Three stocks for downside protection as global growth outlook turns grim

Economists have identified U.S.-China trade spat, the possibility of a no-deal Brexit, and public and private debt as some of the key dangers to global economic growth

Vikram Barhat 30 January, 2019 | 6:00PM

If the headlines coming out of the Davos annual summit are anything to go by, the world economy may be heading for a period of gloom and doom. The IMF recently joined the World Bank and OECD to lower its global growth forecast citing multiple reasons for pessimism. The news comes close on the heels of China’s 2018 GDP numbers which indicate the Asian economic giant grew at the weakest pace in nearly three decades.

Economists have identified U.S.-China trade spat, the possibility of a no-deal Brexit, and public and private debt as some of the key dangers to global economic growth. Given that none of these macro-economic issues have quick fixes, investors would do well to expect a period of uncertainty and turn their attention to sectors that are relatively immune from negative news cycles and economic malaise.

One such sector is consumer staples, or consumer defensive. The sector comprises non-cyclical and stable businesses like food, retail, and beverages, that tend to do relatively well through challenging economic conditions. Consumer staples companies make products that are considered essential goods which helps these businesses weather economic upheavals and market volatility.

The following consumer defensive stocks are trading well below their fair values and represent attractive buying opportunities, according to Morningstar equity research.

Campbell Soup Co.
Ticker: CPB
Current yield: 3.96%
Forward P/E: 14.64
Price: US$34.66
Fair value: US$45.5
Value: 22% Discount
Data as of Jan. 24, 2019

The 150-year-old manufacturer of branded convenience food products, Campbell Soup (CPB) owns an assortment of well-known brands including Campbell’s, Goldfish crackers, Prego pasta, Swanson, and Pepperidge Farm.

With around 60% share of the U.S. soup aisle, the company enjoys a dominant position in the U.S., which enables Campbell to maintain its negotiating power with retailers, says a Morningstar report.

The wide-moat firm’s robust competitive strength is built on intangible assets and cost advantage. The packaged food behemoth has the resources to bring new products to market and promote them vigorously to “drive customer traffic into outlets, [which] enhances the stickiness of its retailer relationships,” says Morningstar sector director, Erin Lash, who estimates the stock to be worth US$45.5.

The company’s US$4.8 acquisition of snack maker Snyder’s-Lance has bolstered “exposure to the faster-growing on-trend snack food aisle beyond its Pepperidge Farm lineup,” says Lash, noting that the combined entity will reshape its product mix and help differentiate its fare in an intensely competitive space, thereby boosting competitive edge.

Beyond portfolio changes, the soup company’s push for business turnaround includes drastic cost-cutting and divestments. “Campbell also aims to up the ante on its cost savings, now targeting US$650 million by fiscal 2022,” says Lash, adding the firm’s returns on invested capital will remain above its cost of capital over the next 20 years.

Ingredion Inc.
Ticker: INGR
Current yield: 2.55%
Forward P/E: 12.9
Price: US$97.35
Fair value: US$128
Value: 23% Discount
Data as of Jan. 24, 2019

Ingredion (INGR) provides ingredients for the food, beverage, paper and personal-care industries. Sweeteners account for 35% of sales, while starches contribute 50%. The company has a multinational footprint with meaningful exposure to developing markets in Latin America and Asia-Pacific, with half of sales outside the U.S.

Although the company’s core ingredients generate roughly 70% of sales and nearly 50% of profits, its specialty ingredients, including proprietary formulations, command twice the gross margins and enjoy twice the sales growth of core ingredients, says a Morningstar report.

The specialty ingredients business, which accounts for slightly less than 30% of sales and half of its profits, includes “an array of proprietary offerings that align with growing market and consumer trends,” says Morningstar equity analyst, Seth Goldstein. “Buyers are often unwilling to jeopardize the brand equity of their products by switching to alternative solutions that consumers might reject.”

The specialty ingredients business operates with a narrow moat and earns excess ROICs, he says, adding that volumes should grow in the mid to high single digits, far outpacing core ingredients which are expected to grow roughly in line with GDP in the regions where they are sold.

For that reason, the firm continues to ramp up its specialty product sales, which command higher prices and generate higher margins, says Goldstein, who appraises the stock’s worth to be US$128, calling it undervalued at its current market price.

Unilever NV ADR
Ticker: UN
Current yield: 3.33%
Forward P/E: 18.2
Price: US$53.08
Fair value: US$60
Value: 10% Discount
Data as of Jan. 24, 2019

Unilever Group (UN) is a diversified company selling household and personal product (58% of sales by value) and packaged food (42%). The firm’s brand portfolio includes such household names as Knorr soups and sauces, Hellmann's mayonnaise, Lipton teas, Axe and Dove skin products, and TRESemme hair-care products.

Operating in a highly competitive environment, most consumer staples are struggling to grow organically and are forced to cut costs in order to spend to drive growth. “In the case of Unilever, the management team is taking the right steps to reignite growth in some highly competitive categories,” says a Morningstar report, noting that strategies to streamline the cost structure include supply-chain and gross margin efficiencies, and recalibrating budgets and spending targets.

“The financial targets accompanying these strategies include EUR 6 billion in cumulative cost savings by 2020,” says Morningstar sector director, Philip Gorham, adding that two thirds of these savings will be reinvested in increased acquisition activity and direct returns to shareholders.

These strategies attack the heart of the challenges facing the industry and ensure that “Unilever has a better chance than most of its peer group of reigniting growth in the medium term,” adds Gorham, who puts the stocks fair value at US$60.

The firm has been acquisitive in recent years and has made home high-profile purchases including the mail-order men's grooming business Dollar Shave Club and, more recently, GSK's health food drinks portfolio for EUR 3.3 billion, which generates 90% of the turnover in India and will allow Unilever access to the country’s fast growing hot malted drinks market.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Campbell Soup Co47.17 USD1.20
Ingredion Inc79.95 USD-1.41
Unilever NV ADR59.72 USD2.16

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Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.