth prospects of the online travel industry, particularly those players with international exposure.

Our consumer cyclical universe trades at an average price/fair value of 1.02--a shade below Morningstar's overall coverage universe at 1.03--suggesting that market valuations are generally aligned with our longer-term revenue growth and margin expansion forecasts. Although sentiment among affluent consumers appears relatively healthy, and we expect growth out of our discretionary names (albeit at a decelerating pace), we're monitoring spending among high-end consumers, which tend to take spending cues from asset and equity market valuations. A meaningful reversal in high-end spending would not only have an adverse impact on discretionary names, but it would also have implications across the broader consumer sector.

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

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