November 1 will mark the four year anniversary of Zep, Inc. (NYSE:ZEP) as an independent, publicly-traded firm. Back on this date in 2007, lighting firm Acuity Brands (NYSE:AYI) spun off its cleaning products operations to create Zep. Last Friday, Zep reported financial results for its full fiscal year. Sales trends are proving difficult, but future trends are looking more appealing, as is the valuation due to a recent share price swoon.

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Full Year Recap
Sales advanced 13.6% to $646 million. Organic, or internal, growth trends continued to be weak as management stated that fourth quarter "sales volume remained under pressure" and experienced negative growth to end out the year. However, acquisitions, including last year's purchase of Amrep, a supplier of chemicals and cleaners to the automotive industry, kept total top-line growth in positive territory.

Rising raw material costs served to exacerbate the weaker organic sales trends. Product costs jumped 20.2% and sent gross profit growth down to 7%, or well below the sales increase. However, a reduction in one-time costs, including restructuring charges, acquisition integration costs, and a gain on the sale of a building helped send reported operating profits up 39.3% to $33.2 million. Interest expenses more than tripled and were related to debt taken on to finance acquisitions. As a result, net income rose 28.9% to $17.4 million, or $0.78 per diluted share. Backing out items management deemed one-time in nature, recurring earnings were estimated at $0.97 per diluted share. (For related reading, see Understanding The Income Statement.)

For the coming year, analysts currently project sales growth of nearly 6% and total sales of almost $685 million. The current earnings consensus figure is $1.31 per share, or year-over-year growth of 35%.

Cash flow production for the year was also strong. Free cash flow advanced 15.9% to $28.1 million, or approximately $1.28 per diluted share. Despite the more challenging near-term sales trends, management sees the ability to generate profitable growth, due in large part to three sizable acquisitions that have now been completely folded in to Zep's existing operations. The company also estimates its total addressable markets at about $19 billion, suggesting it has less than 4% overall market share and therefore ample growth potential.

The Bottom Line
Due to the more challenging near-term trends and negative sentiment in the stock market, Zep's forward P/E has become more reasonable at below 11. The trailing free cash flow multiple is also reasonable at just over 11. With more consistent sales and profit growth trends, Zep could eventually sport a higher multiple more in line with industry rivals including Ecolab (NYSE:ECL) and WD-40 Corp (Nasdaq:WDFC), both of which trade closer to 21 times forward earnings. Large-cap rival Clorox (NYSE:CLX) trades at more than 16 times forward earnings and, with a current market cap of nearly $9 billion, could easily digest Zep's current market cap of $316 million, as could other peers. (For more on the P/E Ratio, see The P/E Ratio: A Good Market-Timing Indicator.)

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Tickers in this Article: AYI, ZEP, WDFC, ECL, CLX

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