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Quarter-End Insights

Consumer Defensive: Valuations More Reasonable After Third-Quarter Retreat

Risks to traditional business models remain from e-commerce and retail bifurcation.

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  • Following a modest retreat early in the third quarter, valuations in our global consumer defensive coverage are now just 1% above our fair value estimates on a market-cap-weighted basis.
  • M&A was once again top of the agenda this quarter, with Nestle particularly active on the acquisition front, Reckitt Benckiser Group disposing of its food business, and rumors circulating, later denied by the company, that Estee Lauder might be in play.
  • Amid weak growth, activist investors are increasingly forcing companies to focus on a cost-cutting agenda, with activists taking stakes in P&G, Nestle, and Danone in the third quarter. 
  • Although there are signs that inflation may be creeping back in the U.S. and the U.K., and deflationary pressures have abated in Europe, continued competition from discounters and Amazon's entry into grocery retailing could weigh on medium-term organic growth in the consumer defensive sector.

 

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