Household Products' New Shine
By Sam Stovall
Newly added to the list of industries with top Standard & Poor's this week is the Household Products group. The shares in this industry have cleaned up compared to the dingy performance of the broader market: Through June 21, 2002, the S&P Household Products index had climbed 10.7%, vs. a 12.7% drop in the S&P 1,500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600).
S&P analyst Howard Choe has a positive near-term investment outlook on the industry because of its defensive nature. He says the group has benefited from wary investors seeking the relative safety of brand-name consumer stocks following the Enron debacle and other corporate-accounting irregularities. Its defensive track record has been impressive: During 2001, this industry index also outperformed the broader market, as the group delivered consistent revenue and profit growth.
After some difficulties in 2000, the industry as a whole is healthier and better prepared to combat a tough operating environment, according to Choe. It has worked off much of its bloated retail inventories, shored up balance sheets, and improved operating efficiencies. However, competition has intensified, not just among peers but also with private-label manufacturers.
Price trends for key raw materials -- resin, pulp, and petroleum -- remain mostly favorable. Choe says the declining U.S. dollar vs. the euro will also help, since many of these companies generate significant percentages of their sales from Europe.
In the near term, says Choe, industry growth will be driven by new-product introductions, higher unit volumes, and a continued focus on cost controls. International unit sales for multinationals -- the big industry players with extensive global operations -- should remain solid. Due to the maturity of the U.S. market, multinationals have increasingly looked abroad for growth.
While they've found some success in Southeast Asia and Eastern Europe, they may have to endure some volatility in certain Latin American countries in the short to mid term, though the region remains a viable long-term market. Venezuela's current economic weakness and Argentina's ongoing turmoil will have a modestly negative impact on multinationals such as Dial (DL ) and Clorox (CLX ).
THE BIG THREE.
The industry remains dominated by Colgate-Palmolive (CP ), Procter & Gamble (PG ), and Unilever (UN ) (now in the S&P Foods index, since it derives a greater share of revenue from its food operations). These three control two-thirds of the global household-products market.
Choe thinks consolidation will likely help to improve operating results due to the emergence of global brands, which should leverage marketing and advertising expenditures. He believes that a shrinking retail sector worldwide should also benefit the larger industry players, as the retailers prefer to carry mostly the leading brands.
Choe's current favorite in the group is P&G, which is ranked 5 STARS (buy) by S&P. He likes its focus on high profit growth and ability to leverage its vast distribution channels.
S&P Relative Strength Rankings
These industries carry 12-month relative strength rankings of "5" as of June 21, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief sector strategist for Standard & Poor's