Consumer Cyclical: Ideas for a Slower-Growth World

SECTOR OUTLOOK: Amid global uncertainty, consumer cyclical companies with moats will fare the best, in our opinion

R.J. Hottovy, CFA 2 October, 2014 | 3:43PM
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The consumer cyclical sector currently looks fairly valued, in our opinion, trading at a median price/fair value estimate of about 1.01. That said, we think several industries offer relative attractiveness, including resorts and casinos (with a ratio of 0.80), recreational vehicles (0.93) and leisure (0.94). Moreover, several companies outside these areas look especially attractive given recent concerns that we don't believe will negatively affect the firms' long-run investment theses. In all, although the broader consumer cyclical end markets have showed improving trends in recent months, we'd still generally point investors towards companies with economic moats (or sustainable competitive advantage), as the larger retail spending environment remains uncertain around the world.

Retail sales continue to rise at a modest clip, and we believe the persistence of rising equity prices and home prices has allowed a positive wealth effect to prevail, increasing consumers' willingness to spend. With quantitative easing winding down in the US and former high-growth countries (Brazil, China) moderating to more rational long-term growth levels internationally, we could see some headwinds for both equity markets and global consumer spending ahead. 

To this point, we view consumer tastes as becoming increasingly discerning, and think those companies offering differentiated products, better technical aspects, or garnering brand cachet will continue to outperform substitutes with lower quality or name recognition. This is a cross-industry phenomenon, affecting businesses from power sports to fast-casual dining. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Kingfisher PLC341.80 GBX0.35Rating
Tapestry Inc38.62 USD-0.34Rating
The Swatch Group AG47.46 CHF-1.45

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.