The performance of consumer discretionary businesses is closely linked to economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 6.2% return over the past six months has trailed the S&P 500 by 4.8 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks that may face trouble.
Comcast (CMCSA)
Market Cap: $95.28 billion
Formerly known as American Cable Systems, Comcast (NASDAQ:CMCSA) is a multinational telecommunications company offering a wide range of services.
Why Is CMCSA Risky?
- Demand for its offerings was relatively low as its number of domestic broadband customers has underwhelmed
- Free cash flow margin is forecasted to shrink by 4.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Comcast’s stock price of $26.82 implies a valuation ratio of 7.5x forward P/E. If you’re considering CMCSA for your portfolio, see our FREE research report to learn more.
Sabre (SABR)
Market Cap: $847.5 million
Originally a division of American Airlines, Sabre (NASDAQ:SABR) is a technology provider for the global travel and tourism industry.
Why Do We Avoid SABR?
- Performance surrounding its total bookings has lagged its peers
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Sabre is trading at $2.10 per share, or 6.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SABR doesn’t pass our bar.
Warner Bros. Discovery (WBD)
Market Cap: $71.68 billion
Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.
Why Do We Steer Clear of WBD?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 5.7% over the last five years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8.4% for the last two years
- Returns on capital are growing as management invests in more worthwhile ventures
At $28.64 per share, Warner Bros. Discovery trades at 153.1x forward P/E. Dive into our free research report to see why there are better opportunities than WBD.
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