* All data are as of the close of Tuesday, October 28, 2014.
Thinking of cleaning up on the stock market? Manufacturers of cleaning products will certainly help you polish your investment portfolio to a gleaming shine.
Since cleanliness in the home and at the work place is always a concern regardless of the economic cycle we're in, cleaning product manufacturers are consumer staples which tend to fare well in all conditions, as noted in the two graphs below.
During the economic crisis (June 2007 to March 2009, by one time frame) in which the S&P 500 index [black] fell 56% and the less volatile SPDR Consumer Staples Sector ETF (NYSE: XLP) [blue] fell 30%, America's three largest Cleaning Products companies - Ecolab Inc. (NYSE: ECL) [beige], Church & Dwight Co. Inc. (NYSE: CHD) [purple], and Stepan Company (NYSE: SCL) [orange] - held up very nicely indeed, falling only 30%, 8% and 20% respectively.
Yet during the subsequent economic recovery, all three cleaning products companies surprised with stellar performances you wouldn't expect from the typically less volatile consumer staples, as noted below.
Where the S&P broader market index rose 195% and the consumer staples fund XLP rose 140% in the 5.5 years since the economic recovery began, CHD has scrubbed up 210%, Stepan has sparkled up 260%, while Ecolab has polished up a glistening 275%.
On an annualized basis, where the S&P broader market has averaged 34.93% and the consumer staples sector fund XLP has averaged 25.07%, CHD as averaged 37.61%, Stepan has averaged 46.57%, while Ecolab has averaged 49.25% per year. Not bad at all for staples.
Why cleaning product manufacturers would fare so much better than their consumer staples peers during the economic recovery is a little surprising. Perhaps happy people put a little more elbow action into their cleaning, wearing out their sponges and mops more quickly, and perhaps pouring on the liquids a little more carefreely.
It should be noted that the three top U.S. companies in the space considered here also manufacture industrial cleaning products, which tend to pickup as companies grow during recoveries. Here's a basic run-down of what each company offers:
- Ecolab provides water treatment and process applications in addition to industrial cleaning and sanitizing solutions in manufacturing, food and beverage processing, mining, oil and gas, power generation, commercial laundry, hospitality, healthcare, government, education and retail industries.
- Church & Dwight develops, manufactures, and markets household and personal care products including baking soda, carpet cleaners, cat litter, fabric softeners, bathroom cleaners, dishwashing and laundry detergents, toothpastes, shampoos, even dietary supplements.
- Stepan produces and sells specialty and intermediate industrial cleaning chemicals including detergents for clothes, dishes, floors, carpets, windows and walls, as well as personal care products. It also sells a number of construction products including adhesives, sealants, foams and resins.
Their broad market sphere spanning several sectors that have boomed during the recovery, including the energy space and construction, thus partly explains their outperformance versus the consumer staples sector.
Overall, the Cleaning Products industry is expected to continue along its sparkling trajectory, with its earnings seen outgrowing the broader market average by almost four times next quarter, slowing to around three times in 2015, and finally to about 70% more over the next five years, as tabled below where green indicates outperformance while yellow denotes underperformance.
Zooming-in a little closer, however, the three largest U.S. companies in the industry are expected to underperform their industry peers straight across the calendar, likely due to the individual set of customers each caters to.
Compared to the broader market, though, the three companies' earnings are expected to outgrow those of the S&P average at various times, again according to the type of client each engages.
For instance, it would appear that the industrial leaning of both Ecolab and Stepan will help them outgrow the S&P broader market in 2015 and beyond, while CHD's heavy reliance on consumers' personal needs will slow its growth down to about the broader market's average. This may mean industry will have an easier go of it than individual consumers will over the next several years, though this is just one piece of a very large economic puzzle.
But there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
This comparison may help investors plan ahead of Ecolab's Q3 report due October 28th and CHD's Q3 report due November 3rd.
A) Financial Comparisons
Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Ecolab reported the highest revenue and earnings growth by a substantial degree, while Stepan showed the slowest growth with earnings shrinkage.
Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, CHD operated with the widest profit and operating margins by a significant measure, while Stepan contended with the narrowest.
Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
In returns on assets and equity, CHD's management team returned the most, while Stepan's team returned the least.
Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Stepan provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price by a meaningful degree, while Ecolab's DEPS percentage over stock price is worst, with CHD not far ahead.
Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Stepan has the cheapest stock price relative to forward earnings, company book value and 5-year PEG. At the overpriced end of the scale, Ecolab's stock is the most costly relative to earnings, while CHD's is most expensive relative to book and PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Stepan has the best earnings percentages in three of the four time periods, where CHD promises the best in the current quarter. Ecolab, meanwhile, promises the lowest EPS percentages in all time periods.
Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Ecolab is projected to deliver the greatest earnings growth over the immediate term, while Stepan is expected to deliver it in 2015 and beyond. All three companies take last place in various time periods, with Stepan's growth seen shrinking in the current quarter, while CHD's earnings are foreseen to grow the slowest in the future.
Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Stepan's stock has the greatest upside potential and least downside risk, while CHD has the least upside potential and greatest downside risk.
It is important to note, however, that Stepan has only one analyst making a projection, where each of the other two has 16 analysts placing their bets.
Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Ecolab is best recommended with 7 strong buys and 8 buys representing a combined 75% of its analysts, followed by CHD with 5 strong buy and 5 buy recommendations representing 47.62% of its analysts, and lastly by Stepan with 1 strong buy and 0 buy ratings representing 33.33% of its analysts.
Here again it is important to note that Stepan has only 3 analysts casting ballots, while the other two have 20 and 21 voters respectively.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Stepan by a beaming shine, outperforming in 17 metrics while underperforming in 10 for a net score of +7, followed far behind by CHD, outperforming in 9 metrics and underperforming in 11 for a net score of -2, with Ecolab trailing closely, outperforming in 6 metrics while underperforming in 10 for a net score of -4.
Where the Cleaning Products industry is expected to outperform the S&P broader market substantially this and next quarters and in 2015, and significantly beyond, the three largest U.S. companies in the space are expected to put in split performances, with Ecolab and Stepan outgrowing the broader market in 2015 and beyond while CHD hits pretty close to par.
Yet after taking all company fundamentals into account, Stepan stands first among its peers (despite having the smallest market cap of the three at just $1 billion) given its lowest stock price ratios, most cash over market cap, best current ratio (debt repayment ability), highest future earnings over stock price, highest 2015 and 5-year future earnings growth, tie for highest dividend, and highest projected price targets above current price - handily winning the Cleaning Products industry competition.