3 Consumer Stocks We Approach with Caution

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 4.2% return has lagged the S&P 500 by 3.6 percentage points.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. On that note, here are three consumer stocks best left ignored.

Churchill Downs (CHDN)

Market Cap: $7.15 billion

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Why Do We Steer Clear of CHDN?

1. Lackluster 10.1% annual revenue growth over the last two years indicates the company is losing ground to competitors
2. Poor free cash flow margin of 10.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Returns on capital haven’t budged, indicating management couldn’t drive additional value creation

At $102.47 per share, Churchill Downs trades at 15.5x forward P/E. Dive into our free research report to see why there are better opportunities than CHDN.

Brunswick (BC)

Market Cap: $5.68 billion

Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.

Why Do We Think BC Will Underperform?

1. Muted 4.8% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 6.4 percentage points
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Brunswick’s stock price of $87.41 implies a valuation ratio of 21x forward P/E. To fully understand why you should be careful with BC, check out our full research report (it’s free).

Performance Food Group (PFGC)

Market Cap: $15.02 billion

With a massive network spanning 155 distribution centers and delivering over 250,000 different food products, Performance Food Group (NYSE:PFGC) distributes food and food-related products to over 300,000 restaurants, convenience stores, theaters, and institutions across North America.

Why Are We Out on PFGC?

1. Products are reaching more customers as its unit sales averaged 5.8% growth over the past two years
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1% for the last two years
3. Returns on capital are growing as management invests in more worthwhile ventures

Performance Food Group is trading at $95.81 per share, or 18.3x forward P/E. Check out our free in-depth research report to learn more about why PFGC doesn’t pass our bar.

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