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3 Soaps & Cleaning Stocks That are Braving Industry Challenges

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·8 min read
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The Zacks Soap and Cleaning Materials industry participants have been witnessing high costs associated with operations amid the pandemic. This includes rising input costs and promotional expenses. Nevertheless, some of the players are undertaking prudent cost-curtailment actions to support margins.

Moreover, high demand for cleansing products amid the ongoing coronavirus pandemic has been a significant upside for the industry. Companies such as The Procter & Gamble Company (PG), Unilever PLC (UL) and Church & Dwight Co., Inc. (CHD) have been making the most of this opportunity by coming up with new products and improved marketing efforts.

About the Industry

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 and skin 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. Laundry detergent is one of the largest markets among these. Some of the players in this space also offer baby and feminine care items. Additionally, some companies offer food and refreshments, including soups, sauces, snacks, salad dressings, 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, specialty stores, dollar stores and pet stores as well as through websites.

Major Trends Shaping the Future of the Soaps & Cleaning Materials Industry

Rising Costs are a Concern: The soaps and cleaning materials industry players are grappling with escalating raw material and transportation costs, owing to supply chain hurdles due to the pandemic. Furthermore, heightened competition has resulted in increased pricing pressure and higher advertising investments, which are also hurting margins. Companies such as Colgate-Palmolive Company (CL) and The Clorox Company (CLX) are grappling with such rise in expenses. Such rise in operating costs is likely to persist owing to continued operational disruptions caused by the pandemic. In order to overcome operational shortcomings and improve margins, some of the players in the industry are focusing on cost-containment initiatives. This includes streamlining of supply chain operations and minimizing overhead costs among others.

COVID-19 Boosts Demand for Cleansing Products: Maintaining good hygiene, especially washing hands and keeping surfaces clean, has been an effective way to prevent being infected by COVID-19. The cleaning frenzy among consumers amid the pandemic has been a boon for the soaps and cleaning materials industry. This significantly boosted demand for hand sanitizers, soaps, toilet paper, surface cleaners, disinfecting wipes and other personal and household cleansing essentials. Industry experts believe that such trends are likely to persist even after the pandemic subsides as consumers have begun to increasingly understand the importance of personal hygiene in maintaining a healthy lifestyle. Moreover, a few companies witnessed growth in products that complement at-home beauty and grooming practices. Additionally, the pandemic also served as an opportunity for companies to broaden brand lines and launch products with improved features.

Product Innovation & Strategic Efforts: Investments in product development, to suit consumers’ changing needs, have been supporting the companies in the soaps and cleaning products space. Additionally, the players are undertaking pricing, packaging and marketing initiatives along with restructuring actions including acquisitions and divestitures. Companies are also looking to expand into new markets and channels. Developing products with eco-friendly and natural ingredients is another area of focus among industry players as consumers increasingly prefer environment-friendly ingredients in their daily use items. Further, online availability of products is another key sales driver across various markets due to convenience and ease of shopping.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Soap and Cleaning Materials industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #216, which places it in the bottom 15% 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 bleak 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of February, the industry’s earnings estimate for 2021 has declined 9.3%.

Despite the murky scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Vs. Broader Market

The Zacks Soap and Cleaning Materials industry has underperformed the S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.

The industry has declined 0.6% over this period against the S&P 500’s surge of 48.1%. Meanwhile, the broader sector has gained 18.9% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 22.12X compared with the S&P 500’s 23.12X and the sector’s 20.26X.

Over the past five years, the industry has traded as high as 25.08X and as low as 17.53X, with the median being 21.93X as the chart below shows

Price-to-Earnings Ratio (Past 5 Years)

3 Stocks to Keep a Close Eye on

The Procter & Gamble Company: This Cincinnati, OH-based consumer goods giant has been gaining from strong organic sales growth, backed by improved demand for hand soaps, detergents and surface cleaning products amid the pandemic. It also witnessed growth across categories such as beauty, health care as well as baby and feminine care. Moreover, effective pricing and mix have been favoring the company’s margins. The company is progressing well with its five-year restructuring plan, which mainly targets cost cutting in areas such as supply chain and marketing. Notably, the Zacks Consensus Estimate for fiscal 2021 earnings indicates a rise of 10.6% year over year. The consensus mark has remained stable over the past 30 days. Shares of this Zacks Rank #3 (Hold) company has risen 11.5% in a year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PG

Unilever: This Zacks Rank #3 company has been gaining from enhanced demand for hygiene products and products that complement at-home dining practices. Moreover, the company has been broadening assortments available for online purchasing, while also boosting penetration across markets. Markedly, the company has been focusing on reducing costs through its ‘Fuel for Growth’ savings program. We note that the Zacks Consensus Estimate for 2021 earnings indicates a rise of 2.1% year over year. Shares of this well-known consumer staples products company have gained 9.3% in a year.

Price and Consensus: UL

Church & Dwight: This well-known specialty products company has been gaining from consumption growth across several product categories owing to consumers’ increased preference for essential items amid the pandemic. The company has been gaining from growth in several domestic categories such as gummy vitamins, laundry additives, pregnancy test kits and baking soda. Moreover, this Zacks Rank #3 company’s international business has been doing remarkably well owing to strong brand presence across markets. Further, Church & Dwight’s e-commerce sales have also remained sturdy. Shares of this Ewing, NJ-based company have moved up 20.5% in a year. The Zacks Consensus Estimate for 2021 earnings indicates a rise of 7.1% year over year. The consensus mark has remained stable over the past 30 days.

Price and Consensus: CHD

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