Three Cleaning Champions for Your Portfolio

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

The cleaning and disinfectants industry is led by well-established players with strong market-share positions in each category. However, intense competition from peers on the basis of pricing, new product introductions and promotional activities is becoming a threat and could put a cap on profits. The failure to provide high-quality differentiated products at competitive prices damages the companies’ market share and consequently top-line and bottom-line performance.

Strong fundamentals remain despite a weak quarter

Clorox (NYSE: CLX) manufactures consumer and professional cleaning, household, and lifestyle products.

The company’s weak results for the third quarter were driven by unfavorable weather conditions and currency headwinds. Earnings per share were $1 and sales went up 1% year over year, reaching $1.41 billion with volumes remaining flat. Due to these results, management has lowered its forecast for sales growth to 3%-4%.

Nonetheless, Clorox fundamentals remain strong supported by its solid market share and modest growth. Its strategy of penetrating mid-sized markets - like the Middle East and other Asian countries, instead of BRICs - gives the company great growth potential. Rising household incomes and healthy population sizes, plus less competition, works great for the firm.

Clorox’s brand portfolio is more diversified than its peers and will allow it to sustain itself in the current challenging environment. With proper investments in innovation and marketing, and leveraging on distribution, I believe the company is set for long-term growth.

Through acquisitions, Clorox is expanding its infection-control products for the healthcare industry. Buying Aplicare and HealthLink moves the company in that direction, providing expertise to reinforce R&D and sales capabilities.

However, the company's long-term debt of $1.57 billion and leveraged balance sheet remain a concern. At the end of fiscal 2012, the ratio of debt-to-capitalization was over 109%. A high debt affects the company’s flexibility to expand its operations.

Looking for better margins

Church & Dwight (NYSE: CHD) produces and sells a range of household, personal care and specialty products.

The company’s first-quarter results show a 2% modest growth in sales with a 2.4% increase in volumes, which was offset by lower pricing and an unfavorable mix. Operating margin expanded to 21.7% thanks to efficiency initiatives and better cost environment.

Church & Dwight's initiatives to lower costs and invest in product innovation and marketing support have helped to improve sales and profitability. Arm & Hammer, the company’s core brand, has grown its net sales 10% annually over the past several years, making $1 billion in annual sales. Innovation, marketing and product expansion pay off for the firm.

The recent acquisition of the leading gummy vitamin firm Avid Health shows the company’s intention to generate more higher-margin business. For the past several quarters, the personal care business has lagged the performance of the lower-margin household business. I support the company’s decision; personal care products now account for more than 40% of sales.

Unfortunately, Church & Dwight lacks the scale and financial muscle to battle competitors like Procter & Gamble in certain categories such as laundry detergents. The company's recent success does not seem very sustainable, given the impending challenges from competitors to regain market share.

Rock-solid second-quarter results

Zep (NYSE: ZEP) provides cleaning and maintenance chemicals and related products and services.

The company reported earnings of $0.12 per share show a growth of 9.1% compared to the second quarter one year ago. Revenues increased by 7.7% to $163.4 million and net income was $2.8 million, a 14.7% up. Retail sales grew, driven by automotive aftermarket products and by sales to new retailers.

Management is pleased with the results and announced that they will focus on the integration of Zep Vehicle Care. The company will utilize free cash flow to reduce debt as well.

The recent acquisition of Ecolab's vehicle-care division for $120 million in cash is expanding the company’s presence among car, truck and fleet wash operators through Zep’s trademarks Niagara and Washtronics.

I believe the company will show good results in the future. Zep’s earnings have been positive for the past two years and I believe this trend should continue. Plus, its gross profit margin is very encouraging, currently it is at 47.4% after growing 260 basis points.

Conclusion

Clorox has a proven strategy for long-term growth and its stock should be considered as such. Hence, I would buy Clorox shares and keep an eye on its debt level, goals and overall performance.

Despite Church & Dwight’s huge efforts to remain competitive and gain market share, I find it hard to foresee a major overall growth driver for the firm. I would not stay long on the company.

Unless broad bear-market conditions prevail, I see more upside potential for Zep looking ahead. I would invest in this company.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus