Consumer Defensive: Still Thirsty for Growth

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

Zain Akbari, CFA

Mar 30, 2017

Mentioned: Symrise AG (SY1) , Symrise AG (SY1) , Mead Johnson Nutrition Co (MJN) , Reckitt Benckiser Group PLC (RBGLY) , Pinnacle Foods Inc (PF) , The Kraft Heinz Co (KHC) , Blue Buffalo Pet Products Inc (BUFF) , Sanderson Farms Inc (SAFM) , Campbell Soup Co (CPB) , Mondelez International Inc (MDLZ)

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.

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

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