Companies involved in the manufacturing and supplying 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 positive consumer environment, backed by favorable consumer spending and overall economic growth. Disposable income greatly influences the quality and quantity of FMCG products. For example, consumers will purchase low-cost, generic products when the disposable income is low. However, the industry is currently favored by rising income levels and consumer spending.
- The Soaps and Cleaning Materials industry players are grappling with escalated raw material and transportation costs, much like 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 in turn is hurting margins.
- The industry players are resorting to pricing initiatives; product improvement and innovation; packaging and marketing initiatives; and restructuring actions — including acquisitions and divestitures, to counter operational headwinds. The key focus area for most day-to-day consumer product companies at present is launching products with eco-friendly and natural ingredients to attract environment and health-conscious consumers. This has considerably buoyed demand and market share. Players in the industry are also making notable progress on cost-containment and productivity enhancement initiatives to overcome operational shortcomings and improve margins. These initiatives include cutting costs in areas like supply chain, research & development, marketing, and overheads, and at the same time investing in brands, e-commerce and technological advancement.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Soaps and Cleaning Materials industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #163. This rank places it at the bottom 36% 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 position 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 hope in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have declined nearly 10.6%.
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 13.8%, the Zacks S&P 500 composite has improved 2.8%. In contrast, the Zacks Consumer Staples sector has declined 7.8% 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 20.98X compared with the S&P 500’s 16.95X and the sector’s 18.12X.
Over the last five years, the industry has traded as high as 22.52X, as low as 17.89X, and at the median of 20.40X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
The impact of increased transportation and raw material costs are far from subsiding in the near term, which is likely to continue impeding revenue and margin growth for industry players. Further, these companies will witness pronounced impacts from tariff increases as well as higher advertising and restructuring costs.
Nonetheless, investment in innovation and marketing initiatives, along with efforts to drive cost-savings and productivity should open up long-term opportunities. Not to mention, a stable economic backdrop with a tightened job market and rising income present the right environment for growth of this consumer-driven industry.
While only one stock in the Zacks Soap and Cleaning Materials universe currently holds a Zacks Rank #1 (Strong Buy), we have also mentioned another stock with a Zacks Rank #2 (Buy). Additionally, we suggest two more stocks from the same industry, which we believe investors should hold on to, as they carry 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.
Unilever N.V. (UN): This Rotterdam, Netherlands-based company operates in the fast-moving consumer goods industry and is a subsidiary of The Unilever Group. The company has advanced 5.3% in the past year. The Zacks Consensus Estimate for current-year EPS was revised 8.4% upward in the last 30 days. The company currently has a Zacks Rank #1.
Price and Consensus: UN
The Procter & Gamble Company (PG): The consensus EPS estimate for this Cincinnati, OH-based company moved nearly 1% higher for the current fiscal year in the last 30 days. This Zacks Rank #2 stock has rallied 22.8% over the past year.
Price and Consensus: PG
Church & Dwight Co. Inc. (CHD): The stock of this Ewing, NJ-based company has surged 34.8% in the past year. The company currently has a Zacks Rank #3.
Price and Consensus: CHD
The Clorox Company (CLX): The stock of this Oakland, CA-based company has risen 22% in the past year. The Zacks Consensus Estimate for current-year EPS has moved up a penny in the last 30 days. The company currently has a Zacks Rank #3.
Price and Consensus: CLX
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