Will You Clean Up With These Cleaning Product Stocks?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love cleaning. There's just something about the smell of bleach that takes me back to childhood. There are tons of companies, such as 3M and Johnson & Johnson, that make household and cleaning products. But what about companies where the household product, and more specifically the cleaning product is their bread and butter? What makes them special? I'd like to find out, and more importantly find out if there's anything that makes the companies in this industry likely to turn into profit-making machines worthy of my portfolio. 

Church & Dwight (NYSE: CHD) is best known for Arm and Hammer line of products, particularly the baking soda. While it's a mid-size company with almost 150 years of cumulative history, I appreciate the hunger that management is showing in continuing to grow the business with new brands.

Since the turn of the twenty-first century, Church & Dwight has acquired over a dozen different brands in the household cleaning market. Between merging with Orange Glo International and making a ton of purchases from the likes of Del Pharmaceuticals and Procter & Gamble, CHD has been on a growth streak that's been building an extra solid moat.

I'm a little ambivalent about the market segments the company has chosen, though. Church & Dwight's headquarters are in New Jersey in the U.S. and Kent in the U.K., which places it in two of the worst hit economies of the Great Recession. The vulnerability of these markets, even in the realm of stalwart household products, makes me wish that CHD would work less on acquiring brands in the established markets and move onward.

I'm not that excited about the growth prospects of a company that keeps buying established brands in established markets. This is particularly the case when they're dealing with heavily intertwined currencies like the euro, the pound, and the dollar. For the time being, I'd like to see Church & Dwight invest some of that 1.7% dividend yield and 11.7% profit margin into growing into less established markets. The fact that this company's stock is trading at more than 24 times its earnings doesn't really impress me -- just a surcharge for perceived safety.

Ecolab (NYSE: ECL), on the other hand, has been going into less established markets for a long time. All the way back in 1991 Ecolab was forming regional partnerships to push its way into Europe and Russia. In more recent times it's been ranked as one of the world's most ethical companies by Ethisphere magazine. Operating in over 160 countries, this is a large and well diversified company that pulls a modest 5.3% profit margin. 

However, I have issues with Ecolab and they aren't concerned with currency issues. I personally like dealing in most every currency in the world. My issue is that Bill Gates owns 25% of Ecolab through his various investment vehicles, which puts a lot of the stock's fate in the hands of one individual's whims. 

Another issue I have is the sheer scope of what Ecolab engages in. While it's technically considered a household and cleaning products company, it deals with numerous different industries from food and energy to healthcare and industry. I'm not big on mutt companies because at the end of the day there's an inverse relationship between how many things one does and how many things one does well. There's too much room for losses in doing so many things, and it seems like the company's energy is too scattered to make significant enough headway to justify trading at 3.6 times book value and over 37 times earnings. I'll pass.

Stepan (NYSE: SCL) is definitely the runt of this list. While it's about the same age as the other two companies, its market cap is a comparatively tiny $1.17 billion (which is about 1/20th of Ecolab and roughly 1/6th of Church & Dwight). While I'm not a big fan of a P/E ratio above 10, I'll let it slide because lately the market has been trading expensively as a whole. So Stepan's 16.62 P/E could actually be called reasonable. But once again I find myself a trifle ambivalent about a company's prospects.

I don't particularly like Stepan's 4.2% profit margins. When a company is under $10 billion in market cap, I expect a higher level of efficiency than that. Rather like an elephant's heart beats more slowly than a mouse's, I like higher margins in smaller companies.

However, I do actually like the lock Stepan has on importing coca leaves, which it then separates into cocaine for Mallinckrodt and a leaf extract for Coca-Cola. That's a pretty significant moat, and as such I have to tip my hat to Stepan and say I like it as a solid long-term prospect. I might even pick up a few shares myself during the next market-related dip.

pongun has no position in any stocks mentioned. The Motley Fool owns shares of Ecolab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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