Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 1.8% return has lagged the S&P 500 by 14.5 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks that may face trouble.
Somnigroup (SGI)
Market Cap: $13.33 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE:SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Do We Think SGI Will Underperform?
- Lackluster 11.6% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Free cash flow margin is on track to jump by 1.5 percentage points next year, meaning the company will have more resources to pursue growth initiatives, repurchase shares, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Somnigroup is trading at $63.36 per share, or 17.9x forward P/E. To fully understand why you should be careful with SGI, check out our full research report (it’s free).
H&R Block (HRB)
Market Cap: $5.49 billion
Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE:HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.
Why Do We Pass on HRB?
- Sales trends were unexciting over the last five years as its 1.9% annual growth was below the typical consumer discretionary company
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 4.6% annually
- Eroding returns on capital suggest its historical profit centers are aging
H&R Block’s stock price of $44.43 implies a valuation ratio of 7.1x forward P/E. Read our free research report to see why you should think twice about including HRB in your portfolio.
United Airlines (UAL)
Market Cap: $37.13 billion
Founded in 1926, United Airlines Holdings (NASDAQ:UAL) operates a global airline network, providing passenger and cargo air transportation services across domestic and international routes.
Why Are We Out on UAL?
- Performance surrounding its revenue passenger miles has lagged its peers
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.8 percentage points over the next year
- Improving returns on capital suggest management is identifying more profitable investments
At $114.53 per share, United Airlines trades at 9x forward P/E. Check out our free in-depth research report to learn more about why UAL doesn’t pass our bar.
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