Zep Continues Building Market Share

By Ryan C. Fuhrmann | July 13, 2011 AAA

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.)

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