Consumer Cyclical: Firms That Blur the Lines of Digital and Physical Are Set to Excel

The Morningstar Global Consumer Cyclical Index has slipped 10% year to date (Exhibit 1), roughly in line with the broader global equity market, as strength in consumer spending and confidence was modestly offset by increasing volatility due to the global political climate.

Exhibit 1: Cyclical stocks have modestly outperformed the broad market

The median stock we cover trades at a 17% discount to our fair value estimate, providing opportunities for investors. Roughly half of the consumer cyclical companies we cover are 4- or 5-star-rated (Exhibit 2), with autos, personal services, and homebuilders trading at the most attractive valuations.

Exhibit 2: Autos, personal services, and homebuilders offer attractive valuations

For many industries in the consumer cyclical sector, including travel and leisure, entertainment, restaurants, and apparel, digital efforts reign supreme, and e-commerce capabilities can set certain companies up to more easily increase sales. Additionally, for operators that recognize trends and make the necessary operational and technology changes, it can lead to many years of market share gains and premium valuations.

We expect e-commerce growth to remain robust in the years ahead. In the U.S., for example, we forecast online retail sales rising at a double-digit clip over the next five years versus less than 4% for the brick-and-mortar channel (Exhibit 3). That said, a physical footprint is likely to remain important, as brick-and-mortar sales would still represent more than 80% of total U.S. retail sales in 2022 (Exhibit 4).

Exhibit 3: Rising e-commerce penetration should boost overall retail sales

Exhibit 4: Physical store sales should remain key in driving retail performance

Given the importance of a physical presence, companies that marry it with digital efforts are set to win. We highlight this across the restaurant industry, where digital factors like online ordering, mobile pay, online reservations, Wi-Fi, and loyalty programs are at least somewhat important to both operators and customers, showing that those that can create a seamless omnichannel experience could be positioned to generate the most promising growth. This movement has already largely begun to play out across the home improvement landscape, with the companies providing the best cross-channel experience capturing the most robust market share gains.

Top Picks

Hanesbrands HBI

Star Rating: 5 Stars

Economic Moat: Narrow

Fair Value Estimate: $27

Fair Value Uncertainty: Medium

5-Star Price: $18.90

Anta Sports Products 02020

Star Rating: 4 Stars

Economic Moat: Narrow

Fair Value Estimate: HKD 55

Fair Value Uncertainty: Medium

5-Star Price: HKD 38.50

Wyndham Hotels & Resorts WH

Star Rating: 5 Stars

Economic Moat: Narrow

Fair Value Estimate: $72

Fair Value Uncertainty: Medium

5-Star Price: $50.40

Exhibit Sources: Morningstar, U.S. Census Bureau 2016 Annual Retail Trade Survey. Data as of Dec. 20, 2018.