The FTSE 100 is well below 6,000, as I write — down some 16% from its April high of just over 7,100.
Dramatic falls in many mining and oil stocks are getting a lot of attention, and naturally twitching the antennae of bargain hunters. But the market correction is also presenting an opportunity to buy into some steadier, defensive businesses at a discount — a big discount in some cases.
Slowing growth in China hasn’t only hit stocks in the natural resources sector. Luxury fashion house Burberry is also suffering from the China factor.
A great driver of Burberry’s growth has been the successful exporting of iconic British style around the world. Around two-fifths of total group revenue comes from the Asia-Pacific region. In the company’s most recent trading update (for the three months to 30 June), management reported high single-digit or double-digit comparable sales growth in most regions, but Asia Pacific saw a low single-digit decline. Modest growth was achieved in Mainland China, but in Hong Kong’s “challenging luxury market” comparable sales fell by a double-digit percentage.
At 1,320p, Burberry’s shares are down 31% from their 52-week high. Fashion can be somewhat fickle, but Burberry’s defensive qualities come from being purveyors of timeless style. No earnings headway is forecast for the current year, but growth is expected to resume at 10% next year. The fall in the shares looks overdone to me and I consider Burberry to be an attractive buy at 15.5 times next year’s forecast earnings.
AG Barr may be a much smaller company than Burberry (a market cap of £600m versus £6,000m), and less geographically diverse (just 3% of revenue comes from outside the UK), but its business is inherently more defensive than that of the fashion house. Barr is a soft drinks maker, its flagship brand being Irn-Bru.
In its half-year results, released last week, the company reported an adverse impact on performance from disappointing weather and challenging market conditions. As with Burberry, little earnings headway is expected this current year, but growth is forecast to resume at a decent clip (7% in Barr’s case) next year.
At 527p, Barr’s shares are 23% down from their 52-week high. Again, I see the fall as overdone. A rating of 17.3 times next year’s forecast earnings looks attractive for a well-run, defensive business, which the market has rated markedly higher when in less pessimistic mood than today.
Unilever is a defensive business par excellence. With a market cap of £78bn it towers above Burberry and Barr, while its incredible geographical diversification and sheer number of top food and household brands give it everything you want from a defensive business.
It is perhaps not surprising that a company with the impeccable, all-round defensive qualities of Unilever hasn’t fallen as far as Burberry and Barr during the market sell-off. Unilever’s shares, at 2,587p, are down a relatively modest 14% from their 52-week high.
But a 14% discount, and a rating of 18.5 times next year’s forecast earnings, is not to be sniffed at for an outstanding business, delivering reliable long-term earnings growth. As such, I would also rate Unilever as a worthy buy at current levels.