Alcohol sales are drying up, leaving some bargains in the consumer defensive stock

The consumer defense sector once again proved rebounding despite volatile market conditions in the second quarter, shedding only 4.7% as of June 27 versus a 14.2% decline in the broader market.

The market found favor with consumer defense this quarter


Source: US Bureau of Labor Statistics, IRI POS, IRI Client Engagement, Morningstar.

However, this has left investors with few opportunities that are undervalued, as the defensive stock of the average consumer is fairly valued in our view. This translates to only 35% of consumer defensive coverage with 4 or 5 star ratings, with the vast majority falling into the alcohol aisle. We believe stocks have been hampered by rising inflation and its potential impact on consumer spending (particularly in the domestic sphere). However, we think that sentiment is a bit pessimistic, given the improved levels of brand equity firms that started hiring even before the pandemic.

In a hot place, we think the names of alcoholic drinks seem understated


Source: US Bureau of Labor Statistics, IRI POS, IRI Client Engagement, Morningstar.

Even with inflation rebounding (via raw materials, transportation, packaging, and labor), we’ve long believed that manufacturers of consumer products have a number of tools at their disposal to stave off profits, including raising prices, and pursuing cost-saving initiatives (which can Including the adoption of increased automation and thus reduced dependence on labor), and the employment of revenue management opportunities. However, with inflation showing few signs of abating, and some companies already raising prices multiple times, we believe continued brand spending will be necessary to skirt the blows on volumes.

Commodity prices have skyrocketed after years of inactivity


Source: US Bureau of Labor Statistics, IRI POS, IRI Client Engagement, Morningstar.

And despite the higher prices on the shelves, shoppers have been resilient so far, with rising wages and relatively high levels of savings through the pandemic helping to offset cost increases, leaving consumer spending largely unscathed. (In real terms, personal consumption expenditures increased 3% in April 2022 compared to the same period last year.)

However, a sharp rise in fuel prices following the Russian invasion of Ukraine in February has exacerbated pocket pressures. This has resulted in more consumers trading in private-brand products in a few food, family, and personal care categories. We don’t think these pressures are set to abate in the near term, so we think it’s important for companies to showcase the value-added nature of their products or risk alienating consumers and bleeding their share.

Consumers are turning to low-priced private-brand fare


Source: US Bureau of Labor Statistics, IRI POS, IRI Client Engagement, Morningstar.

top picks

BEYOND MEAT BYND
star rating: ★★★★★
Economic trench classification: none
Fair value estimate: $72
Fair value uncertainty: High

Beyond Meat’s stock is attractive, trading at 65% off our fair value estimate of $72. We believe investor concerns about slowing US retail demand for plant-based meats are unwarranted, as the slowdown appears to be a result of the pandemic-driven boom in 2020. In our view, growth should accelerate in 2022 with the expanded launch of McDonald’s Mac Planet in geographies Multiple and co-creating products with Yum Brands for various fast food chain restaurants around the world. As primary drivers of growth, these deals combined should result in more than $200 million in additional annual revenue by 2025.

Boston Bear Sam
star rating: ★★★★★
Economic trench classification: narrow
Fair value estimate: $740
Fair value uncertainty: Medium

Shares of Boston Beer, a leader in high-quality malt beverages in the United States and adjacent categories, are trading 60% below our base valuation. We assume that the company has shown a tendency to increase its portfolio in line with the latest growth trends and to capture a disproportionate share of the economic rents resulting from this growth by being one of the first drivers. While carbonated water trends have slowed, a shift in secular consumption, such as the desire for low-sugar products and assorted flavors, should continue to support Boston Beer sales, as evidenced by the recent launch of Truly Margarita solid carbonated water.

Heavenly HAIN . group
star rating: ★★★★★
Economic trench classification: none
Fair value estimate: $39
Fair value uncertainty: Medium

Hain shares are trading at a 40% discount to our fair value estimate of $39 per share, in part as a byproduct of recent weakness in its European arm. We consider these issues largely temporary, and with a range of organic and natural fare aligned with consumer preferences, Hain is well positioned for the long term. Although not historically invested in its brands, Hain has changed course under a new leadership team. The effectiveness of these efforts has led Hain to boast modest gains in the stock (versus previous losses), and we believe net profit growth will remain on an upward trajectory as a result.

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