Groomed for Success?

The personal care group, a defensive favorite, has done well of late. But it may only track the market in the near term

By Sam Stovall

Last week we had a few changes to the list of industries with six-month relative strength rankings of "5" -- meaning they are in the top 10% of all industry groups based on trailing six-month price performance. (See the table below for the top-ranked industries as of Oct. 26, 2001.)

One group that was added is the defensive Personal Care industry, also known as the cosmetics group. This group is followed by S&P analyst Howard Choe, who thinks these stocks will perform in line with the overall market over the near term.

Choe notes that the S&P Personal Care Index is outperforming the broader market thus far in 2001, which he attributes to investor affinity towards defensive sectors in times of economic and political uncertainty. Gillette (G ) dominates this group and its shares have been pressured throughout most of the year. But Choe points out that the shares have received some support of late as the razor maker's market share has improved as a result of a revised pricing strategy.

Despite the strength of Gillette's core blade, grooming and oral care businesses, Choe thinks greater competition in the battery business (where Gillette's Duracell brand is a major player) will likely result in just modest growth in 2001.

What about other companies in the group? Choe says the shares of Avon (AVP ) and Alberto-Culver (ACV ) have held up well, due to consistent earnings growth. Estee Lauder (EL ) has underperformed, which Choe attributes mostly to a softening economy and possible valuation concerns. While Estee Lauder's hair care products are enjoying solid growth, the company's fragrance sales remain lackluster.

And in the longer term? According to Choe, the fundamental outlook for the personal care industry differs geographically. Domestically, where use rates are high, this industry is mature, consolidated, and competitive. According to the Commerce Department, wholesale shipments of beauty care products are projected to rise only 3% to 4% annually in the years ahead.

Currently, only 10 manufacturers control more than 60% of the market. In order to preserve or gain precious shelf space, these manufacturers continue to consolidate, roll out new products, and spend more on marketing and advertising.

And so Choe thinks that significant earnings growth for personal care companies as a whole in the U.S. is therefore unlikely. Much of the growth this year is likely to come from acquisitions and aggressive cost-reduction programs.

Choe believes long-term growth at personal care companies will be driven by expansion into fast-growing markets in Eastern Europe, Latin America, and the Pacific basin. High population levels and economic expansion are stimulating rapid demand for personal products in those regions. Meanwhile, usage levels of cosmetics are low. And those factors, Choe says, translate into a vast potential market for personal products makers.

Sub-Industry Company S&P STARS Rank
Agricultural Products Archer-Daniels-Midland (ADM) 3 STARS
Consumer Electronics Harman International (HAR) Not Ranked
Distillers & Vintners Anheuser-Busch (BUD) 5 STARS
Environmental Svcs. Waste Management (WMI) 4 STARS
Household Products Procter & Gamble (PG) 4 STARS
Insurance Brokers Marsh & McLennan (MMC) 5 STARS
Leisure Products Mattel Inc. (MAT) 4 STARS
Metal & Glass Containers Pactiv Corp.(PTV) 5 STARS
Personal Products Alberto-Culver (ACV) 4 STARS
Trading Cos. & Distributors Fastenal Inc. (FAST) 4 STARS
Water Utilities Amer. Water Works (AWK) 3 STARS

Stovall is senior investment strategist for Standard & Poor's

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