Few other things have proved to be as pandemic-proof as the demand for personal and home cleaning products. The robust revenue and profit numbers of consumer staples companies selling these products are a clear indication that no matter the level of uncertainty, consumers will continue to buy products considered essential. In fact, as evidenced by robust organic sales, personal and home hygiene products are particularly sought after as survival tools needed to limit the spread of the coronavirus.
These companies boast non-cyclical, stable businesses that tend to do relatively well during economic upheavals and market downdrafts, meaning they can be expected to generate solid revenue during the pandemic and into the foreseeable future. They are leading players in Morningstar’s consumer defensive coverage universe as well as are stable cash-flow stories.
Year to date, as of Oct. 26, due to coronavirus-driven sales of homecare products, they’re trading well above their fair values, far outstripping the 6.77% gains for the Morningstar U.S. Consumer Defensive Total Return Index. It may be prudent for value-seeking investors to wait for a meaningful pullback to open up attractive entry points with some margin of safety.
| Clorox Co | ||
| Ticker | CLX | |
| Current yield: | 2.10% | |
| Forward P/E: | 28.74 | |
| Price | US$212.30 | |
| Fair value: | US$154 | |
| Value | 37% premium | |
| Moat | Wide | |
| Moat Trend | Stable | |
| Star rating | * | |
| Data as of Oct. 26, 2020 | ||
More than a century old consumer staples company, Clorox (CLX) sells cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care products. The firm’s product portfolio includes Clorox disinfecting wipes and bleach cleaner sprays, Liquid-Plumr (drain cleaners), Pine-Sol (floor cleaning agents), SOS (scouring pads and scrubs), Brita (water filtration), and Burt’s Bees (personal care). About 85% of Clorox’s sales comes from its home turf.
“The COVID-19 outbreak has left consumers scouring the shelves for Clorox's fare, leading to a pronounced bump in near-term sales,” says a Morningstar equity report, noting its cleaning mix (around one third of sales) has soared more than 30% in each of the past two quarters. Resultantly, the company’s shares up nearly 40% since the start of 2020, far exceeding the 5.2% gains for the S&P 500, as of Oct 26.
The pandemic has swayed more consumers to cook at home, creating an opportunity for the firm’s Kingsford brand (charcoal briquettes). “Even if volumes decelerate as shelter-in-place initiatives are lifted and consumers gradually increase their consumption of food away-from-home, we think Clorox has laid out a solid playbook that should steady the grilling business over time,” says Morningstar sector director, Erin Lash, who estimates the stock to be worth US$154.
| Colgate-Palmolive Co | ||
| Ticker | CL | |
| Current yield: | 2.22% | |
| Forward P/E: | 25.32 | |
| Price | US$78.41 | |
| Fair value: | US$71 | |
| Value | 12% premium | |
| Moat | Wide | |
| Moat Trend | Stable | |
| Star rating | ** | |
| Data as of Oct. 26, 2020 | ||
Global consumer goods company, Colgate-Palmolive (CL) makes a wide range of products including oral care, personal care, and home care, which are sold across 200 countries around the world. International sales account for about 70% of total, approximately 50% from emerging regions.
Bouncing back from two years of tepid sales, the company’s organic sales were up 4% in 2019. “We think the balanced nature of the gains (a 2% benefit from increased volumes and 2% from higher prices) is a testament to its recent strategic course and unwavering competitive edge,” says a Morningstar equity report.
The firm’s sales this year have got a boost from coronavirus stock-up trips. A portion of these gains is attributed to “consumers’ penchant for home and personal cleaning,” says a Morningstar equity report, but adds “the pace of gains will decelerate over the next several quarters, as consumers work through their at-home inventory.”
The report, however, assures Colgate's portfolio will prove resilient even though the economic recovery will likely remain weak. “We're encouraged that management’s rhetoric suggests a commitment to investing in product innovation to prompt consumers to stay within its brand pillars regardless of the economy,” says Lash, who recently upped the stock’s fair value from US$70 to US$71, prompted by improved cash generation.
| Procter & Gamble Co | |
| Ticker | PG |
| Current yield: | 2.22% |
| Forward P/E: | 26.74 |
| Price | US$140.91 |
| Fair value: | US$111 |
| Value | 28% premium |
| Moat | Wide |
| Moat Trend | Stable |
| Star rating | * |
| Data as of Oct. 26, 2020 | |
One of the world’s largest consumer goods producers, Procter & Gamble (PG) owns an impressive array of household brands, including 21 that generate more than US$1 billion in annual global sales such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Pampers diapers. International sales represent around 55% of the total, with around one third coming from emerging markets.
“Procter & Gamble knocked the ball out of the park again to start its fiscal 2021, posting 9% organic sales growth (on top of 7% growth a year ago), 170 basis points of gross margin expansion, and 320 basis points of adjusted operating margin improvement,” says a Morningstar equity report.
Although a portion of this performance is ascribed to pandemic-driven rush for the home, health, and hygiene products, the report argues “that P&G had begun to steady its footing long before COVID-19 arrived.”
The company’s decision to trim its brand mix to just 65, after shedding more than 100, “was a critical step that has facilitated its ability to hone its resources on the highest return opportunities and more nimbly respond to evolving consumer trends,” Lash notes. The company recently posted its eighth consecutive quarter and second consecutive year of mid-single-digit organic revenue growth, prompting Lash to bump up the stock’s fair value from US$109 to US$111.
Lash assigns the firm a wide moat supported by its position as a leading household and personal-care manufacturer (25% share of baby care, more than 60% of blades and razors, around 25% of feminine protection, and approximately 25% of fabric care).
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