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Quarter-End Insights

Consumer Defensive: Still Thirsty for Growth

Although growth remains sluggish, opportunities in consumer defensive stocks are still available for selective investors.

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  • Consumer defensive sector valuations have edged higher, with shares trading about 5% above our fair value estimates, reversing the approximately 4% discount we saw in the last quarter.
  • Top-line growth is hard to come by, with prices relatively stable and commodity costs still reasonably low; we expect the environment to persist short term before reverting to more normal patterns of inflation.
  • Cost-cutting and share buybacks have dominated as firms try to preserve EPS growth in a soft revenue environment; while much of the efficiency benefit should prove durable as conditions normalize, firms run the risk of underinvesting in their brands and growth infrastructure.
  •  Kraft Heinz's (KHC) failed bid for  Unilever (UL) has spurred speculation that the firm could look to other targets as it continues its consolidation efforts;  Reckitt Benckiser's (RBGLY) pending $17 billion purchase of  Mead Johnson (MJN) also indicates M&A activity remains robust in the sector.

Zain Akbari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.