2 Household & Personal Care Stocks to Buy, 1 to Hold

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

It has been more than two weeks since the earnings season ended. Different industries gave different surprises. Some didn’t. However, the cosmetics, household and personal care (CHPC) space wasn’t one of them. This industry had a tough first quarter of the year. In some cases, weather disturbed the expectations. In other situations, tough comps and soft end markets were claimed to be the main culprits of sequential declines in revenue.

However, what does this tell us about different companies in this space? Are they still attractive investments or not? Let’s have a look.

What the leader had to say

Procter & Gamble (NYSE: PG), the largest company in this space, also took the lead in reporting its earnings this season. The company’s remarks on slow category growth sent warnings down Wall Street, as the company is known to be prescient of macro trends. Although the company didn’t claim it to be the main reason behind its revenue miss, many other companies in this space corroborated P&G’s view on the external environment.

With disappointing organic sales growth despite an improvement in market share momentum, we can understand why P&G shares under-performed the market since the company's earnings release. To be sure, with Staples' valuations having reached near historic levels over the past couple of months, the bigger question will be whether or not P&G’s commentary on the more challenging macro environment is the beginning of a trend or a one-off event.

Either way, I would expect P&G shares to take a breather until the company is able to show a marked acceleration in top-line growth.

The return of A.G. Lafley to the CEO office has sent bullish signals to the market as he was the main hero behind the turnaround of the company in 2010. Not only this, but the company is slowly building growth momentum as the market is witnessing the change after the 40/20/10 strategy that the company employed last year (to focus on its top 40 countries and brand categories that generate the most sales and profit; the top 20 innovations with the most growth potential; and the company's top 10 developing markets).

Weather ruined Clorox’s results

Clorox’s (NYSE: CLX) management blamed the weather for the company's earnings miss. Given this quarter’s top-line and EPS miss, it was surprising to see Clorox shares down only -1.4% on earnings day (vs. S&P 500 -0.9%), particularly as organic revenue fell short in each reported division. Clorox’s revenue trends are often predicated on compares, with one year’s positives becoming the next year’s negatives.

Such was the case again this quarter as the combination of strong base-period sales of charcoal (in F3Q12 due to warmer weather and early merchandising by a large retailer) and a colder F3Q13 (a -20% decline in charcoal volume in the month of March alone) led to a -1.5 point drag on total company volumes (ultimately creating an easier comp in F3Q14).

In any event, with Clorox shares now trading at 19.3x the 2013 EPS estimate of $4.41, inline with its large-cap household and personal care peers despite below peer earnings growth, it seems difficult to see much appreciation from here.

Newell is rated as a buy

Newell Rubbermaid (NYSE: NWL) reported 1Q 2013 core EPS of $0.35; adjusted for the restatement for discontinued operations and excluding a $0.03 per share tax benefit, the EPS was modestly ahead of the expectations. Newell also complained about a colder spring that influenced its sales in the tools division.

On an overall note, with better-than-expected organic growth in two of the company’s three “win bigger” businesses and the management reaffirming guidance for 2013 despite dilution from non-core disposals, Newell Rubbermaid is already demonstrating the viability of its global growth game plan.

Specifically, early investments in the segments and geographies that matter most are accelerating growth while flexibility from project renewal savings provides a cushion to the bottom line. It is this increased visibility on the bottom line coupled with the revenue potential embedded in the company’s long-term strategy that keeps the Street bullish on Newell.

Final word

As we can see, despite a poor 1Q 2013, the CHPC space has some exciting companies and investing themes. I remain bullish on P&G given the return of its ex-CEO. Newell’s Global Growth Plan makes me bullish on this company too. However, expensive valuations for Clorox keeps me on the sidelines. 

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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. 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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