3 ‘buy the dip’ international stocks

Joseph Taylor | Morningstar 

Companies with durable competitive advantages are more likely to compound in value over long stretches of time. This is because this advantage or moat protects their profits and returns on investment from competition.

Shares in businesses of this quality usually trade at a premium price. The only real chance investors will have to buy shares at lower valuations is when some kind of problem – real or perceived – arises and investors sell the shares.

‘Buying the dip’ can prove beneficial if the problem turns out to be temporary and the business recovers. If the problem turns out to be permanent, the purchase could end up looking expensive. The challenge, then, is figuring out whether it is a temporary or permanent issue.

The three stocks covered in this article all have Wide Moat ratings, which means our analysts think they have structural advantages enabling them to earn excess returns on capital for at least 20 years. They have also all had a tough time of it recently in the stock market.

In all three cases, our analysts think that the shares have now fallen to a level significantly below Fair Value. As a result, their weak share prices could provide an attractive “buy the dip” opportunity for long-term investors.

Before we start, I would like to remind you that buying any investment should only follow the construction of a deliberate investment strategy. You can find a step-by-step guide to forming your strategy here. You can also find an explanation of terms like moat, Star Rating and Fair Value at the foot of this article. Now, onto the shares.

Pernod Ricard ★★★★★

As I wrote in this article a couple of months back, major alcoholic spirits companies have fallen out of favour. Pernod Ricard, which owns brands including Jamesons, Chivas, Absolut, Malibu and Beefeater is no exception.

Pernod Ricard shares are down almost 40% over the past twelve months. The spirits industry has hit a soft spot, with some of the volume growth of recent years has been in reverse as consumers trade back down to other categories of alcohol. Our Pernod Ricard analyst Jelena Sokolova expects this to be temporary. While she expects Pernod’s revenue to decline by around 3% in fiscal 2024, she feels that a return to growth is likely the following year.

Pernod Ricard’s Wide Moat rating stems mostly from intangible assets. This is most prevalent in categories in which the product is aged. Pernod’s largest matured products by volume is scotch whisky (22% of fiscal 2023 net sales), which must be aged by at least three years; Irish whiskey (12%), which must be aged at least three years; and cognac (16%), which must be aged for at least two years.

The intangible asset competitive advantage of aged spirits lies in the pricing power that these products possess. There is a scarcity value to matured spirits as alcohol evaporates during the aging process and consumers also perceive the aging process to improve the product. The aged spirits category is also ripe for brand loyalty and premium pricing, as there is a high level of perceived product differentiation.

Sokolova regards Pernod’s non-aged portfolio as being fairly strong but operating in niche categories. For example, Malibu is the world's leading coconut-flavored rum, and Ricard is the largest aniseed-based spirit. Although the pricing power in these categories may be more limited, Pernod’s ‘must have’ items make it a top-tier vendor for most on-premise customers. Pernod can leverage this is into sales of its broader portfolio as most buyers prefer to work with fewer vendors.

At recent prices of around EUR 126 per share, Pernod Ricard traded at over a 30% discount to Sokolova’s estimate of Fair Value. An important factor in her valuation is Pernod’s quest to take home more of its revenue as profits. Pernod has historically generated EBIT margins in the mid 20% range as opposed to its closest peer Diageo’s 30% plus margins. The company has made strides to close the gap in recent years and Sokolova’s valuation assumes they can improve margins to 29% in the medium term.

Estee Lauder ★★★★★

Starting from its namesake brand in 1958, Estee Lauder has expanded its portfolio of beauty products to include 22 global brands such as La Mer, Clinique, Origins, M.A.C., Bobbi Brown, Jo Malone London, and Aveda. Estee exclusively targets the premium segment, which comprises roughly 40% of the overall beauty market globally, according to Euromonitor.  

Estee has held the number one market share position in premium color cosmetics globally over the past 10 years, with its share of 23% in 2023 ahead of L’Oréal at 17% and LVMH at 15%. However, Estee’s market value has fallen by more than 40% over the past year due to a weaker than expected recovery in travel retail, concerns over China’s economy and worries that consumers may trade down to cheaper brands if there is a recession.

Nonetheless, our Estee Lauder analyst Dan Su thinks that Estee Lauder has reinforced its competitive position with category-leading brands in skin care, cosmetics, and fragrances. She also thinks it has retained its preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, she awards Estee a wide moat rating.

While she doesn’t expect macro challenges to subside soon and believes quarterly results may remain choppy, Su thinks Estee’s self-help initiatives, including steadfast investments in marketing and product innovation and cost-cutting programs, should continue to support its competitive standing. These initiatives could also fuel a rebound in sales growth and gross margins in the coming years.

Su maintains her 10-year forecasts for 7% annual sales growth and operating margins averaging 16%. As a result, she thought Estee shares looked attractive at recent prices of around $100 – a price more than 50% below her Fair Value estimate of $210.

Nike ★★★★★

Nike shares have fallen by more than a third in the past year. The main catalyst for this fall was the weak outlook given in Nike’s June earnings report. However, the company has been out of favour for a while.

Economic conditions have been less than ideal, especially in China, which is expected to be a fast-growing market for sportswear. Meanwhile, investors are also concerned that Nike has become less innovative than new competitors like On and Hoka. So far, Nike’s increased focus on direct-to-consumer channels like e-commerce and Nike stores also hasn’t worked as well as hoped.  

As he told me in a recent interview, Morningstar’s David Schwarz still believes that Nike is a wide moat company with big advantages in terms of visibility, product development, and distribution. Nike leads sportswear market share in most of the world’s major countries and is still very strong in basketball, running shoes and many other areas. All in all, it is the only sportswear company that Morningstar currently assign a Wide Moat rating.

By fiscal year 2026, Schwarz thinks that Nike can get back to sales growth as demand in its markets improves and new product releases drive sales. He also thinks that Nike has great opportunities in China and other developing economies such as Africa and India, where incomes are rising, populations are young, and the brand is already well known. Meanwhile, cost cuts should improve its profitability and the company’s direct-to-consumer efforts could reap further rewards on this front.

Nike’s recent share price of around USD 72 was significantly lower than Morningstar’s Fair Value estimate of USD 124. In a potential silver lining for Nike shareholders, its recent fall in price could allow the company to execute large share repurchases at lower prices than before. Nike management has historically used buybacks as the primary method of returning cash to shareholders.

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