Soap & Cleaning Materials Industry Outlook Bubbling With Optimism

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. Laundry detergent is one of the largest markets among these.

The product range of these companies extends to baby and feminine care, 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 global novel coronavirus menace has jeopardized the global economy, not sparing any sector. However, the Soaps and Cleaning Materials industry seems to be benefiting from the cleaning frenzy among consumers to fight off the virus. The household and personal care businesses are essential witnessing robust trends amid the pandemic. The outbreak has significantly boosted demand for hand sanitizers, toilet paper, surface cleaners, disinfecting wipes and other household cleansing essentials, a trend that is here to stay. The pandemic presents both an opportunity and a challenge for hygiene products companies. The companies in the business are vying to showcase how their products can help deal with the current public health crisis. In general, the FMCG industry enjoys inelastic demand as soap and cleaning products are staple goods. This makes the industry defensive in nature.
  • The industry players mostly thrive on a positive consumer environment, backed by favorable consumer spending and overall economic growth. Efforts to boost productivity, product launches, and enhanced focus on investments and innovation should favor the companies. Additionally, the players are undertaking pricing, packaging and marketing initiatives, and restructuring actions — including acquisitions and divestitures, accelerated investments in brands, cost-based pricing strategy and expansion into new markets and channels. These are likely to aid the sales graphs of consumer product companies. Developing products with eco-friendly and natural ingredients is another area of focus among industry players as consumers are turning environment-friendly due to toxic chemicals and bad odor in chemicals. This strategy has considerably pushed up demand and market share. Further, online availability of products is another key sales driver in various markets due to convenience and ease of shopping. Moreover, it has become more relevant for shopping amid the coronavirus pandemic.
  • 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 is hurting margins. Consequently, players in the industry are 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 #42. This rank places it at the top 17% 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 solid 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 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.

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 Sector and Lags S&P 500

The Zacks Soap and Cleaning Materials industry has underperformed the S&P 500 but outperformed its own sector in the past year.

While stocks in this industry have collectively gained 5.8%, the Zacks S&P 500 composite has risen 9.9%. Meanwhile, the Zacks Consumer Staples sector has witnessed a decline of 7.4% 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 23.3X compared with the S&P 500’s 23.05X and the sector’s 20.01X.

Over the last five years, the industry has traded as high as 23.53X, as low as 17.89X, and at the median of 21.16X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The Soap and Cleaning Materials industry players have been on the winning side through the coronavirus pandemic due to skyrocketing demand for household and personal care products. The near-term prospects of the Soap and Cleaning Materials industry look buoyant as demand for cleaning agents and bleaches will continue to be robust. This makes the industry a defensive play, while the global markets continue to spiral down. However, the industry is grappling with increased cost burden, higher operating expenses due to increased advertising investments and unfavorable currency rates. Nevertheless, its efforts to fight back with increased investments in brands, e-commerce growth, focus on the naturals range, and effective execution of pricing and productivity initiatives should pay off.

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) and two more with 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 Clorox Company (CLX): The stock of this Oakland, CA-based company has rallied 39.3% in the past year. The Zacks Consensus Estimate for its current-year EPS has moved up 0.5% in the last seven days. The company currently has a Zacks Rank #2.

Price and Consensus: CLX

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 past 30 days. This Zacks Rank #2 stock has risen 11.8% over the past year.

Price and Consensus: PG

Church & Dwight Co. Inc. (CHD): The stock of this Ewing, NJ-based company has moved up 15.7% in the past year. The Zacks Rank #3 company currently has a long term earnings growth rate of 8.6%.

Price and Consensus: CHD

Colgate-Palmolive Company (CL): The stock of this New York City-based company has moved 3.2% north in the past year. The Zacks Consensus Estimate for its current-year EPS has been stable in the past 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: CL

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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