Four Household Product Stocks to Keep You Bullish: CLX, ENR, KMB, and PG

The consumer staples sector enjoys some natural immunity to an economic downturn, as Lauren DeSanto in Morningstar reminds us in a review of the household and personal care sector [HHPC], based partly on company representations at the recently held Consumer Analyst Group of New York [CAGNY] conference. The time is not right though for launching any new product lines:

Currently, we don't hear much buzz about blockbuster new products. In our opinion, most of the companies in the HHPC sector have their hands full with acquisitions, divestitures, or cost-cutting initiatives. The big new product launches... aren't on the horizon in the near term. Prior to attending CAGNY, we had been thinking that the HHPC sector was in a bit of a downcycle for breakthrough products, and nothing we saw from the companies at the conference really challenged this view. Colgate is busy improving its at-the-shelf promotions and merchandising, Energizer is digesting its acquisition of Playtex, and Clorox is integrating Colgate's bleach business and its Burt's Bees acquisition.

Indeed all consumer product companies pursue a "premiumization" policy, piling on the features on existing products so that higher prices can be charged, and keeping private label competitors at bay. Given current market conditions, Morningstar believes there are some bargains to be had, and DeSanto selects four in particular: Clorox (CLX), Energizer (ENR), Kimberly-Clark (KMB), and Procter & Gamble (PG).

DeSanto was initially most concerned about Clorox, but its presentations at the CAGNY conference helped to dispel these concerns:

The firm has solid plans to boost growth in core categories and to exit unprofitable business segments. Expansion overseas appears to be more measured than in the past, so the firm seems to have learned its lesson from problems it encountered in Brazil years ago. Most importantly, we see real upside to the Burt's Bees acquisition, and in talking to management, it's clear that the company is well aware of how it needs to tread carefully with plans to expand distribution or else it risks destroying the brand's strong niche appeal.

Energizer is somewhat shy, and falls short of Morningstar's standards on transparency. The CAGNY conference provided a welcome opportunity to hear Energizer management:

While the first quarter after the Playtex acquisition offered up more surprises than usual, in the form of higher corporate expenses and receivables, we believe these are only temporary problems for the firm. Longer-term problems are input costs for zinc and nickel, but Energizer has done a decent job with hedging against these costs. More importantly, the firm has a battery business that includes premium batteries, such as lithium and rechargeables, both of which capitalize on consumer trends in portable electronic devices. We expect the company will apply the same discipline to integrating Playtex as it did to its Schick-Wilkinson Sword acquisition.

Procter & Gamble continued to show the strength of its product lines, and to Morningstar's delight, stressed its current focusing on productivity. DeSanto was reassured by CEO A.G. Lafley that overhead costs among the international company's operations would be aggressively held in check.

Kimberly-Clark was the least newsworthy of the crowd, though the company remains a solid cash-flow generator. DeSanto expressed hope that the company would provide more innovation on the product line.

The ability of the consumer staples sector to weather tough times must indeed make other sectors weep. As Lafley expressed it so well at the conference:

Even if you look at the U.S. economy over the last three to six months, most of the consumption from borrowing more on your home went into discretionary items.... People are not reducing tooth-brushing incidence. They are not going to the bathroom less often. They are not shaving meaningfully less often.

Comments

[moneygardener]

I like Clorox, and I am going to have a closer look at it.