Soap & Cleaning Materials Industry Outlook Upbeat on New Products

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 example, consumers will purchase low-cost, generic products when 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 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 in turn is hurting margins.
  

• Despite the odds of rising material costs and other adversities, the industry players are poised to benefit from pricing and productivity programs. These include pricing initiatives, product improvement and innovation, packaging and marketing initiatives, 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 the consumer product companies. 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 #102. This rank places it at the top 40% 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 robust 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.

Our proprietary Heat Map shows that the industry’s rank has improved considerably over the past eight weeks.

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. Year to date, the industry’s earnings estimates for the current year have increased nearly 1.7%.

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 27.9%, the Zacks S&P 500 composite has improved 6.3%. Meanwhile, the Zacks Consumer Staples sector has witnessed growth of 4.5% 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 22.91X compared with the S&P 500’s 17.29X and the sector’s 19.73X.

Over the last five years, the industry has traded as high as 22.91X, as low as 17.89X, and at the median of 20.58X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Players in the Soap and Cleaning Materials industry seem to be on track for accelerated growth backed by increased investments in brands, e-commerce growth, focus on the naturals range, and effective execution of pricing and productivity initiatives. These efforts are likely to steer these companies through persistently soft margins and a tough currency backdrop, which has been weighing on performance for a while.

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 none of the stocks in the Zacks Soap and Cleaning Materials universe currently hold a Zacks Rank #1 (Strong Buy), we have mentioned two stocks 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.

The Procter & Gamble Company (PG): The Cincinnati, OH-based consumer goods’ giant’s consensus EPS estimate for the current fiscal year has been stable in the last 30 days. This Zacks Rank #2 stock has rallied 45.3% over the past year.

Price and Consensus: PG

Church & Dwight Co. Inc. (CHD): The stock of this Ewing, NJ-based company has surged 39% in the past year. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the last 30 days. The company currently has a Zacks Rank #2.

Price and Consensus: CHD

Colgate-Palmolive Company (CL): The stock of this New York City-based company has risen 12.5% in the past year. The Zacks Consensus Estimate for current-year EPS has been stable in the last 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: CL

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 9.9% in the past year. The Zacks Consensus Estimate for current-year EPS has been stable in the last 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: UN

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