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Soap & Cleaning Materials Stock Outlook Buoyant on Innovation

Rajani Lohia

Companies involved in the manufacturing and supply of fast-moving consumer goods (FMCG), including personal care, household and specialty products, mainly make up the Zacks Soap and Cleaning Materials industry. The personal care segment comprises skin and hair care products, deodorants, and oral care items. The household category covers home care products, including fabric and laundry care, house cleaning agents, bleaching products, air care, dishwashing liquids and other cleaning items.

The product range of these companies extends to baby and feminine care products, such as baby wipes, diapers, paper towels, tissues and toilet paper. Additionally, some companies offer food and refreshments, including soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarines, spreads, ice creams and tea-bag beverages. The industry also includes companies offering pet nutrition products.

These companies market and sell products through supermarkets, mass merchandisers, grocery stores wholesale clubs, distributors, wholesalers, department stores, drugstores, convenience stores, home stores, baby stores, specialty beauty stores, dollar stores and pet stores, and other specialty stores, as well as through websites. Pet nutrition products are mainly distributed via pet supply retailers and veterinarians.

Here are the three major industry themes:

  • The industry enjoys inelastic demand as soap and cleaning products are staple goods. The industry players mostly thrive on a positive consumer environment, backed by favorable consumer spending and overall economic growth. Disposable income greatly influences the quality and quantity of purchases for FMCG products. For instance, consumers will purchase low-cost, generic products when disposable income is low. However, the industry is currently favored by rising income levels and a steady job market.
     
  • The Soaps and Cleaning Materials industry players are grappling with escalating raw material and transportation costs, much like the others in the broader Consumer Staples sector. Cost elevation along with U.S.-China trade war concerns, uncertain global markets, higher operating expenses due to advertising investments, and unfavorable foreign currency rates is eating into revenues and margins. Furthermore, heightened competition has resulted in increased pricing pressure due to aggressive promotional activities, which is hurting margins.
     
  • Despite the odds, the industry players are poised to benefit from efforts to boost productivity, product launches and enhanced focus on investments and innovation. Additionally, the players are undertaking pricing, packaging and marketing initiatives, and restructuring actions — including acquisitions and divestitures, accelerated investments in brands, and expansion into new markets and channels. These are likely to aid the sales graphs of consumer product companies. For instance, the cost-based pricing strategy adopted by The Clorox Company (CLX) has enabled it to address the inflationary environment that has persisted for over three years, resulting in gross margin expansion. Focus on products with eco-friendly and natural ingredients is catching pace among industry players as consumers are turning environmentally friendly and health-conscious. This strategy has considerably pushed up demand and market share. Players in the industry are also making notable progress on cost-containment initiatives to overcome operational shortcomings and improve margins. These initiatives include cutting costs in areas like supply chain, research & development, marketing and overheads.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Soaps and Cleaning Materials industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #108. This rank places it at the top 43% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have moved up 2.3%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Shareholder Returns

The Zacks Soap and Cleaning Materials industry has outperformed both the S&P 500 and its own sector in the past year.

While stocks in this industry have collectively gained 16.5%, the Zacks S&P 500 composite has moved up 12.4%. Meanwhile, the Zacks Consumer Staples sector has witnessed growth of 4.7% over this period.


One-Year Price Performance

Soaps and Cleaning Materials Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 22.19X compared with the S&P 500’s 17.82X and the sector’s 19.04X.

Over the last five years, the industry has traded as high as 22.53X, as low as 17.89X, and at the median of 20.97X, as the chart below shows.


Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Players in the Soap and Cleaning Materials industry are grappling with increased cost burden a well as the effects of the trade war. Moreover, higher operating expenses due to increased advertising investments and unfavorable currency rates are a constant drawback. Nevertheless, efforts to fight back with increased investments in brands, e-commerce growth, focus on the naturals range, and effective execution of pricing and productivity initiatives should pay off. Additionally, a stable economic backdrop with a tightened job market and rising income present the right environment for growth of this consumer-driven industry.

While none of the stocks in the Zacks Soap and Cleaning Materials universe currently hold a Zacks Rank #1 (Strong Buy), we have mentioned one stock with a Zacks Rank #2 (Buy) and three more with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look at them.

The Procter & Gamble Company (PG): The Cincinnati, OH-based consumer goods giant’s consensus EPS estimate for the current fiscal year has moved up 1.6% in the last 30 days. This Zacks Rank #2 stock has rallied 28.6% over the past year.


Price and Consensus: PG

Church & Dwight Co. Inc. (CHD): The stock of this Ewing, NJ-based company has risen 3.9% in the past year. The Zacks Consensus Estimate for its current-year EPS has not moved in the last seven days. The company currently has a Zacks Rank #3.


Price and Consensus: CHD

Colgate-Palmolive Company (CL): The stock of this New York City-based company has risen 7.2% in the past year. The Zacks Consensus Estimate for its current-year EPS has been stable in the last seven days. The company currently has a Zacks Rank #3.


Price and Consensus: CL

Unilever PLC (UL): Shares of this Rotterdam, Netherlands-based company have advanced 9.9% in the past year. The company has a long-term earnings growth rate of 8.6%. The company currently has a Zacks Rank #3.


Price and Consensus: UL

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Unilever PLC (UL) : Free Stock Analysis Report
 
Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
 
The Clorox Company (CLX) : Free Stock Analysis Report
 
Colgate-Palmolive Company (CL) : Free Stock Analysis Report
 
Church & Dwight Co., Inc. (CHD) : Free Stock Analysis Report
 
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