Consumer Defensive: Firms With an Edge Are Poised to Win

SECTOR OUTLOOK: Consumer defensive firms look to offset muted growth by beefing up their competitive positioning, and select opportunities for investors remain

Erin Lash, CFA 3 October, 2014 | 8:00AM
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While the consumer defensive space is far from trading at a bargain-basement valuation, we contend that pockets of value remain. Overall, the sector appears slightly overvalued, at a median price/fair value of 1.04, but we note that the fundamentals for this group tend to outperform during cyclical downturns because of the competitive edge these firms have amassed (as evidenced by the fact that approximately two thirds of them maintain a narrow or wide economic moat). As such, we recommend that investors looking to gain exposure to the space consider companies with established economic moats, or sustainable competitive advantage—those operating with structural supply chain and distribution advantages, economies of scale, sufficient resources to extend brand reach, and pricing power to withstand softness in volume growth.

Growth prospects remain bleak in mature, developed markets, highlighting the appeal of emerging regions for consumer product firms. We believe consumer staples companies with established economic moats can leverage their existing supply chain and distribution assets (to an extent) relative to smaller emerging-markets peers, have easier access to cheaper capital, can foster brand awareness and loyalty across multiple pricing tiers, and typically utilise sensible go-to-market strategies.

For investors looking for consumer staples names less reliant on a single economy that can withstand the economic shock from any particular region, Coca-Cola (KO), Diageo (DGE), Unilever (ULVR) and Philip Morris International (PM) may be attractive. With geographic diversification, there is a trade-off in reduced exposure to regions with faster-growing populations and higher disposable income potential that names like MaricoWuliangye Yibin and ITC offer. But Yum Brands (YUM), SABMiller (SAB) and United Breweries (CCU) offer both growth and diversification, as they've sufficiently broadened their geographic exposure while also establishing more concentrated positions in markets like China, Africa and Latin America, respectively.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Coca-Cola Co53.07 USD0.00Rating
Diageo PLC3,841.50 GBP0.00Rating
ITC Ltd225.45 INR0.00
Marico Ltd532.55 INR0.00
Philip Morris International Inc87.84 USD0.00Rating
Tesco PLC277.85 GBP0.00Rating
Unilever PLC3,872.00 GBP0.00Rating
United Breweries Co Inc ADR16.26 USD0.00
Wuliangye Yibin Co Ltd222.75 CNY0.00Rating
Yum Brands Inc126.53 USD0.00Rating

About Author

Erin Lash, CFA  Erin Lash, CFA, is a senior stock analyst with Morningstar.