Four long-term growth stocks for uncertain times

Despite the recent surge, some consumer staples stocks continue to trade well below their fair value estimate, according to Morningstar equity research, creating some attractive buying opportunities.

 Wal-Mart Stores Inc. (WMT) is the largest retailer in the world with more than US$485 billion in annual global sales and 11,600 stores across the world. Groceries account for roughly half of total sales, while the rest is comprised of apparel, health and wellness, entertainment and home goods.

"Wal-Mart has a wide economic moat because of the cost advantages that stem from volume purchasing power and massive scale," says a Morningstar report, noting that the U.S. retailer "focuses on operating at the lowest cost possible so that it can offer customers lower prices than its competitors."

The retailer has been pushing to grow its market share through aggressive prices. It recently launched a new price-comparison test at 1,200 U.S. stores to take on German-based discount grocery chain Aldi and other U.S. rivals, according to Reuters.

Morningstar sector head Erin Lash says Wal-Mart has tremendous leverage to extract the most favourable terms possible from suppliers, vendors and manufacturers. Further, Wal-Mart is beefing up its e-commerce capabilities and expanding its reach by opening smaller-format, grocery-and-pharmacy stores, she adds.

Wal-Mart is particularly focused on improving international returns. "Internationally, 10 of 11 markets had positive [comparable-location] sales with six of the 11 markets showing comp sales greater than 4%," says Lash, who puts the stock's fair value at US$76, implying a 2018 price-to-earnings ratio of 18, and free cash flow yield around 5%.

Lash's longer term forecast for Wal-Mart International includes sales growth of 3% to 5% over the next 10 years, prompted by the retailer's growing strength in China.

The world's largest non-alcoholic beverage company,  Coca-Cola (KO) generates nearly 60% of its revenue and about 80% of its operating profit from outside the United States. With household brands such as Coke, Sprite and Dasani, the company has built a sustainable competitive advantage stemming from its iconic brand image, strong distribution network and economies of scale.

As well, the firm's "ability to drive organic growth last year through price/pack architecture bolsters our belief in its wide moat, and we believe this strategy will allow for further value gains in both developed and developing markets," says a Morningstar report.

In developed markets, the firm has been able to revive its carbonated soft drink offerings through smaller pack sizes and low-sugar colas. "This strategy has proved successful, with sugar-free cola sales in the U.S. outpacing growth in the overall sparkling portfolio," says Lash, who stresses that "the strategy has should help counter volume declines without weighing on gross margins.'

The firm's ambitious 2020 targets include increasing volumes at a 3% to 4% clip, revenue gains in the mid-single-digits, and earnings before tax expansion of 6% to 8%, notes Lash, whose US$44.50 fair value for the stock implies a 21.4 times price-to-earnings ratio and a 18.2 times enterprise value/EBITDA.

Lash argues, however, that with declining consumption of carbonated drinks in North America, the company's long-term growth opportunities exist predominantly in international markets. "Emerging- and developing-market gains drive the bulk of the top-line performance," she says, projecting 5% annual top-line gains, boosted by Coke's dominant presence in developing markets.

 Anheuser-Busch InBev (BUD) is the largest brewer in the world, with a portfolio containing five of the top-10 best-selling beer brands that include Beck's, Corona and Budweiser. Seventeen of its brands generate more than US$1 billion in retail sales. The company recently closed a deal to acquire SABMiller, the world's second-largest brewer. AB InBev also has a 62% economic interest in its Latin American subsidiary, Ambev.

The global beer behemoth has built a strong competitive advantage by swallowing rivals and keeping tight cost control, which has helped generate excess returns on invested capital for many years. "Management's playbook is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business," says Morningstar sector strategist Philip Gorham. He forecasts the company to "consistently generate low-double-digit [return on invested capital] throughout" 2020, and asserts "its cost advantage will sustain this level of returns for at least the next two decades."

Anheuser-Busch InBev has one of the widest economic moats in Morningstar's consumer defensive coverage and is among the most efficient operators. "Vast global scale and near-monopoly dominance in several Latin American markets give AB InBev significant fixed cost leverage and pricing power," says Gorham, who puts the fair value of the company's American Depository Receipt (ADR) at US$126, implying a 4.1% free cash flow yield and 15.5 times adjusted enterprise value/EBITDA.

AB InBev, he adds, represents one of the strongest franchises in global consumer staples. "There is compelling value in the shares for long-term investors," especially after the recent pullback where the stock fell by 20%, Gorham notes.

A leading global provider of ingredient solutions to diversified industries,  Ingredion (INGR) primarily processes corn, in addition to tapioca, rice, potatoes, fruits and vegetables. Sweeteners account for 40% of sales, and starches for another 44%. The company derives 70% of its sales from outside the U.S., with a sizeable presence in developing markets, including Latin America and Asia-Pacific.

"Ingredion is benefiting from secular drivers of growth in ingredients, including health and wellness trends (removing unhealthy contents like salt, fat, sugar or sodium)," says a Morningstar report. Other factors creating tailwinds include, "demographics (growing urban populations in developing markets), and more snacking and demand for processed and convenience foods in developed markets," says the report.

Much of its future growth is expected to come from developing markets, which account for 45% sales, says Morningstar equity analyst Adam Kindreich. "It is the leader in South America, with strong positions built up in Brazil, Argentina and Colombia over decades," he adds, but cautions that emerging markets could be prone to political and currency volatility.

The company's attractiveness also lies in managing growth and acquisitions, and in paying back shareholders. "The company has a long track record of prudent capital allocation [and] has paid keen attention to returning cash to shareholders through a careful balance of dividends and share buybacks," says Kindreich, who recently raised the stock's fair value by 6% to US$147 following strong fourth-quarter 2016 results, and projects a 3.5% sales growth in 2017, followed by long-term growth of 4.0% from 2018 onward.

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