Is Now the Time to Buy Supermarket Stocks?

Consumer defensive names look expensive thanks to a price rally, but a handful of firms remain undervalued

Ken Perkins 7 July, 2016 | 10:10AM

Valuations within the consumer defensive sector have remained elevated, trading at around a 4% premium to our fair value estimate. From our vantage point, this premium reflects a rotation into higher-quality names amid the uncertainty within the global macroeconomic landscape, along with investors' appetite for yield, the strong shareholder returns that characterize the sector, and continued optimism for merger-and-acquisition activity in the space.

The first quarter of 2016 was challenging for many consumer companies; as expected, however, defensive firms delivered more stable results than many firms on the consumer cyclical side especially clothing retailers. In general, organic revenue growth remains positive but relatively uninspiring across the consumer defensive landscape.

Although the consumer staples space tends to be fairly defensive in a more challenging market climate, global consumer spending, particularly in emerging markets, remains tepid. But beyond these pressures, we expect the pace of emerging-markets growth to exceed more developed markets in the longer term, given favourable demographic and disposable income trends.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Campbell Soup Co46.04 USD-0.73
Carrefour14.92 EUR-0.57
Danone SA ADR13.47 USD-1.43
Sainsbury (J) PLC240.20 GBX0.84
Tesco PLC242.30 GBX0.08

About Author

Ken Perkins  is a Morningstar equity analyst covering consumer packaged goods firms.

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