RBC In RBC’s 2024 Global Consumer Outlook report released Tuesday, analyst Christopher Caril named Restaurant Brands International Inc. as his top pick for North American restaurant and fitness stocks, while Irene Nattel selected Alimentation Couche-Tard Inc as her best bet for Canadian consumer stocks.
“We share many of the same views on factors that we expect to broadly influence consumer markets in tandem across the globe and will likely be the focus of investors as a result: 1) Deteriorating Financial Health of the Consumer – Our analysts largely share the belief that the health of global consumers will worsen as the effects of higher interest rates and persistent inflation continue to take their toll. Household savings rates have declined while their credit levels have increased post-Covid, which we view as a warning sign. 2) Value Seeking Behavior – Across the globe, our teams are seeing that consumers are in search for value, which can come in several forms: A spend rotation towards experiences vs. goods, increased share of private label, lower willingness/ability to participate in luxury consumption, prioritizing essentials over discretionary, increased preference of discount/value channels, and even overall decrease in spend. 3) Moderating Inflation – While there are nuances across countries, RBC’s consumer teams generally believe that inflation will continue to ease in 2024 but remain elevated vs. historical levels. As a result, some of us (especially those with discretionary-focused coverage) have expressed concerns that the effects of higher costs of living will weigh on consumer spending. 4) Rising Unemployment/Slowing Wage Growth – Unemployment remained low in 2023 across the regions leading to a strong labor market and generally resilient consumer, accompanied by strong wage growth. That said, we believe that unemployment will rise in 2024 in the US + CAD, and in Europe the labor markets have also shown signs of softening in the recent months. The unemployment outlook adds to our caution on the consumer,” the firm said in a report.
Ms. Nattel and colleague Sabahat Khan said their positioning on consumer stocks is unchanged heading into 2024.
“Against the backdrop of muted and value-oriented consumer spending augmented by uncertainty around the effects of mortgage renewals on purchasing power, our primary focus remains on the less cyclical elements of retail,” they said. “Nonetheless, recognizing the valuation opportunity in certain small-cap and discretionary names, and mindful of anticipated flow of funds toward more cyclical stories as visibility on the macro backdrop improves, we also recommend exposure to a basket of small-cap/growthier stocks as the year evolves. Against this backdrop, we narrow our best ideas for 2024 to: i) ATD, L and DOL as our best quality growth ideas on particularly solid footing to cater to a value-oriented consumer, and with upside bias to earnings revision, ii) MFI as our best self-help idea poised to harvest benefits of multi-year capital intensity, driving pivot to significant free cash flow, and iii) ATZ, TOY and JWEL as our best small-cap/discretionary ideas, each with specific catalysts and opportunities.”
Ms. Nattel has an “outperform” rating and $94 target for Couche-Tard shares. The average is $86.25.