5 Soaps & Cleaning Materials Stocks Showing Potential Amid Hardships

Players in the Zacks Soap and Cleaning Materials industry have been witnessing headwinds from higher manufacturing and logistic costs, increased commodity costs, and lower volume. The ongoing supply-chain constraints have been pinching the margins of industry players due to higher freight and input costs. Also, elevated advertising and sales promotion spending is expected to dent margins in the near term. Some of the players have been undertaking cost-curtailment actions to support margins, while coming up with the latest products and improved marketing efforts.

Nevertheless, continued solid demand for consumer products and brands, cost-saving efforts, strong execution, and pricing actions have been aiding industry participants. Companies focused on transforming operations, digital commerce growth, innovation and brand building have been gaining amid the macro hardships. Companies like The Procter & Gamble Company PG, Reckitt Benckiser Group RBGLY, Henkel AG & Co. HENKY, Church & Dwight Co., Inc. CHD and The Clorox Company CLX have stayed upright on these efforts despite the continued cost inflation.

About the Industry

Companies involved in the manufacturing and supply of fast-moving consumer goods, including personal care, household and specialty products, primarily 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 the above-mentioned ones. A few players in this space also offer baby and feminine care items. Some companies offer pet care products. These companies market and sell products through supermarkets, mass merchandisers, grocery stores, distributors, wholesalers, department stores, drugstores, specialty stores, dollar stores and pet stores, and websites.

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

Elevated Costs: The soaps and cleaning materials industry players have been grappling with escalating raw material and logistic costs, particularly transportation, due to supply-chain disruptions and current industry dynamics. Higher-than-anticipated commodity and freight costs have been hurting the industry participants’ margins. Elevated manufacturing and distribution costs, as well as increased advertising and sales promotion expenses, are other factors impacting margins. Additionally, the companies have been incurring higher SG&A expenses on account of increased operational costs related to salaries and bonuses, as well as planned investments in digital capabilities and productivity enhancements. To overcome these shortcomings and improve margins, some of the players are focusing on cost-containment initiatives, including streamlining the supply chain and minimizing overhead costs, among others. Most companies are resorting to price increases to cushion their margins.

Demand Trends & Competition: The soaps and cleaning materials industry has been experiencing volatile demand trends across markets and ambiguous pricing conditions. Post the COVID-19 pandemic, increased awareness about personal and household hygiene are likely to fuel product demand for the players in the industry. The cultivation of new habits, including maintaining good hygiene, especially sanitizing hands, is likely to continue to encourage consumers to purchase soaps and sanitizers. Meanwhile, the industry players are at risk of increased competition due to the availability of alternate products in the market. With the rise in competition, players remain focused on actively coming up with hygiene campaigns, which are anticipated to promote their products and expand their customer bases.

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. Investments in innovation, product portfolio and digital capabilities have been the key to driving sales of companies. Additionally, the players have been 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. The online availability of products has been another key sales driver across various markets due to convenience and ease of shopping. Consumer goods companies are undertaking pricing and productivity efforts to counter inflation, which are likely to continue.

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 #157, which places it in the bottom 37% 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 outperform 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 a 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. In the past year, the industry’s earnings estimates for 2022 have declined 9.7%.

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 is worth taking a look at the industry’s performance and current valuation.

Industry Vs. Broader Market

The Zacks Soap and Cleaning Materials industry has outperformed the S&P 500 index in the past year. However, it has lagged the broader Zacks Consumer Staples sector in the same period.

The industry has lost 2.1% in the past year compared with the S&P 500’s decline of 15.1%. Meanwhile, the broader sector has gained 1.3%.

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 22.78X compared with the S&P 500’s 17.59X and the sector’s 19.13X.

Over the past five years, the industry has traded as high as 25.13X and as low as 17.56X, the median being 22.1X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Stocks to Keep a Close Eye on

Procter & Gamble: The Cincinnati, OH-based consumer goods giant has been benefiting from strength across all segments, coupled with robust volume, pricing and mix. Procter & Gamble’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers worldwide. Increased consumer demand for its hand soaps, detergents and surface cleaning products has been a key catalyst. 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.

