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7 defensive stocks on sale

Susan Dziubinski  |  28 May 2019Text size  Decrease  Increase  |  
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There haven’t been any “May flowers” for the stock market – just showers instead. The S&P 500 has skidded about 4 per cent so far this month as of this writing.

US-China trade-war fears have rained down on stocks, with energy and technology stocks bearing the brunt. And as the rhetoric between President Donald Trump’s administration and the government of Chinese leader Xi Jinping persists, we may be in for a protracted trade war.

Of course, Morningstar isn’t in the business of predicting when the trade impasse will end nor in guessing where the market is going. Moreover, tough trade talk doesn’t have to equal a stalled stock market. Remember, the S&P 500 has still notched double-digit gains for the year through 23 May – nothing to sneeze at.

Still, equities have been in rally mode for most of the past decade. It’s not unreasonable to suggest that playing a little defence right now might be a good idea.

So, for this week’s screen, we went looking for some defensive stock picks. We will follow up tomorrow with a selection of defensive – and undervalued – plays in Australia.

Specifically, we screened for:

Stocks in Morningstar’s Defensive Super Sector: This Super Sector includes industries that are relatively immune to economic cycles: healthcare, consumer defensive, and utilities. Companies in these sectors provide goods and services that we need in both good and bad times. If the economy slows, we’ll still fill our prescriptions, seek medical care, practice good hygiene, and enjoy our favourite beverages and snacks.

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Stocks with wide or narrow Morningstar Economic Moat Ratings: Stocks that have competitive advantages – those that have economic moats – are by their very natures more reliable than no-moat companies in terms of their businesses. Moaty companies are financially healthy and highly profitable – two qualities that are prized when economic times get tough.

Stocks trading at 5-star levels: Stocks at this rating level are significantly undervalued relative to our fair value estimates, providing a substantial margin of safety.

Stocks with low or medium Morningstar Uncertainty Ratings: In short, the uncertainty rating represents the predictability of a company's future cash flows. As such, we have a pretty high degree of confidence in our fair value estimates of companies with low and medium uncertainty ratings. (Long version: The uncertainty rating captures a range of likely potential intrinsic values for a company based on the characteristics of the business underlying the stock, including such things as operating and financial leverage, sales sensitivity to the economy, product concentration, and other factors. If the range of potential intrinsic values is narrow, the company earns a low uncertainty rating. If the range is great, the company earns a high uncertainty rating.)

Seven stocks made the cut.

7 American defensive stocks on sale

British American Tobacco

Our fair value estimate for BAT’s ADRs is US$59, which implies 2020 multiples of 15 times earnings, 12 times EV/EBITDA, a free cash flow yield of over 6 per cent, and a dividend yield of 4 per cent. These are roughly in line with historical valuations and are sandwiched between those of Philip Morris International, BAT’s closest comparable with slightly higher implied multiples, and Imperial Brands. This is appropriate, in our view, because it reflects the companies' relative positioning in the heated tobacco category. (Philip Gorham)

CVS Health Corp

Following a slightly weaker outlook that we expected in the firm's first full-year owning Aetna, we're lowering our fair value estimate to US$92 per share from US$96, implying roughly 14 and 11 times our updated estimates for 2019 adjusted earnings and EBITDA, respectively. The firm appears deeply undervalued despite our forecasts that largely reflect a continuation of the headwinds that have long pressured the firm's segment performance. (Jake Strole)


Ingredion manufactures ingredients for the food, beverage, paper, and personal-care industries. Sweeteners account for about 35 per cent of sales, starches nearly 50 per cent, and co-products the balance. Our fair value estimate is US$125 per share. Ingredion reported an average adjusted operating margin just below 11 per cent over the previous decade, and we forecast a roughly 15 per cent margin in a midcycle environment. This assumes a more favorable product mix as specialty ingredients volume will continue to proportionately displace core volume. Additionally, we expect South America margins to expand as economic growth stabilizes and higher capacity utilization drives the benefits of operating leverage. However, we expect these tailwinds to be largely offset by the negative impact of rising corn prices. (Seth Goldstein)


DaVita Inc is the largest provider of dialysis services in the U.S., boasting market share levels that eclipse 35 per cent measured by both patients and clinics. The firm operates 2905 facilities worldwide, with 2664 located in the US, and treats over 225,000 patients globally each year. We're slightly lowering our fair value estimate to US$79 per share from US$81, which reflects modestly lower cash flow forecasts and incorporates the revised US$4.3bn sale price for DMG. This implies 18.0 and 8.4 times our updated 2019 estimates for adjusted earnings and EBITDA, respectively. (Jake Strole)

Imperial Brands

Imperial Brands is the world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2018 volume of 255 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories and is a leading seller of cigars in several countries. Our fair value estimate for Imperial's ADRs is US$48. Our valuation implies fiscal 2020 multiples of almost 19 times our earnings forecast, which, unlike consensus, is not adjusted for amortisation, and 12 times EV/adjusted EBITDA, with a dividend yield of 5 per cent. These implied multiples represent a slightly lower valuation than competitors Philip Morris and British American, which we think is justified, given that Imperial's weaker long-term competitive positioning is likely to lead to a slower growth profile. (Philip Gorham)

Roche Holding

Roche is a Swiss biopharmaceutical and diagnostic company. The firm's best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008. We think Roche's pharmaceutical division will see a 4% top-line compound annual growth rate through 2023. (Karen Andersen)

Anheuser-Busch InBev

Anheuser-Busch InBev SA/NV is the largest brewer in the world and one of the world's top five consumer product companies, as measured by EBITDA. After the SABMiller acquisition, the company's portfolio now contains five of the top 10 beer brands by sales and 18 brands with retail sales over $1 billion. The key driver of our valuation is medium-term margin expansion. While the acquisition of SABMiller will give AB InBev a foothold in Africa, which should improve the growth profile of the enlarged group, we expect the presence in developed markets will continue to mitigate the low- to mid-single-digit volume growth we anticipate from emerging markets. (Philip Gorham)

is director of content for Morningstar.com.

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