Zep Looks To Clean Up Its Profit Trends

By Ryan C. Fuhrmann | April 07, 2011 AAA

Zep, Inc. (NYSE:ZEP) bills itself as a leading provider of cleaning products and related chemicals. Its end markets are professional cleaning crews for janitorial/sanitation and automotive markets, just to name a few. The company is still getting used to life on its own, as it was spun off from Acuity Brands (NYSE:AYI) in 2007, and while it is boosting reported sales with acquisitions, it has yet to report steady profit growth from its operations.
TUTORIAL: Economic Indicators To Know

Second Quarter Recap
Reported net sales jumped $19.5 million (15%) to $146.8 million. $15 million of the increase was related to acquisitions, meaning that organic growth was decent, but modest at just over 3%. Management attributed the organic growth to $3.1 million of higher pricing and improved sales volumes in several end markets, including customers "in the industrial, food and transportation end-markets." Retail sales and those to schools and governments struggled, though the company stated trends are improving to these underlying customers.

Product costs increased 16.1%, and tempered gross profit growth to 14.4%, or $68.6 million. However, selling, distribution and administrative costs rose only 11.5%, and the lack of acquisition charges helped send reported operating profits up by more than 200% to $4.7 million. Interest expense rose significantly as a result of debt taken on to fund the latest round of acquisitions and income taxes rose sharply, but net income still jumped 191% to $2.2 million, or 10 cents per diluted share. When backing out charges the company deemed to be one-time in nature, earnings were 15 cents to match analyst projections and represent year-over-year growth of 67%.

For the full year, analysts expect sales growth in excess of 13% and total sales of nearly $643 million. The current earnings consensus figure is $1.16 per share, or year-over-year growth of approximately 87%.

The Bottom Line
Zep operates in the highly competitive market for cleaning and maintenance chemicals, and considers large firms, including Ecolab (NYSE:ECL), Procter & Gamble (NYSE:PG), WD-40 Corp (Nasdaq:WDFC) and Church & Dwight (NYSE:CHD), as key rivals. With a current market capitalization of less than $400 million, Zep is much smaller than these rivals, and should find it easier to grow the top line.

It is relying on acquisitions to boost organic trends, and though this is helping sales, it has yet to demonstrate that this will lead to steady profit growth. A flat share price means its forward P/E has become more reasonable at less than 15, but prospective investors may want to wait until profit and cash flow growth becomes more consistent. (For related reading, take a look at How To Use The P/E Ratio And PEG Ratio To Tell A Stock's Future.)

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

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Consumer Spending Keeps In Line - Ahead of Wall Street
    Stock Analysis

    Consumer Spending Keeps In Line - Ahead of Wall Street

  3. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  4. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  5. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

Trading Center