Consumer cyclical: Market underestimating apparel and e-commerce

Structural trends across these sectors are being mispriced by the market.

R.J. Hottovy, CFA 5 July, 2016 | 5:00PM

Our consumer cyclical coverage trades at an average price/fair value ratio of 0.93, reinforcing our views that the market is underestimating longer-term revenue growth and margin expansion opportunities from this group. Although we acknowledge the possibility of more-volatile consumer spending trends than we've become accustomed to across the globe--especially when factoring in Brexit-related uncertainty in Europe--as well as supply/demand inventory imbalances during 2016, we believe the market is now pricing in long-term cash flow assumptions that are more conservative than those baked into our longer-term consumer cyclical valuation assumptions.

Sentiment among affluent consumers generally remains healthy, even after recent market volatility, and we still expect growth out of our discretionary names, albeit at a decelerating pace. We continue to monitor consumption trends among high-end consumers, who take spending cues from asset/equity market valuations. A meaningful reversal in high-end spending not only would adversely affect discretionary names, but could have implications across the broader sector.

What we make of the near-term and long-term apparel retail environment

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About Author

R.J. Hottovy, CFA

R.J. Hottovy, CFA  R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

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