Zep, Inc. (NYSE:ZEP) sells and distributes cleaning products and maintenance solutions to businesses in the United States, Canada and Europe. Its business lends itself to strong profits and cash flows, and though quite a bit of future growth is already priced into Zep's stock, it has plenty of room to grow market share.

TUTORIAL: Stock Basics

Third Quarter Recap
Revenue advanced 9.7% to $168 million, which management attributed to higher prices and three recent acquisitions, including last year's purchase of Amrep, a supplier of chemicals and cleaners to the automotive industry. It cited particular strength from customers in the automotive, food processing, and industrial markets.

Higher commodity costs tempered the gross profit increase to only 3.7% as Zep had to spend more on raw materials that include polymers, resins and related petroleum-based compounds, which form the ingredients for the cleaning products it sells. These higher costs are also adversely affecting the gross margins of larger rivals that include WD-40 Corp (Nasdaq:WDFC), Clorox (NYSE:CLX), Church & Dwight Co (NYSE:CHD) and Reckitt Benckiser.

Zep was able to control SG&A costs, which rose only 2.9% during the quarter and a lack of restructuring charges that occurred last year in order for Zep "to consolidate facilities and streamline its operations." As a result, operating income jumped nearly 27% to $11.6 million for a decent operating margin of nearly 7% of sales. Higher interest expense and income tax expense tempered the bottom-line increase, but net income still rose a healthy 19.3% to $6.2 million, or $0.28 per diluted share. This met analyst projections for the quarter. (For more about the income statement, see our article on Understanding The Income Statement.)

Outlook
For the full year, analysts currently expect sales growth of more than 13% and total sales of just over $643.3 million. The current earnings projection is $1.14 per share, or more than 16% above reported earnings of $0.98 per share for fiscal 2010.

Zep was spun out from lighting installation and services firm Acuity Brands (NYSE:AYI) back in 2007. As such, it is still young as an independent firm and has spent the past year integrating a number of significant acquisitions. It finally appears to be managing a stable collection of cleaning businesses in a market Zep estimates is worth $19 billion annually.

The Bottom Line
With less than 1% overall market share, Zep has plenty of room to grow its operations. And with a forward P/E of nearly 18, quite a bit of future growth is already discounted in the share price, but the stock is worth keeping a close eye on should it fall back into the high to low teens. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  5. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!