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3 Soaps & Cleaning Materials Stocks to Wash Away Industry Blues

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Players in the Zacks Soap and Cleaning Materials industry are witnessing moderation in demand when compared to last year’s trends. The industry participants are also witnessing high costs associated with operations amid the pandemic, including rising input costs and promotional expenses.

Nevertheless, consumers’ continued adherence toward maintaining good hygiene is an upside for the industry participants. Some of the players are undertaking prudent cost-curtailment actions to support margins, alongside coming up with new products and improved marketing efforts. Such efforts are aiding companies such as The Procter & Gamble Company (PG - Free Report) , Unilever PLC (UL - Free Report) and Church & Dwight Co., Inc. (CHD - Free Report) .

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 care products, deodorants, and oral care items. The household category covers home care products, including 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 pet care products.These companies market and sell products through supermarkets, mass merchandisers, grocery stores, distributors, wholesalers, department stores, drugstores, dollar stores and pet stores as well as through websites.

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

Impact of Pandemic on Demand Trends: The heightened cleaning frenzy among consumers last year, amid the peak of the COVID-19 pandemic, was a boon for the soaps and cleaning materials industry. With the rollout of vaccines and the society gradually emerging out of the pandemic-led adversities, demand trends have moderated. This has led to unfavorable year-on-year sales comparisons for a few companies in the industry. In fact, the industry is witnessing surplus supply as many Americans are already well-stocked. Nevertheless, the prolonged battle with the disease has made the society realize the importance of maintaining good hygiene, especially sanitizing hands.  Cultivation of this new habit is likely to continue encouraging consumers to purchase soaps and sanitizers, even after the pandemic subsides.  

Rising Costs 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 - Free Report) and The Clorox Company (CLX - Free Report) are grappling with such rise in expenses. Operating costs are likely to keep rising owing to continued operational disruptions caused by the pandemic. In order to overcome such shortcomings and improve margins, some of the players are focusing on cost-containment initiatives, including streamlining supply chain and minimizing overhead costs among others.

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. The pandemic served as an opportunity for companies to broaden product lines. A few companies have been boosting offerings that complement at-home grooming practices. 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. Online availability of products has also been a 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 #251, which places it in the bottom 1% 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 April, the industry’s earnings estimate for 2021 has declined 1.7%.

Despite the murky scenario, we will present a few stocks that one can retain in their portfolio, 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 9.4% over this period against the S&P 500’s surge of 33.9% and the broader sector’s rise of 13.4% 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 22.51X compared with the S&P 500’s 21.68X and the sector’s 20.22X.

Over the past five years, the industry has traded as high as 25.08X and as low as 17.53X, with the median being 22X 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 continued demand for home and fabric care, oral care, health care, grooming as well as beauty products. Its appliances category is also doing well. The company has been witnessing strong growth in two of its largest markets, the United States and Greater China. The company’s e-commerce sales have been growing globally. Apart from these, effective pricing and mix have been favoring the company’s margins. The company is progressing with its five-year restructuring plan, which mainly targets cost cutting in areas such as supply chain and marketing. The Zacks Consensus Estimate for fiscal 2021 earnings indicates a rise of 4.8% year over year. The consensus mark has improved by a penny over the past 30 days. Shares of this Zacks Rank #3 (Hold) company have risen 11.7% in the past six months.

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 growth across product categories including beauty & personal care, home care as well as food and refreshments. Moreover, the company has been broadening assortments available for online purchasing, while also boosting penetration across markets. The company has been in particular focusing on growth across three key markets, the United States, India, and China. The company has been carrying out acquisitions to strengthen offerings. It has also been focusing on managing costs. We note that the Zacks Consensus Estimate for 2021 earnings indicates a rise of 3.9% year over year. Shares of this well-known consumer staples products company have gained 2.9% in the past six months.

Price and Consensus: UL

Church & Dwight Co.: 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 domestic categories such as gummy vitamins, electric grooming, laundry additives, pregnancy test kits and cat litter. Moreover, this Zacks Rank #3 company’s international business has been doing remarkably well owing to strong brand offerings. Church & Dwight’s e-commerce sales have also remained sturdy. The company has been engaging in prudent innovations and acquisitions to boost its portfolio. Shares of this Ewing, NJ-based company have moved up 3.2% in the past six months. The Zacks Consensus Estimate for 2021 earnings indicates a rise of 6% year over year.

Price and Consensus: CHD