Procter & Gamble is focused on productivity and cost-saving plans to boost margins. The company’s continued investments in business, alongside efforts to offset macro cost headwinds and balance top and bottom-line growth, underscore its productivity efforts. It has been witnessing SG&A expense leverage, owing to savings from overhead and marketing expenses, and cost leverage gains due to higher sales and real estate. The Zacks Consensus Estimate for PG’s fiscal 2023 earnings indicates a year-over-year rise of 0.3%, while sales estimates suggest a decline of 1%. The consensus mark has moved down by a penny in the past 30 days. Shares of the Zacks Rank #3 (Hold) company have risen 1.8% in the past year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PG

Reckitt: The consumer goods company engages in health, hygiene and nutrition products in the U.K., the United States, China, India and internationally. The U.K.-based company’s resilient business is driven by a strong earnings model. Its earnings model has been gaining from a positive mix and outstanding performance from its productivity program, as well as responsible pricing, all of which have been contributing to operating margin growth. The company is on track with its transformation and innovation efforts.

Reckitt remains focused on innovation, which fuels its key growth drivers of penetration and market share optimization. Shares of the Zacks Rank #3 company have declined 12.8% in a year. The Zacks Consensus Estimate for RBGLY’s 2022 earnings indicates flat year-over-year results for the company, while sales estimates suggest a decline of 6.8%. The consensus mark has been unchanged in the past 30 days.

Price and Consensus: RBGLY

Henkel: The Germany-based consumer goods company engages in adhesive technologies, beauty care, and laundry and home care businesses worldwide. The company has been benefiting from the progress in implementing the purposeful growth agenda and merging the consumer businesses into Henkel Consumer Brands. By combining the Laundry & Home Care and Beauty Care consumer businesses into Henkel Consumer Brands, HENKY expects to broaden its customer base and optimize its portfolio to deliver higher growth, while improving its margin profile. The company has been witnessing robust organic sales growth, driven by strength across all business units and regions.

Henkel looks poised to gain from significant price increases, strict cost management and further efficiency improvements, which are likely to offset the effects of input cost inflation. The Zacks Consensus Estimate for HENKY’s 2022 sales indicates a year-over-year rise of 3.5%. The consensus mark for earnings suggests a year-over-year decline of 26.1%. However, the earnings estimate has moved up 5.3% in the past 30 days. Shares of the Zacks Rank #3 company have declined 12.1% in the past year.

Price and Consensus: HENKY

Church & Dwight: The well-known specialty products company has been gaining from its prudent buyouts, solid innovation and favorable consumption demand. Church & Dwight remains optimistic about its 2022 performance on category growth and impressive brand performance. The company is on track with its pricing and productivity efforts to counter cost inflation. The Ewing, NJ-based company remains focused on product innovation for further growth.

Church & Dwight remains focused on making capital investments to expand its factory and supplier network capacity, courtesy of the constant strength in consumer demand for its products. Its regular innovation helps in improving brand positions and market share in the consumer categories. Shares of the Zacks Rank #3 company have declined 10.1% in a year. The Zacks Consensus Estimate for CHD’s 2022 earnings indicates a year-over-year decline of 2.3%, while sales estimates suggest an improvement of 2.7%. The consensus mark for earnings has moved down by a penny in the past 30 days.

Price and Consensus: CHD

Clorox: Clorox is on track with the IGNITE strategy, its latest and integrated strategy, formulated on a sturdy foundation of its 2020 Strategy. Management announced a streamlined operating model to create a faster, simpler company through the Reimagine Work under its IGNITE strategy. The operating model implemented in the first quarter of fiscal 2023 will help increase efficiencies and transform the company's operations in the areas of the supply chain, digital commerce, innovation and brand building in the long term. The company has undertaken some strategic initiatives, including pricing actions, cost-reduction efforts, increased focus on building supply-chain resiliency, and enhanced productivity to counter the ongoing cost headwinds. CLX is on track with its cost-saving and productivity initiatives.

Clorox continues to undertake digital investments to transition to a cloud-based platform. It earlier announced plans to invest $500 million in the next five years in transformative technologies and processes. Also, continued strength in the international segment bodes well. It is witnessing strong progress in the core international business as it continues to build on the success of the segment's Go Lean strategy. The Zacks Consensus Estimate for Clorox’s fiscal 2023 earnings suggests year-over-year growth of 0.5%, while sales estimates indicate a decline of 0.7%. The consensus mark for earnings has moved up 2.7% in the past 30 days. Shares of CLX have declined 10.7% in the past year. The company has a Zacks Rank #3 at present.

Price and Consensus: CLX

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Procter & Gamble Company The (PG) : Free Stock Analysis Report

The Clorox Company (CLX) : Free Stock Analysis Report

Church & Dwight Co., Inc. (CHD) : Free Stock Analysis Report

Reckitt Benckiser Group PLC (RBGLY) : Free Stock Analysis Report

Henkel AG & Co. (HENKY) : Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research