Most consumer discretionary businesses succeed or fail based on the broader economy. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 3.3% return was close to the S&P 500’s.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks that may face trouble.
LKQ (LKQ)
Market Cap: $7.67 billion
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Avoid LKQ?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin is projected to show no improvement next year
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
LKQ’s stock price of $30.11 implies a valuation ratio of 9.7x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.
Marriott Vacations (VAC)
Market Cap: $2.35 billion
Spun off from Marriott International in 1984, Marriott Vacations (NYSE: VAC) is a vacation company providing leisure experiences for travelers around the world.
Why Do We Pass on VAC?
- Annual revenue growth of 11.8% over the last five years was below our standards for the consumer discretionary sector
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Marriott Vacations is trading at $66.84 per share, or 8.7x forward P/E. To fully understand why you should be careful with VAC, check out our full research report (it’s free).
Ruger (RGR)
Market Cap: $655.9 million
Founded in 1949, Ruger (NYSE: RGR) is an American manufacturer of firearms for the commercial sporting market.
Why Do We Steer Clear of RGR?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.8% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $41.16 per share, Ruger trades at 21.7x forward P/E. Dive into our free research report to see why there are better opportunities than RGR.
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