Consumer Defensives: Firms Must Cater to Consumers Seeking Value and Convenience

The Morningstar US Consumer Defensive Index rose in the first quarter, well outpacing the broader market’s decline. Across our coverage universe, the median stock trades at a modest 1% discount to our intrinsic value estimates, although roughly 37% of names in the sector are rated 4 or 5 stars, signaling attractive long-term return potential.

The most compelling valuation opportunities are concentrated in alcoholic beverages and consumer packaged goods, which trade at 28% and 18% discounts to our fair value estimates, respectively. We believe consumer confidence remains under pressure from persistent inflation, a challenging job market, and geopolitical tensions, driving shoppers toward value-oriented choices. The companies best positioned to navigate this difficult environment are those that are effectively catering to deal-seeking consumers through product innovation, optimized pack sizes, and disciplined pricing.

As consumers’ penchant for value and convenience grows, e-commerce usage for household, food, and personal care products continues to rise. Since the onset of the pandemic in 2020, US ecommerce sales in these categories have grown at an average annual rate of roughly 14%, compared with approximately 3% for US supermarket sales over the same period. Shopping on e-commerce platforms makes it more efficient for consumers to find the items they need and access deals. As shopping patterns increasingly bifurcate, CPG companies must offer the right pack sizes at the right price points or risk losing sales. In a challenging consumer environment, firms should have differentiated, trend-aligned products to win over value-conscious shoppers.

With many CPG companies delivering lackluster organic sales growth, firms are increasingly seeking external avenues to bolster their growth trajectories. Difficulty driving volume within existing portfolios has pushed many toward acquiring higher-growth brands that resonate with consumers to reinvigorate declining sales. While the right acquisition can support growth, we believe long-term success will ultimately require brand reinvestment and product innovation.

Top Consumer Defensive Sector Picks

General Mills

• Fair Value Estimate: $57.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Narrow-moat General Mills GIS trades at roughly a 35% discount to our $57 fair value estimate and offers a 6.6% dividend yield, underscoring its long-term investment appeal. A weak consumer environment has led to soft volumes and a higher share of purchases made on promotion to appeal to deal-seeking consumers, which weighs on margins. The firm’s planned $600 million in cost savings should help offset these headwinds, though we expect some savings will be reinvested to support organic growth. We view these pressures as cyclical rather than structural and maintain assumptions for low-single-digit revenue growth and mid-teens mid-cycle adjusted operating margins long term.

Mondelez International

• Fair Value Estimate: $75.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Trading at a 25% discount to our $75 fair value estimate with a 3.5% dividend yield, wide-moat Mondelez MDLZ offers an attractive investment opportunity. Elevated cocoa costs have pressured margins, though prices have eased from peak levels. While near-term relief is limited given locked-in cocoa needs through fiscal 2026, Mondelez’s efforts to diversify sourcing beyond West Africa should reduce future volatility. And even as concerns around health and wellness trends continue to percolate, we believe the firm’s increased investments in consumer-driven innovation, marketing, and pack-size flexibility should support its long-term competitive position.

Clorox

• Fair Value Estimate: $163.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Wide-moat Clorox CLX trades around a 35% discount to our $163 fair value estimate and offers a more than 4% dividend yield, creating an attractive entry point. In our view, the market has put Clorox in the bargain bin following a slew of noise in its results over the past few years. But we see opportunities for improved sales growth (around 3%-4%), stemming from its unrelenting commitment to investing in its brands and capabilities through the cycle, funded by savings from its recently upgraded ERP system.